State Property-Tax Systems Make Little Sense to Struggling Farmers

This article is republished from Stateline, a project of the Pew Charitable Trusts.

Doug Schmale’s family farm straddles the Great Plains in two parts: 4,500 acres in western Nebraska and a separate 160-acre plot in eastern Colorado. Schmale pays wildly different property taxes on either side of the border.

“The last time I ran the numbers, I was paying somewhere close to five or six times as much in Nebraska than I was paying in eastern Colorado,” said Schmale, a third-generation wheat farmer. “And the better land, and the better school system, is in eastern Colorado.”

Schmale’s situation illustrates the load that farmers carry in Nebraska: a heavy property tax burden that, on top of a poor farm economy, threatens their ability to earn a living. On average, Nebraska farmers pay $16,200 in property taxes per year, among the highest figures of any state. And the state relies heavily on that money: More than a quarter of its total property tax revenue, much of which pays for public education, comes from farmland.

In fact, Nebraska brings in more cash taxing farmland than any state but California and Texas.

But as farmland continues to increase in value, even amid declining farm prices and weather woes, and farmers see their tax bills rise, some in the Nebraska legislature want to give farmers some relief — even at the potential cost of state revenue.

There is no relationship, critics say, between how the land is taxed and landowners’ ability to pay for it, and Nebraska’s antiquated system reflects a time when property ownership was an indication of wealth and income.

“I wish more than anything else that I could leave the state of Nebraska and move my farm to another state,” Schmale said. “Almost any state would be better than here.”

Nebraskans are not alone in carrying a heavy tax burden on agricultural property in comparison with their profit margins, said Katherine Loughead, a policy analyst with the Washington, D.C.-based Tax Foundation. The Northeast region is notorious for its high property taxes.

Policymakers in Nebraska, Iowa and other agriculture-intensive Midwestern states prioritize property tax cuts, Loughead said. “But real, lasting property tax reform is difficult to accomplish, so these debates can take years to play out.”

The Nebraska Revenue Committee introduced a bill this week that would lessen the property tax burden for taxes levied by school districts. The multi-step plan would reduce the tax evaluation for agricultural property for school district taxing purposes from 75% of its taxable value to 55% over a two-year period. Residential and commercial properties would be taxed from 100% down to 85% over three years.

Nebraska also would use excess state revenue to increase state aid to K-12 education so school districts are less reliant on property taxes. In his budget address this week, Republican Gov. Pete Ricketts recommended putting roughly $500 million over the next three years toward property tax credit relief by controlling local and state spending. Ricketts increased the property tax credit relief fund by more than 20% last year.

A grassroots group also is collecting signatures for a ballot initiative to provide all residents a rebate on their property taxes.

Assessing a smaller share of a property’s value is a promising start, said Adam Weinberg, communications and outreach director with the Platte Institute, a free-market think tank in Omaha. But even as Nebraska is spending $275 million a year on direct subsidies for property taxes, they are at historic levels for agriculture.

“If you look at the share of property taxes relative to their income, there aren’t too many people who would pay 40 or 50% of their income to run a business,” Weinberg said.

The Nebraska legislature has tried before to tackle the issue based on past complaints, but tax revenue and a lack of economic resources have limited its ability to address the problem. In 2017, taxes on agricultural property, which are overwhelmingly drawn from the state’s rural areas, were 47% of the state’s net farm income.

“I’m in a commodity that prices in the third world and I’m paying first-world taxes,” Schmale said.

The latest Census of Agriculture from the U.S. Department of Agriculture showed that in 2017, 43,000 Nebraska farmers paid $686.5 million in property taxes, a 43% increase from the previous census in 2012, and a 206% increase from 1997.

(The census figures reflect property taxes paid by producers for the farm share of land, machinery, buildings and livestock. They exclude taxes paid by landlords, which would result in significantly higher figures.)

By comparison, 37,000 Colorado farmers and ranchers paid about $129 million or $3,500 each. Nebraska farmers paid nearly five times as much, both collectively and individually.

Only two states collected more property tax from farmers than Nebraska. In California, 65,000 farmers paid $1.1 billion, or roughly $17,300 each.

In Texas, which has no state income tax, 236,000 farmers and ranchers paid $698 million, or roughly $3,000 each.

Following Nebraska are Iowa ($538 million), Illinois ($432 million), Ohio ($412 million) and Minnesota ($403 million).

