When we are not on the road presenting, in the classroom teaching, or keeping up with the news for the blog, our team is busy working on large scale research projects for the Agricultural & Food Law Consortium. One of our recent projects looked at how states assess farmland for property tax purposes, and we then created a compilation of every state’s laws on this topic. Based upon the research, we found that property taxes are a fact of life for virtually all landowners in the United States, but that each state uses a “differential tax assessment” for agricultural lands.
What exactly is a differential tax assessment? Many Ohio farmers know about and use Ohio’s special property tax assessment known as CAUV, which is short for Current Agricultural Use Valuation. Instead of assessing property taxes on the basis of the market rate for developable land, CAUV uses a different formula that assesses the land on its value for agricultural production. CAUV is a form of differential tax assessment.
While each state utilizes differential tax assessments for agricultural lands, they use different definitions of agriculture, different formulas, and different application processes. Some areas of law utilize model acts that states may adopt in order to make it easier to do business across state lines. Differential tax assessments of agricultural land do not have a model act, so each state’s language reflects the culture, norms, and conditions of the respective state at the time the state adopted or amended its differential tax assessment.
An example close to home illustrates what this means. Under Ohio Revised Code § 5713.30(A), agricultural use means commercial animal or poultry husbandry, aquaculture, algaculture, apiculture, the commercial production of field crops, tobacco, fruits, vegetables, nursery stock, ornamental trees, and sod. Commercial timber qualifies, but non-commercial timber only qualifies if it located on or next to land that otherwise would qualify for CAUV. Exclusive use requires just that: the land is exclusively used for an activity listed as an agricultural use. Lands of more than 10 acres that are exclusively devoted to agricultural uses qualify, but lands of less than 10 acres only qualify if the average yearly gross income exceeds $2,500 over the preceding three years. That is an example of a definition of what qualifies as agriculture for the purposes of the differential tax assessment.
The differential tax assessment project compiled the approaches taken by all fifty states, and the compilations are available on the National Agricultural Law Center website HERE. This material is based upon work supported by the National Agricultural Library, Agricultural Research Service, U.S. Department of Agriculture.
A landowner may present evidence regarding the value and acreage of his or her land, but the Board of Tax Appeals (BTA) is free to weigh that evidence as it wishes, according to the Ohio Supreme Court. All seven justices agreed that the BTA in the case of Johnson v. Clark County Board of Revision acted with appropriate discretion, although two justices did not sign onto the reasoning as to why the BTA acted appropriately. The case involved a property owner’s challenge of the Clark County Auditor’s determination of Current Agricultural Use Valuation (CAUV) for property tax purposes.
Continue reading for more information about what CAUV is, how CAUV determinations and tax assessments can be appealed, what happened in the Johnson v. Clark County Board of Revision case, and the main takeaways from the Supreme Court’s decision.
What is CAUV?
CAUV permits owners of land devoted exclusively to agricultural uses to request that the county auditor assess property for tax purposes based upon the value of the land’s current agricultural use, rather than its true market value. Since its inception, CAUV has generally provided landowners with qualifying property a lower tax bill than they otherwise would have using market value. Ohio most recently changed the formula for CAUV in 2017. If CAUV land is converted to a use that no longer qualifies for CAUV treatment, the land is again assessed based upon its fair market value and the landowner must pay to the county the difference between the CAUV value and the fair market value for the prior three years. To learn more about CAUV, visit the Ohio Department of Taxation’s CAUV webpage here.
How can a CAUV determination be appealed?
First, if a landowner believes that all or part of his or her parcel qualifies for CAUV, an application must be submitted to the county auditor where the land is located. County auditors are the “chief assessing officers of their respective counties” and have the authority, within the guidelines of the state tax commissioner, to make the initial CAUV determination under Ohio Revised Code § 5715.01(B). Landowners should contact their county auditors about filing instructions.
