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Agricultural Land Tax

2003 Agricultural Land Reappraisal Report
1997 Full Reappraisal Values
2003 Full Reappraisal Values

History

As of July 1, 1973, the Department of Revenue was delegated the responsibility for classifying all agricultural lands. Previously, that was the duty of the county commissioners under Chapter 191, Laws of 1957. As with the previous law, the values determined by the department were to be based on the productive capacity of the land, i.e., the ability of the land to produce income from a cash crop (wheat, hay, forage for grazing, etc.).

Standardized agricultural land valuation schedules were developed in the early 1960s. The standardized values were based on a capitalization of net operating income (gross income less operating expenses). Data sources for income, expense and production information included the USDA Crop and Livestock Reporting Service, Montana Department of Agriculture Statistics, the ASCS, SCS, BIA, BLM and other government agencies.

The department updated and revised the agricultural land valuation schedules for the reappraisal cycle that concluded on December 31, 1985. Again, the primary source of the data was the various government agencies listed above. A concerted effort was made to include individual operations and agriculturally related associations to help refine the figures.

After developing the new valuation schedules, public comment was solicited through the administrative rules process. Agriculturalists expressed their lack of support of the new valuation schedules because the new schedules would have increased the valuation of some types of agricultural land. To address their concerns, former Governor Ted Schwinden suspended the rules hearing process. Governor Schwinden directed the department to assemble an advisory committee to review the data and procedures and make changes if necessary.

The advisory committee had difficulty arriving at a consensus on the agricultural land valuation schedules. The 1985 Legislature froze the agricultural land valuation schedules that were in effect, specified the approach for developing future agricultural land valuation schedules and required the formation of an agricultural advisory committee. In September 1990, the Department of Revenue Agricultural Advisory Committee was appointed. The committee reviewed, evaluated and recommended changes to the taxation of agricultural land. It presented its recommendations at public meetings held throughout the state. The recommendations of that committee were presented in legislation that was passed by the 1993 Legislature as Senate Bill 168. It required specific methodology, formula, and data sources in the calculation of the new agricultural land valuation schedules. While the appraised value of agricultural land increased significantly, the statewide impact of the new schedules was taxable value neutral. There were shifts in value, however, within the various classes of agricultural land (i.e. grazing, non-irrigated farm land, continuously cropped hay land, non-irrigated continuously cropped farm land, and tillable irrigated land). The tax rate for agricultural land was reduced from 30% to 3.86%. That was the same rate used for residential and commercial property.

To mitigate the impact on agricultural taxpayers, the bill provided a phase-in of the change in taxable values over a four-year period. That affected both increases and decreases in value.

Finally, Senate Bill 168 established another interim agricultural land advisory committee to review water costs and other issues applicable to the valuation and assessment of agricultural land. That committee was appointed in November 1993. It made recommendations to the Department of Revenue.

Committee recommendations adopted by the 1995 Legislature in Senate Bill 198 included:

  • Allowing a base water cost of $ 5.50 per irrigated acre
  • Establishing an energy cost base year for irrigated land
  • Limiting allowable water costs to a maximum of $35 per acre of irrigated land
  • Continuing the phase-in of the taxable value of irrigated land

Valuation Formula for Agricultural Land

Statutory formula for determining productive capacity value:

The formula for valuation of agricultural land is: V = I/R

Where:
 V is the value of each type of agricultural land
 I is the net income of each type of agricultural land
 R is the capitalization rate.  That rate converts the net income estimate into an estimate of productive value.

Example of Calculation:

Income Per Acre = $50
Capitalization Rate = 6.4%
Value = $781.25 Per Acre
V = $50 divided by 6.4% = $781.25/Acre

If the Capitalization Rate decreases, the taxable value and property tax on the land increases. If the Capitalization Rate increases, the taxable value and property tax on the land decreases.

Classification of Agricultural Land Taxation

More than 50 million privately owned acres are classified as agricultural land in Montana. Classification is the determination of the agricultural use and the productive capability of that use for each acre of taxable agricultural land.