Nationally, 1.9 million farms paid $9.4 billion in property taxes, for an average of roughly $4,900 per farm.

Five years earlier, 2 million farms paid about $3,800 each. Between 2012 and 2017, property taxes overall increased about 27%.

A Structural Inequity

States vary in what property they tax and how. For example, the taxable value of agricultural land in Colorado is based on a 10-year average of the earning or productive capacity of the land, regardless of the property’s market value.

“As a result, the actual values of agricultural property are often much lower than their market values, and they tend to be relatively stable from year to year,” according to the 2018 annual report from the division of property taxation at the Colorado Department of Local Affairs.

But the system is not without faults. Broader qualifications for farms and ranches in Colorado have resulted in people falsely claiming an agricultural tax status. Among the qualifications are that the land is used for grazing livestock, is in a conservation reserve program or has forestland in a forest management program.

“There’s literally companies out there that will run goats on your property for a couple days just so you can say you’re agricultural property,” said Chris Stiffler, a senior economist with the Colorado Fiscal Institute in Denver.

For farmers like Schmale, the tax burden dings his standard of living, retirement savings and ability to pay for new machinery.

“For an equal-sized farmer in Nebraska and a comparable-sized farm in eastern Colorado, those guys are always going to be ending up better,” Schmale said. “They’re going to have a competitive advantage.”

The Nebraska bill doesn’t go far enough, but it’s a “good step in the right direction,” said Republican state Sen. Curt Friesen, who’s among the Revenue Committee members to sign on to the bill.

“We have all said we didn’t get there in one year, so we’re not going to fix it in one year,” said Friesen, who’s also a corn and soybean farmer.

But critics seek a long-term solution. Without a constitutional amendment, a new group of senators could change the property tax calculation. Some also question whether the state will have enough money to cut property taxes without other revenue to make up for it.

Lawmakers tend to keep an eye on what neighboring states are doing because every state wants to remain competitive and avoid losing residents over high taxes, said the Tax Foundation’s Loughead.

“We’ve had an over-reliance on property taxes for a long time,” said John Hansen, president of the Nebraska Farmers Union, “and the legislature and the governor have not been willing to step up and accept the responsibility to fix a structural inequity.”

Grassroots group True Nebraskans is collecting signatures to put a ballot initiative on the 2020 ballot that would provide a 35% rebate of the property tax all residents pay and credit it to their state personal or business income tax.

The proposal wouldn’t require local governments to change their policies and attempts to move Nebraska toward a consumption-based tax revenue stream, according to advocates. The state ranks among the lowest in the United States in sales taxes and school aid.

But critics of the initiative, including Ricketts, warn that it would result in significant state tax increases if adopted.

“The governor has accused us of attempting to blow a hole in the state budget,” said True Nebraskans’ Campaign Manager Patrick Bonnett. “To that I say, the legislature has spared precious little to the hole that’s been blown in local Nebraska families’ budgets.”

‘We’ll Tough It Out’

In 2017, Frederic “Fritz” and Nancy Oltjenbruns were fed up. That year, they paid Lancaster County, Nebraska, roughly $50,000 in property taxes for their 585-acre family farm in Ceresco, 20 miles north of Lincoln. They took home about $30,000 for themselves.

“With that kind of money, you would think our kids could converse with Einstein and our roads would be paved in silver,” Fritz said. “We didn’t think we were getting much value for our money.”

The couple became the poster children for the Cornhusker State’s property tax woes when they left their 150-year-old family farm behind. After considering states including South Dakota, Minnesota, Iowa and Kansas, they settled near Warrensburg, Missouri. They bought 850 acres on the Blackwater River with 2-foot-thick topsoil, and a third more rain than Ceresco, so they no longer worry about drought.

“The first year down here was the best crop of my entire career,” Fritz said.

The next year wasn’t, given the region’s historic flooding. But the Oltjenbruns say they’re still better off.

“We’ll tough it out,” Fritz said.

In Missouri, they paid $1,100 in property taxes for their farm in 2018. After they added a 60-foot grain bushel and 100-foot machine shed, their taxes increased, to $1,200 in 2019.

Overall, Missouri farmers paid roughly $235 million in property taxes in 2017, a 21% increase from 2012.

“You can’t help but notice,” Nancy said, “things are different when you move to another state and wonder, why does it have to be this way?”

Sign up for our newsletter

A Structural Inequity

‘We’ll Tough It Out’

Related