Lansing Tries Again on Farmland Tax Reform
Are House-passed bill’s anti-speculative measures strong enough?
July 11, 2004 | By Patty Cantrell
Great Lakes Bulletin News Service
State lawmakers from rural districts are again trying to bring property tax relief to Michigan farms. Success could help slow sprawling development.
The Michigan House of Representatives has approved legislation that would allow qualified local governments to make dramatic cuts in property taxes on agricultural land. It is the Legislature’s latest attempt to tax farmland for its agricultural value rather than its development value in a longstanding effort to preserve active farmland from commercial and residential development.
The bill, which now goes to the state Senate for debate, would grant dramatic tax reductions of between 60 and 75 percent to working farms. To qualify, local governments would have to have a comprehensive land use plan in place, and landowners would have to agree to keep farming for at least 20 more years. In exchange, the state’s currently very hard-pressed general fund would lose an estimated $27 million annually in lower property tax revenues, after a five-year ramp-up period that would start in 2006.
The proposal, House Bill 5030, is sponsored by Traverse City Republican Representative Howard Walker and aims to help Michigan farmers in their struggle to survive in the face of both chronically low prices for commodity crops and the state’s unusually high tax rates on agricultural land. Michigan is one of only two states that taxes farmland based on its potential value as fully developed commercial or residential property, rather than on its generally much lower value as a farm. Michigan farms pay an average tax of $17 to $20 per acre, roughly twice the national norm of $7 to $10 per acre.
Farmland protection activists argue this difference is often a deciding factor when a farm owner gives up on the low-profit industry and sells out to high-dollar subdivision and strip mall developers. Farmland loss has been severe and steady in Michigan over the past two decades, which has helped fuel the state’s extraordinary rate of sprawling development, among the nation’s highest.
Farmland Protection and Smart Growth
Legislators from rural districts have been pushing their fellow lawmakers to reduce the property tax burden of Michigan farms for many years. Last August, the Michigan Land Use Leadership Council, the bipartisan panel that Governor Jennifer M. Granholm tasked with charting a new course for statewide economic development, called for such farmland tax relief as a way to keep farms in business, restore rural communities, and slow sprawl.
The council noted that protecting farms also protects Michigan’s scenic countryside, wildlife and tourist dollars that depend on it, and waterways that suffer severe pollution from massive storm-water runoffs that large-scale suburban development generates. Studies consistently show also that preserving active farmland saves taxpayer dollars because farms require far fewer municipal services than sprawling suburban development.
The question now before the state Senate is whether Representative Walker’s bill is worth its formidable price tag. At issue is whether the bill builds in enough deterrents to landowners who might soak up the tax breaks and then convert the land to sprawl anyway. Such actions would defeat the legislation’s farmland protection purpose and cost taxpayers a large amount of money.
"HB 5030 does seem to line up with the provisions of the governor’s land use task force," said Brad Deacon, legislative liaison for the Michigan Department of Agriculture. But there is some concern about how well the bill, which requires a 20-year commitment to keeping land in agriculture, provides for the changing circumstances of a farm family while also preventing unwanted speculation. "We want to make it possible, but not easy," he said, to get out of the contract. "We can hopefully accomplish those goals by allowing someone to get out of the program only for a few specific reasons."
Pluses and Minuses
The bill gives landowners who enroll their farmland in proposed "agricultural district" contracts either a Single Business Tax credit or an income tax refund for the difference between the total property taxes they paid that year on their land and the legislation’s proposed, dramatically reduced, $5-per-acre flat rate.
The proposed agricultural district contract operates much like the state’s current Farmland and Open Space Preservation Program, known by its statutory reference as Public Act 116. Representative Walker’s bill, however, is open to more types of farms because it does not limit eligibility to lower income farms only.
These higher-income farms could include developers waiting for the best chance to build on the land or large livestock factories, which are some of the most profitable agricultural operations in Michigan but also the most controversial due to ongoing pollution problems and conflicts with neighboring farms over nauseating odors. However, a large group of higher-income farms the bill would benefit are smaller operations in urbanizing areas, where farmland is most threatened. Many of these parcels do not qualify for P.A. 116 because owners have off-farm incomes or higher revenues derived from specialty crops.
The opportunity to keep those urbanizing farms in agriculture gives H.B 5030 momentum in the Legislature. So does the bill’s requirement that local governments plan for farming and other land uses. The bill would allow local governments to offer agricultural district contracts to farms only if the county they are in has an up-to-date, comprehensive land use plan that includes strategies for farm and farmland protection. Observers say that as many as 20 of Michigan’s 83 counties qualify currently.
Representative Walker said he believes the requirement may bring more citizen pressure on non-qualifying local governments to do the same: "If their local government doesn’t have a comprehensive plan, this gives citizens a say in whether they’d like to have one."
Running the Numbers
The Senate’s work on the bill will focus on how well it will deter speculation, while also considering calls by farm neighbors of livestock factories that the bill expressly prohibit operations that violate environmental laws from receiving the property tax benefits.
Some analysts and state lawmakers concerned about speculation issues are scrutinizing the provisions in H.B. 5030 that would allow landowners to get out of the 20-year contract in either years 10 or 15 by paying fees of, respectively, either 7 or 5 percent of the land’s "true cash value," as determined by the local tax assessor. All revenue from required paybacks and penalties from broken contracts would go to the state’s Agricultural Preservation Fund. This fund, which is supposed to help local farmland preservation boards purchase farmland development rights, has been without a revenue source since the Legislature created it four years ago.
Doubts about the effectiveness of H.B. 5030’s early-out penalties center on the fact that the assessed, "true cash value" of property in Michigan is often less than its market value. In some cases, computing the penalty that way could amount to an actual net gain for the landowner because they would have to pay back less than they received in tax benefits, said Scott Schrager, special assistant to the state treasurer.
Farmland protection advocates, including the Michigan Land Use Institute, have long called for fees that are significantly greater than the total tax benefits. They argue that requiring landowners to only pay back the benefits they received amounts to a zero-interest loan for holding onto land until the development price is right.
Treasury analysts are still looking at whether Rep. Walker’s bill would encourage speculation with insignificant fees or effectively discourage it with a real penalty.
The proposed legislation "clearly will get people enrolled, and it requires them to make a long-term commitment," said Mr. Schrager. "The question still being looked at is what impact the recapture fee will have" in preventing farmers from selling out anyway.
The early-out penalties do appear stronger than those proposed in other, earlier attempts to tax farmland according to its actual, not highest possible, use. An extremely weak recapture fee sealed the fate of an otherwise promising package of use-value bills in 2000 sponsored by then Senator George McManus, a Traverse City Republican like Representative Walker.
That bill, which the Institute and other observers said was essentially hijacked by pro-development interests, would have required developers to pay back less than 1 percent of the land’s market value after enjoying years of large tax breaks and nevertheless converting the land to sprawl sites such as suburban tracts and shopping areas. The Legislature rejected the package, and farms in Michigan continued to pay high property tax rates.
Patty Cantrell, a journalist and economist, directs the Institute’s Entrepreneurial Agriculture Program. Reach her at email@example.com.