Second, the procedure to appeal whether land qualifies for CAUV is different than the procedure to appeal a tax valuation assessment. If a landowner does not agree with their county auditor’s determination as to whether or not land qualifies for CAUV, they have thirty days to file an appeal with their county court of common pleas under Ohio Revised Code § 929.02(A)(2). Decisions of courts of common pleas can be appealed to the state district court of appeals, and those decisions can be appealed to the Ohio Supreme Court.
If a landowner does not agree with their county auditor’s valuation assessment, the landowner may file a complaint with their county Board of Revision. The forms for these complaints are generally available at the county auditor’s office or website. If a Board of Revision believes that the county auditor made an error in applying the CAUV statute and rules, the board has the authority to revise tax assessments. If the landowner still does not agree with the Board of Revision’s decision, he or she may appeal to the Ohio Board of Tax Appeals within thirty days of the Board of Revision’s decision under Ohio Revised Code § 5717.01. More information is available on the BTA’s website here. Alternatively, under Ohio Revised Code § 5717.05, the landowner may appeal the Board of Revision’s decision to the appropriate county court of common pleas.
Decisions of the BTA can be appealed to the respective state district court of appeals where the land in question is located, and those decisions can be appealed to the Ohio Supreme Court. However, there are certain cases in which landowners can appeal decisions of the BTA directly to the Ohio Supreme Court under Ohio Revised Code § 5717.04. However, the types of appeals of a BTA decision eligible for direct appeal to the Ohio Supreme Court were reduced in September 2017 through House Bill 49.
What happened in Johnson v. Clark County Board of Revision?
Mr. Johnson challenged the Clark County Auditor’s 2013 tax assessment of his 154.61 acre farm. Neither party disagreed that the land qualified for CAUV, but Mr. Johnson disagreed with how much the Clark County Auditor said the farm was worth under the CAUV formula. For tax year 2013, the auditor assessed the property’s CAUV at $457,250.
Mr. Johnson appealed to the Clark County Board of Revision. He testified, and also elicited testimony from an employee of the Clark County Soil and Water Conservation District and an employee of the Clark County Auditor’s office. Further, Mr. Johnson presented photographs, official records from the tax commissioner and auditor, and a “self-prepared written statement purporting to convey [the SWCD employee’s] site-visit findings.” The Board of Revision rejected Mr. Johnson’s claims.
Mr. Johnson then appealed to the Ohio Board of Tax Appeals. Again, Mr. Johnson testified and produced a number of exhibits. At this appeal, he elicited testimony from an employee of the Ohio Department of Taxation. The BTA also rejected Mr. Johnson’s claims, finding that the Clark County Auditor had acted appropriately. Mr. Johnson then filed an appeal to the Ohio Supreme Court in 2016. Mr. Johnson represented himself pro se, or without an attorney.
What are the main takeaways, and why did the landowner not succeed?
First, the Ohio Supreme Court explained that a landowner challenging a Board of Revision or Auditor’s tax assessment must convince the BTA that his or her valuation assessment is correct and the one they are challenging is incorrect. This requirement to convince the Board of Tax Appeals is known as the burden of proof. The burden of proof determines which party must play an active role in proving his or her argument, while the opposing side will only have to present proof to counter if the board finds that the first party has carried its burden. Here, the court said that Mr. Johnson, as the landowner challenging the assessment, had the burden to convince the BTA. The court disagreed with Mr. Johnson’s argument that the county should have to rebut his evidence and prove the value that it assessed.
Second, even though the BTA properly said that Mr. Johnson had the burden of proof, this does not mean that the BTA should have presumed the Board of Revision’s decision to have been correct. Instead, the BTA must independently analyze the evidence presented to it, and not simply defer to and accept the Board of Revision’s decision. Here, the Ohio Supreme Court found that the BTA did conduct an independent assessment in confirming the Board of Revision’s determination.
Third, while an owner may present evidence as to the value of his or her land, a BTA has discretion to determine how much weight to give to that evidence. An owner’s opinion as to the value of his or her land is not determinative, but is merely a piece of evidence that the BTA may consider.
