cauv
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.
To read SB 36, visit this page. For more information on previous CAUV bills, see our previous blog post.
Tags: cauv, current agricultural use valuation, differential tax assessment, real property tax
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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.
To access the bills and follow their status in the Ohio legislature, visit HB 398 here and SB 246 here.
For an explanation of the CAUV formula, see our Tax Bulletin "Why did my CAUV values increase so much?" available here.
Tags: cauv, current agricultural use valuation, differential tax assessment, real property tax
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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.
SUMMARY
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.
Bill makes wind and solar in Ohio competitive with neighboring states
Passed by both chambers of the Ohio legislature early morning on Friday, June 4, S.B. 232 provides tax exemptions for certain sources of new power generation. The bill was sponsored by State Senator Chris Widener and enjoyed bipartisan support. A press release from the Governor’s office makes clear he intends to sign it into law as soon as he receives it.
The new law will eliminate both the tangible personal property tax and the real property tax on new advanced energy projects. Qualified energy sources include wind, solar, and all other renewable energy resources as defined in Ohio Revised Code Section 4928, in addition to clean coal, nuclear energy, and the cogeneration of electricity from waste heat sources. To qualify, new projects involving wind, solar and other renewables must be under construction by January 1, 2012 and in service by January 1, 2013. All other qualified energy sources must be under construction by 2017.
One impetus for this change in tax treatment is that the current tangible tax rate energy companies pay is not competitive with other states. In Ohio, the tax rate for wind facilities stands at approximately $40,000 per megawatt, while solar is approximately $100,000 per megawatt. This compares to a range of $3,000 to $9,000 per megawatt in neighboring states.
The Ohio Department of Development will certify the exemption and base new payment rates (payment in lieu of taxes) on the number of Ohioans employed in the construction and installation of a qualified facility. Energy companies will have to comply with several other requirements including road repair, first responder training, and the establishment of university partnerships to promote the education, training and curriculum development of renewable energy industries.
The new rates will be as follows:
- Solar - $7,000 per MW
All other facilities:
- $6,000 per MW when 75% or more Ohio-domiciled employees are employed during construction and installation.
- $7,000 per MW when 60% or more Ohio-domiciled employees are employed during construction and installation.
- $8,000 per MW when 50% or more Ohio-domiciled employees are employed during construction and installation.
The bill also addresses Current Agricultural Use Valuation (CAUV) property and provides that the installation of an energy facility will not cause the remaining portion of a CAUV tract to be ineligible for CAUV.
The new law may signify the beginning of wind development in Ohio’s rural communities. Three wind projects have already received an Ohio Power Siting Board certificate and may be the first projects situated to apply for the new tax exemptions. Information regarding the three approved wind projects and four pending projects can be found on the Ohio Power Siting Board website.
Full text of S.B. 232 is available here.
Tags: cauv, property tax exemption, renewable energy law, renewable energy tax exemption, tangible personal property tax exemption, wind energy
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Proposal would ensure that on-farm bioenergy activities qualify for CAUV and are exempt from zoning regulation.
A legislative proposal in the Ohio House of Representatives would include on-farm bioenergy production activities in two key provisions of Ohio law: qualification for differential tax assessment under the Current Agricultural Use Valuation program and exemption from local zoning authority. Representatives Pryor and Domenick introduced House Bill 485 in mid-April with assistance from the Ohio Department of Agriculture. The bill was referred to the House Agriculture and Natural Resources Committee, but no other action on the bill has taken place.
The proposal addresses "biodiesel production, biomass energy production, electric or heat energy production and biologically derived methane gas production" where at least 50% of the starting material or feedstocks are from the same tract, lot or parcel on which the energy production takes place. This 50% requirement targets on-farm energy production, where a farm is producing and processing the energy inputs, as long as no more than 50% of the supplementary inputs derive from other properties.
The bioenergy production activities that meet the 50% rule would be included in the CAUV' program's definition of "land devoted exclusively to agricultural use" in ORC 5713.30, thus guaranteeing eligibility for the CAUV property tax rate. The bioenergy production activities would also become part of the definition of "agriculture" for purposes of county and township zoning, ORC 303.01 and ORC 519.01. Because counties and townships have limited zoning authority over "agriculture," the proposal would ensure that a county or township could not use zoning authority to prohibit the qualifying bioenergy production activities.
H.B. 485 is available online, here.
Tags: agricultural zoning, bioenergy, biofuels, cauv
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