For landowners in Ohio, their farmland’s property tax is not based on the market value of the land but instead through the Current Agricultural Use Value Program (CAUV). The stated intention of the program is to provide a value of agricultural farmland based on expected value from agricultural use and depends on soil type, yields, prices, non-land costs, and capitalization rate (derived from interest rates on farmland) that is used in place of the market value of land.
Ohio introduced CAUV in the mid-1970s as a way to reduce urbanization pressures on property tax values of farmland. CAUV reduced the property assessment value to 35% of market value in 1985 with a steady decline to below 14% of market value in 2006. However, since 2006 there has been a rapid increase in CAUV values, which has led to CAUV values being at least half of the market value since 2014. This rapid increase in CAUV values prompted lawmakers in Ohio evaluate the formula used in CAUV calculations and propose changes to the formula to reflect more modern appraisal techniques. The new changes, from House Bill 49, were signed into legislation on June 30, 2017 and will be phased-in over the next six tax years starting with 2017. Ohio Department of Taxation has already calculated the CAUV values for 2017 and determined that the average CAUV value was $1,153, which represented a 12% decline in average CAUV from 2016, which averaged $1,310. Here in the Department of Agricultural, Environmental, and Development Economics at Ohio State, we are currently projecting the average CAUV value for 2018 to be $1,023 which will result in an approximately 11% decrease in CAUV values. We anticipate this decline to continue as the phase-in process continues through the 2022 tax year.
CAUV values are assigned to each of the over 3,500 soil types in Ohio and based partly on the potential revenues from corn, soybeans, and wheat. Prior to 2006, the yields of corn, soybeans, and wheat for each soil type was based on its yields in 1984. This format did not account for any yield trends for the crops, which artificially reduced the expected revenues for soils in CAUV calculation. Beginning with 2007, yields have been adjusted by statewide trends for each crop, which partially explains the rise in CAUV values over time (seen in Figure 1). Even though the average CAUV value is expected to decline in 2018 by 11%, not all soil types will decline by 11% as some will see larger decreases and others smaller based on each soil types’ expected yields.
Figure 1: 2018 Projection for CAUV Values of Cropland
Other factors, which led to the increase in CAUV values since 2007, have been high prices for crops and falling interest rates. For CAUV calculations, most components in the calculation are based off of a seven-year Olympic average -- meaning, for example, that the previous seven years of corn prices will remove the highest and lowest values to take the average of the five remaining years. These are backwards looking as well, which means that the 2018 CAUV values will utilize crop prices and interest rates from 2011 to 2017.
The largest adjustment to CAUV calculations in 2017 is the update to how the capitalization rate is determined. The capitalization rate is a mixture of interest rate on a 30-year mortgage on farmland along with the appreciation of the farmland. Previously, the appreciation of farmland was based on the Federal Funds rate but this has been replaced by official values from USDA on the average total rate of return on farm equity. The overall effect is to increase the capitalization rate, which further reduces the CAUV values.
In order to help ease the transition to lower CAUV values, the changes in CAUV values are phased in at half of the difference of the previous year’s CAUV value. For example, if a soil type had a CAUV value of $1,000 in 2016 and would then have a 2017 value at $900 under the new CAUV formula that is a difference of $100. Then for the tax year of 2017, that soil type’s CAUV value would officially be $950 for calculating the tax bill -- a decline of $50. The same process occurs for the 2018 CAUV calculations. If the new calculation of our hypothetical soil type ends up being $850, then the official CAUV value in 2018 for that soil type would be $900 -- a $50 decrease from its official CAUV value in 2017. Figure 2 displays the expected phase-in for the 2018 CAUV values, if the phase-in was not in place then our estimates for the average 2018 CAUV values would be $893 instead of the current $1,023 estimate.
Figure 3: Schedule for Updating CAUV
In addition to the phase-in procedure of the new CAUV calculations, property taxes in Ohio are only adjusted once every three years. While CAUV values update every year, only counties, which are receiving an update to property taxes, will correspondingly see a change in their CAUV values. Changes in property tax calculation depends on what county one lives in with the most counties (41 of 88) receiving updates in 2017. In 2018, there will be 24 counties updating and the remaining 23 counties update in 2019.
Overall, the new 2017 legislation related to CAUV should continue to put downward pressure on CAUV values over the next 5 cycles. Farmers can expect to see the reduction in their property tax bill throughout these years in part to the new CAUV calculations as well as the high commodity prices around 2012 being dropped from the CAUV calculations.
If you’d like to learn more about the changes in the CAUV calculations and/or how CAUV is calculated, please see the more detailed technical report at: https://aede.osu.edu/sites/aede/files/publication_files/2018CAUVProjectionsReport.pdf
Or view the projected CAUV values for each soil type here: https://aede.osu.edu/file/cauvprojections2018xlsx