According
to data from the 1997 Natural Resources Inventory, on average,
1.2 million acres of land are converted out of agricultural
use every year in America. That’s about 2 acres lost every
minute of every day.(1) Developers
who exploit a loophole in state tax laws are contributing
to the loss of our nation’s agricultural lands and cheating
state governments out of tax revenue. Farmland tax breaks
exist in most states. There are two types: differential
use assessment and circuit breakers. Differential or “use-value”
assessment taxes agricultural land according to what income
farmers can be expected to earn from it, as opposed to the
land’s market or development value. Circuit breaker laws
allow farmers to claim state income tax breaks to offset
local property taxes. Circuit breaker laws exist only in
Wisconsin, Michigan, and New York.
Farmland tax break laws help farmers survive by alleviating
their real property taxes; tax farmers appropriately by
assessing farmland for its agricultural value as opposed
to its market / development value; and, protect farmland
by giving farmers a financial incentive not to sell their
property. Because the definition of “agricultural use” is
broad in most of these laws, many developers, planning to
convert farmland out of agricultural use, can qualify for
the break by maintaining even symbolic farming activities.
Throughout the time a developer is preparing land for construction,
he / she can qualify for a farmland tax break by keeping
a few cows or a small crop. Developers in some states continue
to claim the break even after they begin construction. Here’s
a typical example: In Iowa, real estate developer Knapp
Properties Inc. owns 239 acres near the Des Moines Airport.
The land, close by a Wingate Hotel and a Federal Reserve
check-processing plant, is subdivided for commercial development
and for sale at a total price of $7 million. But, because
Knapp allows local farmers to plant corn and soybeans on
it, the company paid $14,345 in property taxes last year
instead of $320,514.(2) This
sort of tax avoidance is being played out all over the country.
Surprisingly, very few states have taken action to prevent
it.
According to numerous studies on the costs of community
services, farmers pay out more in property taxes – even
if they are enrolled in a farmland protection program with
the state – than they receive in services from the government.
The opposite is true for residential housing; in every case,
the cost of government services exceeds the taxes paid by
property owners.(3) This is a
disturbing fact, and should weigh heavily on the minds of
state legislators when deliberating farmland taxation.
To slow the loss of our remaining farmland, we must, through
more effective, smart growth planning strategies, shift
development away from our remaining productive farmland.
Two concrete actions state legislators can take in this
vein are to strengthen their farmland tax laws, and incur
stiffer penalties on those who abuse farmland preservation
programs. States can:
- Require local governments to designate “agricultural
preserves,” in order to protect farmland and enter into
long-term, renewable contracts with farmers who own agricultural
land within preserves. Include a provision that allows
farmers to break the contract under extreme circumstances.
In California, the state signs 10-year contracts with
farmers (see below for more details).
- Institute a tax penalty system that is an appropriate
disincentive for developers intent on building-over farmland,
but will not dissuade farmers from entering into preservation
contracts.
- Keep the program focused on preservation and make it
flexible for farmers. Many farmland tax laws require farmers
to keep their land agriculturally “active.” Under theses
programs, if a farmer decides to leave his / her land
fallow for a year (as farmers practicing sustainable agriculture
sometimes do), they lose the tax break for that year.
As discussed above, farmers receiving tax breaks, in most
states, still pay more in taxes than they receive in services
from the government.
State Actions
California
Arguably, the most comprehensive and successful agricultural
tax break program in the country, the Williamson
Act, began in 1965. Since then, over 16.3 million acres
of agricultural land have been preserved under the program
in California.(4) The Act allows
farmers to sign renewable 10-year contracts with local governments.
Landowners agree to restrict use of property within preserves
to agriculture or open space for the term of the contract.
