Michigan Land Use Institute

MLUI / Articles from 1995 to 2012 / New Farmland Tax Proposals Encourage Development, Not Protection

New Farmland Tax Proposals Encourage Development, Not Protection

Hidden subsidy invites rampant land speculation

May 12, 2000 | By Patty Cantrell
Great Lakes Bulletin News Service

A Michigan Land Use Institute Assessment

Governor John Engler encouraged residents across the state earlier this year when he announced his intention to slow the loss of Michigan farmland to suburban development by reducing property taxes on agriculture. The public and the media welcomed the Governor's announcement as a sensible solution to an urgent problem.

But a package of farmland-related bills now moving through the Legislature includes two measures that are sure to accelerate the rate at which crop, orchard, and pastureland are slated for development. Those proposals, Senate Bill 1246 and 709, provide developers and land speculators with a taxpayer-funded subsidy to buy and develop farmland at markedly reduced property tax rates.

The proposals reward land speculators by intentionally failing to make an important distinction between land used for farming and farmland carved up for development. Other states address this problem by requiring those who convert the land to repay the taxes they avoided before developing it. The two Michigan proposals are patterned after that idea. But their tax repayment requirements are so low that this "recapture fee" would mean nothing to speculators, whose intention is not to keep the land agricultural but to develop it at the most profitable opportunity.

If approved, S.B. 1246, and S.B. 709 would accelerate the loss of farmland in Michigan, erode the foundation of the state's $4 billion farm economy, and transform miles of rural countryside into ugly and damaging sprawl. Moreover, they would defeat the purpose of Gov. Engler's proposed Farmland Preservation Fund, a central component of his package. Money for the fund is supposed to come from a tax recapture fee on farmland that is developed. But if those recapture fees are negligible, the fund will be useless.

The Michigan Land Use Institute has analyzed S.B. 1246 and S.B. 709, as well as the other proposed farmland protection bills. We conclude that, with the exception of these two bills, the package is strong and will go a long way toward helping farmers lower their costs, stay on their land, and keep Michigan agriculture strong.

The Institute recommends that the Legislature amend the developer-friendly bills significantly to eliminate the incentive for developers to speculate on agricultural land at the public's expense. The Institute calls on the Legislature to establish a credible agriculture tax recapture fee so that the state's new property tax policy produces the farmland preservation voters want.

Gov. Engler's announcement on February 15, 2000—the first comprehensive plan by the Administration to simultaneously strengthen the farm community and stem sprawl—was especially timely.

Michigan farmers are receiving some of the lowest market prices of the century. They are also paying some of the highest taxes in the country. Michigan is one of only two states that taxes farmland on the basis of its value for development, not its farming value. That development tax rate helps put Michigan farmers in the highest bracket in the nation: Their property taxes are double the national farmland average.(1)

The state's farmers are now singularly unable to resist the lure of high returns that come from selling their land for development. Michigan as a result loses 75,000 acres of farmland a year—more than 1 million acres in the last 15 years, the eighth highest amount in the nation.(2)

Such swift conversion of agricultural land to sprawling suburbs destabilizes rural economies, pushes up municipal expenses, and harms the environment. It also erodes the principal natural resource—abundant and rich farmland—upon which the state's second largest industry is based. A more balanced property tax structure will help farmers cut costs and hang onto the fertile land that is so valuable to the state's character and economy.

The key elements of the Governor's farmland protection package are:

Preferential tax treatment for agricultural land
The preferential tax treatment portion helps farmers in three ways.

First is the proposal to assess farmland property taxes on the land's agricultural value instead of its development value. This change to "use value assessment" would save Michigan farmers up to $84 million per year, according to the Senate Fiscal Agency.