Fourth, instead of looking at the acreage, the focus of the assessment should be on boundaries and a property’s uses within those boundaries. The Ohio Supreme Court explained the distinction between calculating acres and delineating boundaries by using dictionary definitions, and the distinction is essentially that a bounded area is fixed in space, while acreage alone describes an area without a specific line of demarcation. To prove that a parcel or portion of a parcel qualify for CAUV treatment, the boundaries of the qualifying land must be determined. Acres can only be determined after the boundaries are established. Here, Mr. Johnson did not prove the boundaries of CAUV areas on his land to the BTA’s satisfaction, and the Ohio Supreme Court said that it was within the BTA’s discretion to reject Mr. Johnson’s evidence.
The Ohio Supreme Court’s full opinion, cited as 2018-Ohio-4390, is available here. Additional facts about the case can be found within the court’s opinion.
Decisions announced today by the Ohio Supreme Court will allow landowners to challenge Current Agricultural Use Valuation (CAUV) land values established by Ohio’s tax commissioner by appealing the values to the Board of Tax Appeals.
Twin rulings in cases filed by a group of owners of woodland enrolled in CAUV, Adams v. Testa, clarify that when the tax commissioner develops tables that propose CAUV values for different types of farmland, holds a public hearing on the values and adopts the final values by journal entry, the tax commissioner’s actions constitute a “final determination” that a landowner may immediately appeal to the Board of Tax Appeals. The Board of Tax Appeals had argued that the adoption of values is not a final determination and therefore is not one that a landowner may appeal to the Board.
The tax commissioner forwards the CAUV tables to the county auditors, who must use the values for a three year period. An inability to appeal the values when established by the tax commissioner would mean that a landowner must wait until individual CAUV tax values are calculated by the county auditor, who relies upon the tax commissioner’s values to calculate the county values. As a result of today’s decision, landowners may appeal the values as soon as the tax commissioner releases them.
The landowners also claimed that the process and rules for establishing the CAUV values are unreasonable and not legal. However, the Court rejected those claims.
For an excellent summary of the Adams v. Testa cases by Court News Ohio, follow this link.
Written by Chris Hogan, Law Fellow, OSU Agricultural & Resource Law Program
Governor Kasich signed HB 49 on June 30, 2017, otherwise known as Ohio’s Operating Budget. In addition to setting the budget for various agencies, HB 49 changes how farmland is valued under Ohio’s Current Agricultural Use Value program. HB 49 changes Ohio Revised Code Sec. 5715.01. The overall effect of the changes will likely be a downward trend in property tax valuation for Ohio farmers.
The budget bill prescribes the method for determining CAUV value for land devoted to agricultural use. The law requires appraisal methods to reflect and consider the following:
- standard and modern appraisal techniques that take into consideration the productivity of the soil under normal management practices;
- typical cropping and land use patterns;
- the average price patterns of the crops and products produced;
- typical production costs to determine the net income potential to be capitalized; and
- other pertinent factors.
Under HB 49, the Tax Commissioner must annually determine and announce the capitalization rate used to compute CAUV values. The bill directs the Tax Commissioner to use standard and modern appraisal techniques in determining the land capitalization rate to be applied to the net income potential from agricultural use. In determining this yearly rate, the Commissioner must use an equity yield rate equal to the greater of the average of the total rates of return on farm equity for the last 25 years (as published by USDA), or the loan interest rate the Commissioner uses for that year to calculate the capitalization rate. The Tax Commissioner is required to assume that the holding period for agricultural land is twenty-five years for computing buildup of equity or appreciation with respect to that land.
HB 49 requires that land used in conservation programs be valued at the lowest soil productivity type. However, if land devoted to a conservation program ceases to be used for conservation purposes within three years of certification, the land will be valued at its actual soil type for all preceding years.
The Tax Commissioner must publish an annual report of CAUV values that can be sorted by county and by school district. The changes to CAUV begin in 2017, starting with counties undergoing reappraisal for the 2017 tax year. The budget bill, as signed by the Governor, is here—see page 2145 of that document for the changes to CAUV.
