Everyone loves the family farm. People who otherwise dote on the federal estate tax are generally at great pains to ensure that no small farm will ever be subject to the tax.
This phenomenon has been around in the property tax world for years. Virtually all states have enacted a special property tax break for farmers, usually known as "use value." The use value exemption typically says that agricultural property will be valued, for property tax purposes, according to its use as farmland-- not according to its potential market value to developers. The idea is that as suburban development encroaches on farmland, farmers shouldn't be pressured by growing property taxes into selling their land.
On one level, use valuation clearly works. Property taxes paid by farmers in use-value states are much lower than they would be if this tax break didn't exist. And given the low profit margins of most farmers, this has to help make it possible for long-term farmers to stay on their land. But in more and more states, good government advocates are pointing out that some of the people benefiting from use valuation don't appear to be the sort of farmers we cherish as a nation. This Orlando Sentinel article describes the apparent widespread abuse of this tax break in Florida.
The problem described in the article is that the tax break is being claimed by land developers, whose long-term goal is to convert agricultural properties to residential use, who engage in just enough agricultural production to qualify for the tax break.
This is clearly a bad thing. As with most tax breaks, use value is designed to change people's behavior. In this case, the desired behavior is keeping farmland in production rather than selling it off for sprawl-inducing development. When land speculators claim the credit just because it's available, and engage in just enough farming to satisfy the terms of the credit, they are responding to the tax incentive just like the family farmer-- the problem is, they're just not the sort of people the tax break was designed to help.
So how do you ensure that this tax break only goes to legitimate family farms? Under current Florida law (according to this article), purchasers of agricultural property can be denied the use value tax break if they buy ag property at a price that is more than three times its agricultural value. The thinking here is that if people are willing to spend that much for the land, they must have a non-agricultural use in mind.
This seems like a decent first-cut approach. But it prevents only the most flagrant violations of the tax break's behavioral goal. The big-picture problem with special tax breaks of this kind is that anytime lawmakers decide to reward a certain type of behavior with tax breaks, they have to spend their scarce resources ensuring that people comply with the rules for eligibility.
And use valuation adds an additional compliance wrinkle: the problem here isn't that these part-time farmers aren't engaging in the right behavior, but that they don't plan to do it any longer than they have to in order to claim the tax break. So for use value to be truly well-targeted, it's not enough to ensure that the people getting the tax break are acting like farmers-- they also have to be in it for the long haul.
Line-drawing in the tax code (that is, distinguishing between those who get breaks and those who don't) always creates compliance problems, although they're not always as hard to police as this one. Let's hope the Bush reform commission's pending recommendations reflect this basic truth.
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