The Governor also proposes to limit increases in the assessed value of agricultural land, upon sale, to 5 percent or the rate of inflation, whichever is lower, if the land remains in agricultural use. Currently, assessments on all land in Michigan "pops up" to a higher assessment based on market value when it is sold. The proposed elimination of the state's "pop-up tax" for agriculture could reduce assessments by as much as 50 percent or more over time.(3)

Finally, under this property tax package, farmland would continue to be exempt from the 18 mill education levy that the state now applies to all businesses and other land. This continued exemption amounts to approximately $130 million annually in savings to farmers.(4)

A "Recapture" Fee to Prevent Speculator Windfalls
The differences between development land values and agricultural land values are so great that failure to recapture a portion of the avoided taxes would give land speculators an incredible windfall. Without a significant recapture fee, developers and speculators would have every incentive to buy up land, hold it at low tax costs, and develop it with no penalty. To accomplish the public purpose of farmland preservation, the state must include a recapture fee that protects the public's investment in agriculture.

Ample State Funding for Farmland Preservation
The strength of Gov. Engler's original proposal is that it recognizes both the need to reduce agricultural property taxes and raise funds to protect threatened farmland. The mechanism for making both work to slow sprawl is the proposed recapture fee, which would build up an Agricultural Preservation Fund large enough to put a dent in farmland loss. Grants from this fund would go to counties for local purchase of development rights, establishment of conservation easements, and pursuit of other farmland preservation tools.

After working with agriculture interests to shape the farmland protection package, the Engler Administration entered into closed-door negotiations this spring with the Michigan Association of Home Builders, the Michigan Association of Realtors, and the Michigan Chamber of Commerce.

The resulting legislation, S.B. 1246, introduced by Senator George McManus (R-Traverse City), undermines the entire legislative package by reducing the proposed recapture fee to an insignificant amount. A similar proposal, contained in S.B. 709, was approved late last year by the Senate and is pending in the House Agriculture Committee.

If passed, these bills would give speculators interest-free, government loans in the form of reduced property taxes for buying up farmland for development. The proposals would then also forgive the public's loan by requiring hardly any repayment.

An Example: Livingston County
Consider the actual example of 235 acres of farmland in Livingston County with a taxable value of $158,000. A developer recently bought this land from a farmer for $3 million. The developer plans to subdivide the land this year into more than 160 lots to sell at prices ranging from $80,000 to $120,000, for total gross land sales of nearly $15 million.

Under the Governor's use value assessment proposal, the property taxes would not be based on the market value of $3 million but instead on the land's agricultural value of approximately $235,000 (at typical farmland values of $1,000 per acre) until the developer subdivides the land into 160 pieces. In this case, the preferential agricultural tax savings would add up to $61,562 per year.(5)

Once the farmland is subdivided and developed, S.B. 1246 would require essentially nothing in return to the state treasury for the preferential agricultural tax savings the farmland has received. That's because the recapture fee in S.B. 1246 is based not on the land's market value, but on the difference between its taxable value and the agricultural value under use value assessment.

In this example, the developer would repay the citizens of Michigan only $3,525, or $15 an acre on land worth nearly $13,000(6) per acre. This recapture fee, under S.B. 1246, is only 0.1 percent of the land's actual market value of $3 million.

The Institute's analysis of similar land speculation in more rural Jackson County indicates that speculators would repay only $2.50 an acre for land sold at $5,000 an acre for new housing.(7) In Senate hearings, the Engler Administration has proposed doubling S.B. 1246's recapture fee. But such a move would still leave Michigan citizens with an insignificant recapture fee of 0.2 percent of market value, or $5 an acre in this Jackson County example.

Funding for an Agricultural Preservation Fund would be inconsequential if the recapture fee in S.B. 1246 is approved. Our estimate, based on a farmland loss rate of 75,000 acres per year, is that the developer-friendly recapture fee would generate only $1 million to $2 million per year.(8)

Michigan, therefore, would, remain far behind other states, which are putting significant amounts of money into preserving farmland. For example:

  • Maryland generates more than $20 million per year from a 5 percent farmland conversion recapture fee and from a dedicated portion of the state's real estate property transfer tax.
  • Pennsylvania has nearly $100 million available during this fiscal year for farmland preservation, $22 million in dedicated cigarette tax revenue, and more than $71 million in general fund appropriations.
  • New Jersey anticipates more than $100 million in available funds each year over the next 10 years as a result of a $1 billion bond referendum that state voters approved last fall.
  • California approved a $2.1 billion referendum on March 7, 2000, to provide funding for environmental and open space projects. It also has allocated at least $25 million this year to farmland protection efforts in addition to a 12.5 percent market-value based recapture fee on farmland converted to development.
  • Ohio's Legislature has approved a $400 million bond initiative to provide funding for farmland and open space protection.