Written by Chris Hogan, Law Fellow, OSU Agricultural & Resource Law Program
Two separate bills concerning CAUV continue to be debated in the Ohio Legislature: Senate Bill 36 and House Bill 49. Ohioans may see changes to the CAUV program, if either bill passes the Legislature. Both bills aim to address rising CAUV rates for Ohio farmers. SB 36 changes the CAUV formula, making alterations to the capitalization rate and addressing the rate used for conservation land values. SB 36 passed in the Senate and is under consideration by the House Ways and Means Committee. The other bill that would address CAUV values—HB 49, is Ohio’s bi-annual budget bill. HB 49 similarly addresses Ohio’s rising CAUV values through proposed changes to the CAUV capitalization rate.
The difference between the two bills is that the budget bill will undoubtedly pass. That being said, the budget bill’s CAUV provisions may be cut from the final version. On the other hand, there is no guarantee that the House will pass SB 36. There are several scenarios that may occur regarding the two CAUV bills in the Ohio Legislature.
Scenario #1: HB 49 (the Budget Bill) Passes with CAUV Provisions Included
In an earlier post, we explained HB 49’s proposed changes to the CAUV program. HB 49 proposes changes to the CAUV program similar to those proposed in the standalone CAUV bill, SB 36. Although HB 49 currently contains amendments to the CAUV program, it is subject to change.
Passing a budget bill is a long and complex process. Budget bills must start in the Ohio House of Representatives. The main purpose of a budget bill is to set the state’s operating budget, but such a bill may also include changes to Ohio laws. After the House passes a budget bill, the bill goes to the Ohio Senate. The Senate can pass the bill as written by the House, or the Senate may amend the bill and send their amended version back to the House.
The Senate passed their amended version of HB 49 on June 21. However, the House did not agree with the amendments. Therefore, the Senate and the House will soon hold a conference committee where both houses will meet and settle the differences between the two bills. Ohio’s budget is based on a fiscal year which ends on June 30. If passed, a new budget will go into effect July 1, 2017. Ohioans may soon learn if the state’s budget bill will enact changes to the CAUV program.
Scenario #2: SB 36 Passes and Changes the CAUV Program
Ohioans will soon find out if changes to the CAUV formula will be passed as part of HB 49. However, the CAUV provisions of HB 49 could still be removed before the bill passes. If CAUV changes are not passed via the budget bill, the CAUV formula could still be altered via SB 36.
SB 36 recently passed the Ohio Senate and is currently under consideration by the Ohio House Ways and Means Committee. The bill would make changes to Ohio’s CAUV formula, including the capitalization rate calculation and the rate used for calculating the value of conservation lands. For more information on SB 36, see our earlier blog post here.
The Ohio House can consider SB 36 until the end of the legislative session. The current legislative session ends on December 31, 2018. The House Ways and Means Committee may vote on SB 36 before the end of the session, or the bill could expire if it does not leave the committee before the end of the session.
The Legislature will soon meet in a conference committee to try and reach a consensus on the budget bill. HB 49 could pass as written or in an amended form that does not include any changes to CAUV. SB 36 may pass as written or amended as well. Conversely, it is plausible that neither bill could pass.
Ohio's Senate has settled on its solution for fixing Ohio's CAUV formula. The Senate unanimously passed S.B. 36 yesterday after the Senate Ways and Means Committee adopted two amendments to the bill. The legislation aims to stem recent increases in property taxes for farmland enrolled in Ohio's Current Agricultural Use Valuation (CAUV) program. The Senate's bill will ensure that the CAUV formula "sticks to valuing farmland based on agricultural production," stated the bill's sponsor, Sen. Cliff Hite (R-Findlay).
In addition to including new factors in the CAUV formula, making changes to the capitalization rate calculation and addressing rates used for conservation lands (explained in detail in our earlier post on S.B. 36), the bill passed by the Senate yesterday contained two new provisions:
- A three year phase-in of the changes to the CAUV formula, which would begin the first tax year after 2016 in which a county's sexennial appraisal or triennial update occurs. The purpose of the phase-in is to reduce the financial impact of lowered property valuations on school districts.
