Lower crop prices and
changes to formula point to lower CAUV values in the future
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.
For more information about OSU Extension, Darke County, visit the Darke
County OSU Extension web site at www.darke.osu.edu, the OSU Extension
Darke County Facebook page or contact Sam Custer, at 937.548.5215.
|
|
|
|