If Michigan hopes to slow the loss of farmland through the Agriculture Preservation Fund, the Legislature needs to approve a recapture fee that will actually provide the funds required for significant farmland protection.

When a state provides preferential tax treatment to farmland, it is only fair and appropriate to recapture those publicly-funded benefits when the land is taken out of production for development.

Other states already have followed this principle:

  • Maryland levies a fee equal to 5 percent of the market value when farmland is converted for development.
  • California's and Connecticut's recapture fees are 12.5 percent and 10 percent of market value, respectively.
  • Maine assesses a penalty of 20 percent of the market value upon conversion if a landowner owns and enrolls farmland in the preferential agricultural taxation program for less than five years.

The Institute proposes a farmland recapture fee for Michigan of 20 percent of market value phased in over four years. Such a fee would give farmers the tax breaks they need but discourage speculation on agricultural land. The Institute's recapture fee recommendation also would ensure that the Governor's proposed Agriculture Preservation Fund would actually work. The Institute estimates that posting the recapture fee at 20 percent of market value would generate $80 million annually, which is the magnitude of financial commitment required to protect Michigan's important farmland.(9)

The current recapture fee proposals advanced by the home-building lobby are a subterfuge. The attempt is to mislead lawmakers and the public into thinking something is being done to stem the loss of Michigan farmland. The truth is that the developer-friendly proposals are specifically designed to provide taxpayer-supported subsidies for speculators to purchase farmland and carve it up into subdivisions while they receive tax incentives intended for farmers.

It is urgent for the state to take an active role in providing a competitive tax structure that encourages farmers to keep their land in agriculture. Michigan residents, however, will not support new tax policy that tips the scale in favor of wealthy developers and land speculators. The Institute calls for effective public policy that provides incentives for keeping farmers farming, and recaptures the full value of all preferential tax benefits when agricultural land is converted to development.

(1)USDA Economic Research Service.
(2) U.S. Census of Agriculture, 1982-1997.
(3) Michigan Department of Treasury. 1999 Agricultural Taxable Value - $7.3 billion. 1999 Agricultural State Equalized Values - $9.7 billion. The current cap on assessment increases has already reduced taxable values by 25 percent compared to S.E.V.
(4) 1999 Agricultural Taxable Value of $7.3 billion x 18 mills.
(5) Under the current property tax structure, the property should be assessed at 50% of market value, or in this case $1,500,000. Instead, it will be assessed at 50% of agricultural value, or $117,500, assuming typical farmland values of $1,000 per acre. The amount of taxes saved due to agricultural use value assessment is ($1,500,000 - $117,500) x 25 mills (local rate) = $34,562. In addition, agricultural property is exempt from the additional 18 mills education levy, which is levied on all other land. The amount of taxes saved due to the agricultural 18 mills exemption is $1,500,000 x 18 mills = $27,000.
(6) Taxable value ($158,000) - 50% of agricultural value ($117,500) x 12.5 mills (1/2 the local rate) x 7 years. Assumes agricultural values of $1,000 per acre.
(7) Recapture amount calculated in the same manner as the previous footnote. Assumes agricultural values of $800 per acre because of less productive soils.
(8) An estimated average $10 per acre recapture fee x 75,000 acres of farmland lost to development each year = $750,000. Or, using the Senate Fiscal Agency's estimate of $84 million in savings from use value assessment, the calculation would be: $84 million divided by 10 million acres of farmland x 7 years x 75,000 acres converted to development each year = $4.4 million. S.B. 1246 would recapture only half of the $4.4 million.
(9) Four times Maryland's 5 percent recapture fee, which generates $20 million annually.

Michigan Land Use Institute

148 E. Front Street, Suite 301
Traverse City, MI 49684-5725
p (231) 941-6584 
e comments@mlui.org