Owners of qualified land receive reduced property tax rates
varying from 20%-75%. To qualify for the break, the land
must be in an “agricultural preserve” area, the borders
of which are determined by local planning agencies, and
must comply with state law.(5)
If a landowner fails to comply with the terms of the Land
Conservation Contract, the local government may seek a court
injunction to enforce the terms of the contract. Where the
breach of the contract is a violation of land use restrictions,
normal zoning enforcement provisions will also apply. Farmers
may cancel their contracts under specific circumstances,
but not without a penalty.(6)
In 1998, California passed a law allowing the creation of
Farmland Security Zones (FSZ). Farmers who sign 20-year
FSZ contracts receive larger benefits, including a 35 percent
reduction in property tax assessments, in addition to values
tallied under Williamson Act contracts, and protection from
annexation and school sitings on agricultural lands. In
response to a state audit of the program in Santa Clara
County, the local government decided to strengthen the Williamson
Act within its jurisdiction in two ways: (1) By requiring
the establishment of commercial agricultural use on property
before recommending approval; and, (2) By requiring the
establishment of commercial agricultural use, once a piece
land is protected in the program, prior to any development.
Only developments required to carry out commercial farming
activities, or residences for farmers, are considered for
approval.(7)
For Williamson
Act updates in Santa Clara County, visit the Santa Clara
County Planning Office web site.
Massachusetts
Chapter
61A of Massachusetts General Law is designed to encourage
the preservation of the state’s valuable farmland and promote
active agricultural and horticultural land use, by assessing
agricultural property at “use-value” for farm owners who
keep their land in “active” agricultural use.(8)
The program is of note for a few reasons. First of all,
if a landowner plans to sell agricultural property or plans
to convert it to residential, commercial, or industrial
use, the local government has the right-of-first-refusal.
The government may also assign this option to a nonprofit,
conservation organization. Second, a farm under contract
pursuant to Chapter 61A that is no longer “actively devoted,”
whether or not the owner is considering selling the land,
would no longer qualify for the break. The owner would be
subject to the greater of the following two tax penalties:
(1) A roll-back tax for a 5-year period (the roll-back tax
is the difference between the amount the owner would have
paid in annual property taxes on the land if it had been
taxed at its fair market value and the amount of taxes he
/ she paid on the land under Chapter 61A during the same
time); or, (2) An alternative conveyance tax. This is based
on the conveyance tax rate applied to the sales price of
the land or, if converted, to the fair market value of the
land as determined by assessors. The conveyance tax rate
is ten percent, if the land is sold or converted or sold
out of agricultural use within the first year of ownership;
nine percent, if sold or converted within the second year,
and so on.
Michigan
Michigan is one of three states that has a circuit
breaker farmland tax program. Farmers claim state income
tax credits to offset their local property tax bills. They
must sign 10-year agreements with their local government
requiring them to keep the land in agricultural use.(9)
Michigan assesses a recapture tax on property converted
from agricultural use while receiving a farmland tax break
from the state. Under the Agricultural
Property Recapture Tax Act, a recapture tax is owed
for up to 7 years immediately preceding the year in which
the qualified agricultural property is converted by a change
in use, either by sale or development. The recapture tax
equals the tax benefit obtained with respect to the property
as the result of the cap in the period between the date
of the first exempt transfer and the subsequent change in
use, which is not to exceed 7 years.
South Carolina
South Carolina lawmakers tightened the state
tax code in the 1990s, in response to developers exploiting
the state farmland tax break. To qualify for the break,
cropland must now be at least 10 acres, and timberland,
5 acres; or, the owner must show at least $1,000 gross income
from the property for 3 of 5 years.
Press Clips
News Articles
4/5/04 Charleston Post-Courier: State’s
farmland tax law tighter than others
3/31/04 San Francisco Chronicle: AP
Investigation: Loopholes send millions in tax breaks to
developers
4/21/03 Gilroy Dispatch: County
closing ag tax break loophole
Press Releases
10/03 Committee for Green Foothills: The
Williamson Act: Closing loopholes in technical language
turns tricky
8/00 Great Lakes Bulletin: “Farmland
Preservation” Proposal a Sprawl Subterfuge
Links
Special thanks to Jesse Robertson-Dubois
of the American Farmland Trust for technical assistance
with this State Activity Page. |
