Tax relief intended to save Kentucky farms helps pave them instead

A lucrative tax break

In Kentucky, the agricultural exemption in property taxes is given to anyone with 10 acres or more, whether they farm the land or not.
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In Kentucky, the agricultural exemption in property taxes is given to anyone with 10 acres or more, whether they farm the land or not.

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Harvesting Tax Breaks

How tax relief intended to save Kentucky farms helps pave them instead.

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An upscale shopping center, The Summit at Fritz Farm, is rising at Nicholasville Road and Man o’ War Boulevard. The future home of Pottery Barn and Whole Foods Market was sold last summer for $13 million.

It’s 40 acres of prime commercial land, but that’s not how it’s taxed.

Thanks to an obscure state tax break intended to save productive farms for future generations, the muddy lot bustling with construction equipment is assessed on the tax roll as “agricultural,” with a value of just $169,800. Its 2015 tax bill was $1,755 — roughly the same as what’s owed on nearby family homes, and a tiny fraction of the tax burden on similar commercial tracts.

The Summit is only one example of valuable Lexington real estate reaping the benefits of the farmland preservation tax break, with nobody asking questions about whether the land is being farmed or preserved.

A Herald-Leader investigation 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.

As a result, large landowners enjoy reduced overhead, while 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. Kentucky’s state government estimates that it will forfeit $98 million in revenue over the next two years because of this tax break.

Nationally, farmland preservation tax breaks cost public treasuries tens of billions of dollars, said Richard England, a professor of economics and natural resources at the University of New Hampshire.

“This is a classic example of where a small minority of the electorate is getting a tremendous advantage from the law, and the majority of taxpayers simply don’t know about it, so they don’t protest,” said England, who has studied and written extensively about the tax break in various states.

It wasn’t supposed to work this way.

In 1969, Kentucky voters approved a generous tax cut on agricultural property for the specific purpose of helping farm families protect their fields from development amid the rising land values of postwar urban sprawl. To qualify, property owners were supposed to prove that they produced crops or livestock on the land. If they later developed the land, they faced a tax penalty for reneging on the deal.

However, those rules were loosely enforced, and in 1992, the General Assembly scrapped them altogether. In most Kentucky counties, property assessments now are automatically slashed for any 10 or more contiguous acres once used for farming, no matter how long ago, provided that something hasn’t yet been built on top of them.

Explore a map of Lexington properties getting farmland tax breaks

Find out which properties and owners got the farmland tax preservation break.

Using this method, Fayette County waived $1.6 billion in taxable value last year for 2,459 properties covering 116,753 acres. That equals $11.8 million in forfeited taxes to Fayette County schools, and several million more to the health department, Lextran and other public services.

These properties, classified on the tax roll as “agricultural,” are assessed at far less than fair cash value, the standard by which all other properties are taxed in Kentucky. Some are taxed at pennies on the dollar compared to their neighbors.

How many of these properties are working farms being preserved, as the law originally intended? No one knows.

Fayette County Property Valuation Administrator David O’Neill, the elected official in charge of assessing local property values, said he realizes that some of the properties taxed as farms are not farms. For one thing, the U.S. Department of Agriculture found only 718 working farms in Fayette County — less than one-third of the number of properties getting the farmland preservation tax break — during its most recent census in 2012, down from 810 five years earlier.

But there is no farming requirement to get the lower assessment, so there is no legal justification for asking any questions of landowners, officials contend.

“Under the law as it now exists, if we go down Delong Road and cite everybody and ask to see proof of agricultural activity, they’re gonna tell us, ‘Hey, we have 15 acres, 20 acres, whatever, and it’s theoretically capable of producing something, and therefore, I’m entitled to the exemption.’ And they would be right,” Fayette County Attorney Larry Roberts said.

“Something in this law needs to be changed,” Roberts said.

$13 million sale, $1,755 tax bill

Soybeans and vegetables once grew on the large lot at Nicholasville Road and Man o’ War Boulevard. But three years ago, Bayer Properties of Birmingham, Ala., announced that it would use that spot to build The Summit at Fritz Farm. A detailed development plan for the shopping center, with rental apartments above stores, was filed with Lexington’s planning division in April 2013. The opening is set for March 2017.

