The Effects of Farm Property Tax Relief Programs on Farm Financial Conditions

Abstract

Since Maryland developed the first farm land use-value assessment scheme in 1956, 46 other states have adopted programs to provide tax relief to eligible farm landowners (Dunford 1980). Statewide reductions in farm property taxes have been commonly approached through the assessment of farmland on its value in current agricultural use rather than on its market value. The exceptions to this approach are the circuit-breaker programs of Wisconsin and Michigan. Although circuit-breaker schemes for property tax relief for the elderly and/or low income are common, only these two states employ this approach to provide tax relief to farmers (Gold 1979). The improvement in the equity of property tax burdens on farm landowners and the preservation of farmland and open space are generally the justifications for reduced farm property taxes (Hady 1970; Hady and Sibold 1974; Stam and Sibold 1977; Dunford and O'Neill 1981). The purpose of this paper is to estimate the effects of specific illustrations of use-value assessment and circuit-breaker schemes on the financial conditions of the farm operator and nonfarm landlord. The illustrative programs are contrasted with market-based assessments by simulating the financial performance of an Illinois grain farm over a ten-year period. In general, previous research on farm property tax relief programs has not analyzed specific farm-level impacts even though farm financial conditions are often the justifications for such programs. Institutional writings, such as Dunford (1980), have documented the details of alternative approaches to farm property tax relief through surveys of state legislation. Early chronicles of state farm tax relief are provided by the Regional Science Research Institute (1976) and by Hady and Sibold (1974). Ladd (1980) evaluates use-value assessments using the standard tax analysis criteria of efficiency, equity, and administrative feasibility. She concludes that use-value assessments are blunt instruments as policy tools with respect to land use decisions, have adverse distributional effects, and are associated with administrative inequities. Researchers have also been concerned about the consequences of farmland property tax relief programs. Deaton and Mundy (1975) and Bevins (1975) describe the expected relationship between reduced farm property taxes and increased farmland values. Schwartz et al. (1975, 1976), in an analysis of the benefits accruing to landowners under California's program, found the present value of tax benefits not to be substantial unless program participation extended to 20 years and beyond. Lockner and Kim (1973) examined two hypothetical farm circuit-breaker pro-