- Replacement of the seven year rolling average determination of the equity yield rate with an equity yield rate that equals the 25-year average of the "total rate of return on farm equity" determined by the United States Department of Agriculture but that cannot exceed the loan interest rate used in the debt factor of the capitalization rate computation.
Last week, Ohio's House passed legislation containing different solutions for revising the CAUV program in H.B. 49 (see our summary of H.B. 49 here). Senate leaders yesterday indicated a willingness to work with the House to resolve the differences between the two bills. H.B. 49 is now before the Senate Finance Committee.
Written by Chris Hogan, Law Fellow, OSU Agricultural & Resource Law Program
Update: The House passed H.B. 49 on May 2, 2017.
The Ohio legislature continues to consider revising the Current Agricultural Use Valuation (CAUV) law that affects taxation of agricultural land. However, the latest legislative discussions are not about Senate Bill 36, introduced by Senator Cliff Hite on February 7, 2017 (read more about that bill here). Instead, current debate centers on a new proposal in House Bill 49, Ohio’s “budget bill.” The House Finance Committee is currently considering that bill.
The budget bill proposal would require the equity yield rate used in the CAUV capitalization rate to equal the greater of either the 25 year average of the total rate of return on farm equity published by the USDA or the loan interest rate. The capitalization rate is used to calculate a valuation from an annual profit for an average Ohio farm, considering only agricultural factors. The proposal would establish a holding period of 25 years for calculating equity build-up and land value appreciation in the formula. Addressing concerns about taxation amounts on land in conservation programs, the bill also would place a ceiling on the taxable value of CAUV land used for conservation purposes by requiring the land to be valued as though it included the least productive soil.
The proposed changes to the CAUV program would be phased in over two reassessment update cycles. The bill would also reconcile the proposed changes with the current formula by specifying that during the first three-year cycle in each county (beginning with tax year 2017), the tax value of CAUV land would include one half of the difference between its value under the new versus the old formula.
Time may soon tell whether Ohio lawmakers will address the agricultural community’s concerns about property tax increases under the current CAUV formula and if so, whether it will prefer the House’s budget bill or the Senate’s proposal. The budget bill is available here--see page 652 of that document for the suggested changes to CAUV. The Senate’s bill, which has received four hearings before the Senate Ways and Means Committee but still remains in committee, is available here.
Written by: Chris Hogan, Law Fellow, OSU Agricultural & Resource Law Program
The Ohio Legislature is once again considering a bill regarding Ohio’s current agricultural use valuation (CAUV) program. CAUV permits land to be valued at its agricultural value rather than the land’s market or “highest and best use” value. Senator Cliff Hite (R-Findlay) introduced SB 36 on February 7, 2017. The bill would alter the capitalization rate used to calculate agricultural land value and the valuation of land used for conservation practices or programs. The bill has yet to be assigned to a committee.
The content of SB 36 closely mirrors the language of a bill meant to address CAUV from the last legislative session: SB 246. Introduced during the 131st General Assembly, SB 246 failed to pass into law. SB 246 proposed alterations to the CAUV formula which are identical to those proposed by the current bill: SB 36. According to the Ohio Legislative Service Commission’s report on SB 246, the bill would have proposed changes that would have led to a “downward effect on the taxable value of CAUV farmland.” The likely effect for Ohio farmers enrolled in CAUV would have been a lower tax bill.
Due to the similarity between the two bills, the potential impacts of SB 36 on the CAUV program will likely be comparable to those of the previous bill. The proposed adjustment of the capitalization rate is likely to reduce the tax bill for farmers enrolled in CAUV. More specifically, the bill proposes several changes to the CAUV formula:
- States additional factors to include in the rules that prescribe CAUV calculation methods. Currently, the rules must consider the productivity of the soil under normal management practices, the average price patterns of the crops and products produced to determine the income potential to be capitalized and the market value of the land for agricultural use. The proposed legislation adds two new factors: typical cropping and land use patterns and typical production costs.
- Clarifies that when determining the capitalization rate used in the CAUV formula, the tax commissioner cannot use a method that includes the buildup of equity or appreciation.