The property’s tax bill has not kept up with events.

Last year, the Fayette County PVA assessed the land’s fair cash value at $5 million, as it did every year for the previous decade. However, that estimate might have been low, because the land sold in June for $13 million to its new owners. Regardless, it wasn’t taxed based on a fair cash value of either $5 million or $13 million. Instead, because this used to be a farm, it was taxed based on an agricultural value of $169,800.

The Summit at Fritz Farm, soon to be an upscale shopping center at Nicholasville Road and Man o’ War Boulevard. The 40-acre tract sold last year for $13 million yet it generated just $1,755 in taxes. Charles Bertram

So the tax bill was $1,755. By comparison, a smaller undeveloped parcel at a far less prominent location — 27 acres on Greendale Road in north Lexington, with a fair cash value of $1.3 million — generated $13,827 in taxes last year, nearly eight times as much. That property didn’t have the farmland preservation tax break.

In a recent interview, O’Neill said he recognizes that The Summit is going to be a shopping center and isn’t preserved farmland. But he said he can’t strip a property of its agricultural assessment until the year after the city approves a development plan and construction crews break ground at the site. Just knowing that a property is going to be developed isn’t enough, he said.

David O’Neill

Given the current progress at the site, the Summit’s 2016 tax bill will reflect its fair cash value, he said.

“No question about that,” he said.

Bayer Properties didn’t respond to requests for comment.

The current policy doesn’t sit well with everyone. Land being readied for development shouldn’t get a farmland preservation tax break, said Don Robinson, a horse farmer on Military Pike and former chairman of the Lexington-Fayette Urban County Planning Commission.

“I was aware of some instances of this happening, but not that it’s so widespread,” Robinson said. “It’s probably not fair. It ought to get looked into. The agricultural exemption on land is vitally important to incentivize agriculture and for land protection, but a house on a big suburban lot in a rural area is not farming.”

‘That’s due diligence’

A few Kentucky PVAs are more assertive than O’Neill.

In urban Jefferson and Kenton counties, for instance, landowners must complete and sign a short application each year to qualify for the farmland preservation tax break. Those counties ask landowners for the acreage devoted to agricultural production and how those acres are used. Jefferson County requires proof of farming income, such as the Schedule F attachment from the landowner’s federal income tax return.

Last year, Jefferson County reported only about half as many parcels with the tax break as Fayette County, covering roughly one-fourth of Fayette’s discounted acreage.

Nobody should get their property taxes lowered without justification, said Jefferson County PVA Tony Lindauer.

“We’ve got to be fair to everybody,” Lindauer said. “Just because you have 10 acres doesn’t mean you get the exemption for 10 acres of rocks. In my opinion, that’s not farmland.”

Kenton County PVA Darlene Plummer said she feels duty-bound to verify that exempted land is being farmed.

“In my opinion, that’s due diligence, to make sure they are using it for agricultural purposes,” Plummer said.

Such due diligence is not unprecedented. Every Kentucky PVA requires homeowners to submit an application and proof of eligibility for the homestead exemption, which reduces property assessments for people who are 65 and older or disabled. The same is true for any nonprofit, religious or educational institution that wants tax-exempt status for its property. It must fill out paperwork and show proof of eligibility.

Not so for the farmland preservation tax break. Statewide, Kentucky waived $36.6 billion in property value last year for more than 18.2 million acres assessed as agricultural — and in most counties, nobody checked to see how the discounted land is used.

PVAs in Fayette’s neighboring counties — Scott, Bourbon, Clark, Madison, Jessamine and Woodford — said that, like O’Neill, they don’t ask questions about the tax break.

“The previous PVA didn’t do it for 30 years, and when I came in, I didn’t see any point in stirring things up,” Bourbon County PVA Wayne Turner said. Last year, Bourbon County deferred $1 billion in property values under the farmland tax break, benefiting 175,647 acres, according to state data.