The criteria for classifying property as agricultural are:

  • Parcels of land 160 acres or more under one ownership are taxed as agricultural land. These lands are taxed at 3.543% of their agricultural productive capacity value in 2001 and 3.460% in 2002.
  • Parcels of land containing 20 acres or more but less than 160 acres under one ownership are taxed as agricultural land if the land is used primarily for raising and marketing agricultural products. The agricultural use test presumes that land is agricultural if $1,500 in annual gross income is produced and marketed from the land by the owner, owner's immediate family, agent, employee or lessee. These parcels are taxed at 3.543% of their agricultural productive capacity value in 2001, and 3.46% in 2002. Parcels of land containing 20 acres or more but less than 160 acres which do not qualify under these criteria are considered non-qualified agricultural land. These non-qualifying parcels are valued as average (Grade 3) grazing land. The taxable value of the non-qualifying taxable land is then computed by multiplying that value by seven times the tax rate for agricultural land. Since the current rate for agricultural land in 2001 is 3.543%, the tax rate for this property in 2001 is 24.801%.
  • Parcels of land less than 20 acres under one ownership are taxed as agricultural land if they produce and the owner markets $1,500 in annual gross income from the raising of livestock, poultry, field crops, fruit, and other animal or vegetable matter for food or fiber.
  • Land is not valued as agricultural if it is subdivided with stated restrictions prohibiting its use for agricultural purposes. The land may not be devoted to a residential, commercial or industrial purpose.

Agricultural Classes of Land

Grazing Land
Those lands, either native range or domestic range, which are used to support agricultural livestock. Grazing land is graded on the basis of the soils capacity to produce palatable forage for livestock without causing injurious effect to the vegetative cover of the land. Carrying capacity is measured in Animal Unit Months per acre (AUM/AC) or acres per Animal Unit Month (AC/AUM). Grazing land which is irrigated a majority of the time and has a reliable source of water will be classified as irrigated land. Dryland alfalfa or grazing land which is not irrigated or hayed a majority of the time is classified as grazing.

Tillable Irrigated Land
All hayland and cropland that is irrigated a majority of the time (2 out of 3 years, 3 out of 5 years, etc.). All agricultural land, including grazing land, in a specified irrigation district where the land is designated as irrigable, with shares of water appurtenant to such land, shall be classified as irrigated, regardless of whether the water is actually applied or not applied to the land. Land that has water for irrigation most years shall be classified as irrigated if the water is used. Those lands with water available most years but the water is not used, will be classified according to current use. Land that is irrigated only during high water may be classified according to use, but it should carry a higher grade to reflect the occasional extra water and increased production. Irrigated schedules are based on tons of alfalfa per acre. Alfalfa is the predominant crop grown on irrigated fields. Adjustments can be made for other cash crops using a conversion guide. There are three rotations, each indicative of the cash value achieved from the production of generally-accepted irrigated crops grown in a particular area. As shown below, these rotations are generally differentiated by the variety of crops which can be grown in a particular area (i.e., the options a grower has in rotating various crops on his/her irrigated cropland acreage). The number of frost-free days may influence the extent of options available. However, available cropping options are not limited exclusively by frost-free days. Minimum Rotation: 90 or less frost-free days. Production from this land would be limited to alfalfa hay and small grains. Growers would not have the option to profitably produce any other crops over a sustained period of years. Medium Rotation: 91 to 110 frost-free days. Lands are placed in this rotation when the grower has the option of producing a greater variety of crops than listed in the minimum rotation. Growers should be able to produce alfalfa hay, alfalfa seed, small grains, edible beans, sunflowers, safflowers, and potatoes. Maximum Rotation: 111 or more frost-free days. These lands are capable of producing any crop which can typically be grown in Montana. Examples are all crops grown in minimum and medium rotations and, also, corn for silage, corn for grain, and sugar beets. Climatological data should be utilized to assist appraisers in placing irrigated land into the proper rotation.

Continuously Cropped Non-Irrigated Hayland
Lands on which the native vegetation, non-irrigated alfalfa or other domestic varieties are cut for hay yearly or a majority of the time over a period of years. Hayland that is irrigated less than a majority of the time or that does not have a reliable source of water is classified as continuously cropped non-irrigated hayland. It should carry a higher grade to reflect the occasional irrigation.

Non-Irrigated Farmland: Summer Fallow and Continuously Cropped
Typical dryland farming found in the majority of Montana. Strip farming or "block farming" are the most common forms of non-irrigated farmland. Summer fallow: Typically, crops are produced every other year or every third year and the land is left idle in the off years. Continuously cropped lands are found primarily in northwestern Montana. Normally, crops are grown 3 out of 4 years and it must be an accepted practice for the area. Grading is based on bushels of wheat per acre. Conversions are made for barley production.

Agricultural Land Class Valuation Schedule
Valuation is the determination of agricultural land valuation schedules and the application of those valuation schedules to each acre of taxable agricultural land.