- Requires the tax commissioner to add a tax additur to the overall capitalization rate, and that the sum of the capitalization rate and tax additur “shall represent as nearly as possible the rate of return a prudent investor would expect from an average or typical farm in this state considering only agricultural factors.”
- Requires the commissioner to annually determine the overall capitalization rate, tax additur, agricultural land capitalization rate and the individual components used in computing those amounts and to publish the amounts with the annual publication of the per-acre agricultural use values for each soil type.
To remove disincentives for landowners who engage in conservation practices yet pay CAUV taxes at the same rate as if the land was in production, the proposed legislation:
- Requires that the land in conservation practices or devoted to a land retirement or conservation program as of the first day of a tax year be valued at the lowest valued of all soil types listed in the tax commissioner’s annual publication of per-acre agricultural use values for each soil type in the state.
- Provides for recalculation of the CAUV rate if the land ceases to be used for conservation within three years of its original certification for the reduced rate, and requires the auditor to levy a charge for the difference on the landowner who ceased the conservation practice or participation in the conservation program.
Legislation proposing changes to Ohio’s current agricultural use valuation (CAUV) program has remained on hold in the General Assembly since last fall. Senator Cliff Hite (R-Findlay) and Representative Brian Hill (R-Zanesville) introduced the companion bills on November 18, 2015. The Senate referred its bill, SB 246, to the Senate Ways and Means Committee on December 9, 2015 and House Bill 398 was referred to the House Government Accountability and Oversight Committee on January 20, 2016. Neither committee has acted on its bill.
Taking up Ohio Farm Bureau’s recommendations, the bill sponsors target two aspects of the CAUV program—the formula used to determine CAUV values and the valuation of land used for conservation practices or programs. To create more accurate valuations, the legislation proposes several changes to the CAUV formula:
• States additional factors to include in the rules that prescribe CAUV calculation methods. Currently, the rules must consider the productivity of the soil under normal management practices, the average price patterns of the crops and products produced to determine the income potential to be capitalized and the market value of the land for agricultural use. The proposed legislation adds two new factors: typical cropping and land use patterns and typical production costs.
• Clarifies that when determining the capitalization rate used in the CAUV formula, the tax commissioner cannot use a method that includes the buildup of equity or appreciation.
• Requires the tax commissioner to add a tax additur to the overall capitalization rate, and that the sum of the capitalization rate and tax additur “shall represent as nearly as possible the rate of return a prudent investor would expect from an average or typical farm in this state considering only agricultural factors.”
• Requires the commissioner to annually determine the overall capitalization rate, tax additur, agricultural land capitalization rate and the individual components used in computing those amounts and to publish the amounts with the annual publication of the per-acre agricultural use values for each soil type.
To remove disincentives for landowners who engage in conservation practices yet pay CAUV taxes at the same rate as if the land was in production, the proposed legislation:
• Requires that the land in conservation practices or devoted to a land retirement or conservation program as of the first day of a tax year be valued at the lowest valued of all soil types listed in the tax commissioner’s annual publication of per-acre agricultural use values for each soil type in the state.
• Provides for recalculation of the CAUV rate if the land ceases to be used for conservation within three years of its original certification for the reduced rate, and requires the auditor to levy a charge for the difference on the landowner who ceased the conservation practice or participation in the conservation program.
For an explanation of the CAUV formula, see our Tax Bulletin "Why did my CAUV values increase so much?" available here.
By Larry R. Gearhardt, Assistant Professor and Field Specialist, Taxation
Owners of Agricultural land enrolled in the Current Agricultural Use Valuation (CAUV) property tax program in the twenty-four counties that are experiencing a reappraisal or triennial update in 2015 (payable in 2016) will see the highest CAUV values in history, based on preliminary numbers from the Ohio Department of Taxation. Similar to prior years, increases in values will be in the vicinity of 100% to 200%. However, lower crop prices and changes made to the CAUV formula by the Ohio Department of Taxation point to lower CAUV values in the future.
WHAT IS CAUV?
