Fayette PVA calls for reform of Kentucky’s farmland preservation tax break

A Lexington lawmaker said Tuesday she plans to file a bill that would stop land developers and owners of large suburban estates from receiving a tax break meant for saving productive farmland.

A Herald-Leader investigation published in recent days found scores of examples of the tax break benefiting suburban homes surrounded by vast lawns, qualifying as agricultural land that can knock as much as 40 percent off their tax bills, and large parcels rezoned for commercial or residential use, where plat maps have been filed with the city and concrete slabs are expected to be poured soon.

State Rep. Ruth Ann Palumbo, D-Lexington, said details of the legislation won’t be known until it’s ready to be filed in coming days, although its focus might initially be limited to Fayette County.

“This will be a fair assessment of the properties, to bring in the taxes that are properly due to the Fayette County tax rolls,” Palumbo said.

Statewide, Kentucky waived $36.6 billion in property value last year for more than 18.2 million acres officially assessed as “agricultural” — and in most counties, nobody checked to see how the discounted land was used.

For example, the newspaper found a 20-acre lot on Leestown Road with a fair cash value of $2.59 million that produced $84 in tax last year. The owner, Whitesburg Re-Development Co., has filed plans with the city to build a large retail complex on the site called Masterson Station Center, but under the farmland preservation tax break, the land is assessed at an agricultural value of just $8,300.

Part I: Tax relief intended to save Kentucky farms helps pave them instead

Part II: 10-acre lawns get benefit meant for working Fayette County farms

Part III: How other states guard against 'fake farmers' | Developers get tax break as bulldozers approach

The newspaper documented 43 Lexington properties pegged for development that were classified as farms. As a result, their less-fortunate neighbors — middle-class homeowners and business owners — pay higher property taxes to compensate for lost revenue to schools, the city, the health department and other local services.

In 1992, the General Assembly eliminated rules to prevent abuse of the tax break, including a three-year tax penalty if the land in question was developed and requirements for land owners to submit an annual application and provide proof of farming income. Palumbo said legislative staff members are now reviewing what lawmakers did 24 years ago to see if that offers a solution.

“But it’s not quite as simple as just reversing the last bill,” she said. “It’s more complicated than that.”

Palumbo said Fayette Property Valuation Administrator David O’Neill will be consulted on the bill, which O’Neill said he welcomed.

“I definitely think the statutes need to be modified, but I would like some say in what that is,” he said Tuesday. “Fayette County is the predominant county on this issue because of its size and rural/urban mix, and we should be a part of this.”

O’Neill said he is writing a response to the Herald-Leader’s investigation that will “outline specific next steps to much needed reform in this area.” He declined to unveil those planned actions Tuesday, but said he will hold a town hall meeting to answer taxpayers’ questions.

“We need leadership on several fronts in this area, and that includes myself,” he said.

At least two PVAs in Kentucky still require landowners to fill out an application that shows they produce agriculture of some kind.

House and Senate leaders on Tuesday said they shared Palumbo’s concern about the tax break.

“I think that’s a good job that you all did uncovering that problem,” said House Speaker Greg Stumbo, D-Prestonsburg. “Nobody wants to see anybody avoid taxes that they should be paying. I mean, taxes need to be understandable and they need to be fair, I’ve always said that. So it’s obviously an equity issue ... on the taxes. Those people are taking advantage of a tax break that they’re probably not at least equitably entitled to. So I think Ruth Ann’s bill has a good chance of seeing the light of day.”

Senate Majority Leader Damon Thayer, R-Georgetown, said the newspaper’s stories were “very eye-opening.”

Thayer said he wants to talk to O'Neill and to other lawmakers about possible solutions.

“It does ensure that whenever we get to the conversation about comprehensive tax reform, that is probably something that needs to be addressed,” Thayer said.

Mack Bushart, executive director of the Kentucky PVA Association, said county PVAs are following state law the way it’s written.

“We’d be delighted in working with anyone to improve it,” he said. “There should be ways to do that without disenfranchising the people it was put into place to protect.”

The state statutes regarding the farmland preservation tax break are vague enough that the state tax appeals board often rules against PVAs who challenge a property owner’s use of the tax break, said Terry Rakes, Marion County PVA and president of the state association.

“I think we do need some legislation to support us on this,” he said. “The tax board also goes against us because the law is so vague. We’ve got our hands tied.”

But Rakes also cautioned against creating more work for PVAs, who are facing the same proposed budget cuts as most other state agencies.

Several experts and residents have called for change following the Herald-Leader series.

“A law intended to support working farms has grown to include a subsidy for wealthy homeowners and developers,” said Jason Bailey, executive director of the Kentucky Center for Economic Policy in Berea. “That loophole comes at the expense of our schools, infrastructure and other vital investments. Kentucky leaders need to close this loophole this session so we can better support education, health and other things that build thriving communities.”

Several states require landowners to provide tax returns that demonstrate farm income before granting the tax break. Some states set that income requirement as low as $2,500 a year. Other states require penalty payments when farmland is developed.

Fayette County school board member Amanda Ferguson said she would like to see more discussion about changes that would possibly help schools.

According to a Herald-Leader analysis of Fayette PVA data, the farmland preservation tax break reduces the taxable value of 841 parcels that are 10 to 11 acres by a cumulative $183 million. If that property were taxed at its full cash value, Fayette County Public Schools would get about $1.4 million more each year.

“Obviously, it would help our tax revenue for the school district and allow us to do more to help kids,” Ferguson said. “I know David (O’Neill) from school-tax issues and from his service on the FCPS (Fayette County Public Schools) redistricting committee. I know his priorities and I think he wants to do the right thing, for our students and our community.

“But I also think we, as a community, should make this decision together.”

This story was originally published February 23, 2016 at 6:19 PM.