In 1972, Ohio voters approved a constitutional amendment that allowed qualified agricultural land to be valued at its current agricultural use value for real property tax purposes rather than fair market value. The home, home site and outbuildings are still valued at fair market value.
Current agricultural use value can be determined by the capitalization of the typical net income from agricultural crops on a given parcel of land assuming typical management, cropping patterns, and yields for the types of soil present on the tract.
HOW IS CAUV CALCULATED?
The CAUV values are based upon a formula containing five factors applied to three crops: corn, soybeans, and wheat, the three most prevalent crops in Ohio. Hay was dropped from the formula in 2010. The five factors are:
1.) Cropping pattern- based upon the acres of corn, beans and wheat compared to the total acres of those three crops. These percentages are based upon statewide averages.
2.) Crop prices- based upon a survey by NASS of elevators in Ohio
3.) Crop yields- based upon 1984 NRCS/NASS per acre yield estimates for each soil type, adjusted for actual average yields in Ohio for the past ten years.
4.) Non-land production costs- based upon farmer surveys by The Ohio State University.
5.) Capitalization rate- based upon the interest rate for a 15-year fixed rate mortgage at Farm Credit Services, with 40% attributed to equity and 60% to debt.
The crop prices, non-land production costs and capitalization rate are calculated by taking the previous seven years of numbers, eliminating the highest number and the lowest number, and then averaging the remaining five numbers. Cropping pattern is based on an average of the last five years of acres planted. The prices, cropping pattern, costs and yields are then multiplied, added and subtracted to determine the net profit per acre of soil type, and that number is then divided by the capitalization rate to arrive at the final value. This calculation is performed for each of the 3500 soil types in Ohio.
LOWER CROP PRICES IN 2014
For the second consecutive year, the price for corn, beans, and wheat that came into the formula is lower than the prior year. The price for corn that came into the formula for 2014 is $3.65/bu. compared to $4.41 for 2013. Similarly, the 2014 price for soybeans that came into the formula is $10.40 compared to $13.00 for 2013. Likewise, the new 2014 wheat price is $5.55 versus $6.54 for 2013.
NOT AN IMMEDIATE EFFECT
One or two years of lower crop prices will not produce a noticeable decrease in CAUV values. There needs to be a trend lasting several years to substantially reduce the values. A trend is required because the crop prices used in calculating CAUV values are based on a seven-year rolling average, with the highest price and the lowest price during that seven-year period thrown out.
Using corn as an example, the corn prices used in the 2015 calculation for the last seven years are:
2008 - $4.21
2009 - $3.55
2010 - $5.45
2011 - $6.44
2012 - $7.09
2013 - $4.41
2014 - $3.65
Since $3.55 is the lowest price and $7.09 is the highest price, they are removed from the calculation. The average of the remaining five numbers is $4.79. After a management allowance of 5%, which is allowed in the formula, the price for corn used in the 2015 formula is $4.55. Please remember that these numbers are preliminary and may change before finalization of the 2015 values. There is a similar trend for the calculation of the prices for soybeans and wheat.
Continuing to use corn as an example, it will take several years of lower crop prices to substantially lower land values for CAUV purposes. Real property is revalued every three years for tax purposes. Therefore, property being revalued in 2015 will not be revalued again until 2018. During that time, three years’ worth of crop prices will drop out of the formula and will be replaced by three new years’. If the three new years’ crop prices are lower than $6.44, it is likely that there will be a decrease in CAUV values. Based on experts’ opinions and forecasts, such appears to be the case.
CHANGES TO THE FORMULA BY THE OHIO DEPARTMENT OF TAXATION
In response to the alarming increases in CAUV values over the past several years, attorneys at the Ohio Farm Bureau Federation researched and reviewed the CAUV formula in greater detail than it has ever been reviewed since its inception. As a result of this review, Ohio Farm Bureau made several recommendations to the Ohio Department of Taxation to update portions of the formula to more accurately reflect current values. These recommendations do not substantially change the way that CAUV is calculated, but rather to update the data contained in the formula.
The Ohio Department of Taxation has agreed with several of the recommendations forwarded by Ohio Farm Bureau. Therefore, the changes that will appear in the 2015 CAUV calculations are:
- TIMELINESS OF DATA – There has always been a two-year lag period between the collection of the data used in the CAUV formula and the finalization of the values for use by county auditors. This became especially troublesome in a year like 2014 when the price of soybeans fell from $13.00/bu. To $10.40/bu., but CAUV values doubled. Soybean prices dropped even lower by the end of the year and continue to fall in 2015. Because of the two-year lag period, it took two years for these lower prices to appear in the formula. Then, the lower number may be thrown out of the calculation if it was the lowest during the seven-year look back period.
By adjusting the schedule of when CAUV values are calculated, the Ohio Department of Taxation was able to cut the two-year lag period to one year. Therefore, lower crop prices, and potentially higher costs, will come into the formula more quickly and CAUV values will be more current. One consequence of this change is that county auditors will not receive the updated values until later in the year of reappraisal or update.
- CAPITALIZATION RATE – CAUV values are calculated by dividing the projected net income per acre by the capitalization rate for each of the 3500+ soil types in Ohio. A small change in the capitalization rate can have a big impact on CAUV values. For example, a $200 per acre net return divided by a capitalization rate of 6% results in a $3,333 value. If the capitalization rate increases to 7%, the same $200 per acre net return divided by 7% results in a $2,857 value. Low capitalization rates are good if you are borrowing money; they are not beneficial when calculating CAUV.
The Ohio Department of Taxation adjusted the calculation of the capitalization rate to more accurately reflect current borrowing patterns. The capitalization rate is now based upon a ratio where 80% is considered debt and 20% is considered equity. This is compared to a 60/40 ratio used in prior years. Furthermore, the mortgage interest rate (which is the starting point of the capitalization rate calculation) is based on a 25-year fixed multi-flex rate for loans $25,000 or greater at Farm Credit Services. The prior years’ mortgage interest rate was based on a 15-year loan period.
Although the capitalization rate used in the 2015 calculation went down from 7.5% in 2012 (the previous time CAUV was calculated for counties in this cycle) to 6.5% (contributing to the increase in CAUV values), the capitalization rate between 2014 and 2015 increased from 6.2% to 6.5%. As previously stated, higher capitalization rates contribute to lower CAUV values.
- WOODLAND VALUES – Woodland values have increased more dramatically than cropland values, especially if the woodland is located in a high-productivity geographic region. Woodland values are calculated by the same process used to calculate cropland values, with the additional step of subtracting the cost of drainage per acre (for Class I and II soils) and the cost of clearing the land per acre. Since the inception of the program, once the cropland value is determined, there has been a reduction in value for woodlands of $500 per acre for subsurface tile drainage for somewhat poorly drained, poorly drained, and very poorly drained soils. In addition, for 37 soil types, there has been a $250 per acre reduction for surface drainage. There is a $500 per acre reduction allowed for clearing the land for all soil types.
What has occurred in recent years is that the calculation of cropland values is so high that, even with the aforementioned reductions, woodland values have been bumped from minimum value to a value similar to crop producing soils. This scenario is exacerbated if the woodland happens to be located in a high-productivity geographic region.
The Ohio Department of Taxation has increased the reductions for woodland from $500 to $770 per acre for subsurface tile drainage in somewhat poorly drained, poorly drained, and very poorly drained soils; from $250 to $380 per acre for surface drainage in 37 soil types; and from $500 to $1,000 per acre for land clearing in all soil types.
If the trend of lower crop prices continues, couple with the changes to the formula made by the Ohio Department of Taxation, CAUV values will decrease in the future. Nobody likes paying taxes and it is hard to prepare for tax increases of 100% to 200%. But if CAUV landowners can swallow the bitter pill of paying higher property taxes through 2015, while receiving lower crop prices, the CAUV formula will work to decrease property taxes to more accurately reflect the farm economy. Think of it as a roller coaster with crop prices in the front car and CAUV values in the back car. Ultimately, the roller coaster ends up in the same place.