Mixed signals

Although Kentucky’s 120 PVAs are elected county officials, the state Department of Revenue has monitored their work and provided guidance since a Herald-Leader investigation in 1989 uncovered widespread corruption and incompetence on property assessments.

But the Revenue Department sends mixed signals to the PVAs about the farmland tax break. Sometimes it says farming is necessary to qualify; other times, it doesn’t.

In its 2015 land assessment manual distributed to PVAs, the Revenue Department wrote: “The purpose of the agricultural value program is to stimulate the continuation of farming operations and encourage the preservation of farmland in Kentucky by providing property tax relief.” Property must be “used for the production of agricultural products” to qualify for the tax break.

David Gordon, left, is executive director of the Office of Property Valuation at the Kentucky Revenue Department. Tom Crawford is director of Revenue’s Division of Local Support.

However, Revenue Department officials in Frankfort said they don’t expect PVAs to verify that any crop is grown or livestock raised.

“We just don’t require it. It’s not a requirement we have of the PVA,” said David Gordon, executive director of the Office of Property Valuation at the Revenue Department.

“Some PVAs will say, ‘I want to have an application process.’ We don’t have any problem with that. They’re going above and beyond the law,” said Tom Crawford, director of Revenue’s Division of Local Support. “But as to making this a statewide recommendation, maybe we need to take a look at that. I don’t know.”

The state officials blamed an Anderson Circuit Court ruling and opinions from the Kentucky Board of Tax Appeals for discouraging PVAs from stripping properties of their agricultural assessment. Property owners who challenge a PVA usually prevail under the law, even if they’re developing and selling the land in question, the officials said.

Cecil Dunn, chairman of the Board of Tax Appeals, said his panel hears very few farmland preservation tax break cases. In every case, “what we try to do as a board is look at each tax situation, apply the law and come to the conclusion of what we interpret it to be.”

‘They just had the law repealed’

Prodded by the Kentucky Farm Bureau, which ran a statewide campaign urging citizens to “help preserve our open spaces and natural resources,” voters in 1969 amended Kentucky’s constitution to allow for much lower property assessments on agricultural land. Once land no longer was used for “agricultural production,” it was supposed to be taxed at fair cash value again, according to the legislation.

“The intended beneficiaries were farmers,” said John Berry, a Henry County lawyer who helped craft details of the tax break as a member of the Kentucky Senate. “I wish it had been enforced the way it was intended.”

Initially, the tax break came with rules to prevent abuse. Property owners had to apply for it; they had to show proof of farm income from the land; and because the whole point was preservation, if the land was converted to any use other than agricultural, they had to pay a penalty equal to three years of back taxes at fair cash value.

That didn’t last. In 1992, the Kentucky Farm Bureau persuaded the legislature to eliminate those rules by passing House Bill 585.

The Farm Bureau declined to comment for this story. But Lexington developer Tim Haymaker said the change was prompted by land-rich farm families who wanted to cash out in the late 1980s and early 1990s by selling to developers. Among the obstacles was the tax penalty for converting their farms into something else.

“People couldn’t sell their land, not with that in place,” said Haymaker, who has built on converted farmland around Fayette County.

“The farm community is a very strong constituency in Frankfort,” Haymaker said. “So you’ve got these families that wanted to sell their land so a shopping center could be built on it, but they couldn’t afford it (the penalty). If they were sitting on a $500,000 piece of property, it was whatever the fair cash value tax was supposed to be on that, multiplied by three. So they just had the law repealed.”

Another argument made for eliminating the rules: PVAs found the annual proof-of-farm-income process to be too bothersome, said state Rep. Jon David Reinhardt, R-Alexandria, who sponsored HB 585.

“Part of the reason we’re here is because of the PVAs,” Reinhardt told the Senate budget committee in March 1992.

“It was nearly impossible for them to administer the annual application process,” Reinhardt said. “The PVAs quite simply have a difficult, if not an impossible time, doing it. In fact, most of them don’t do it. There’s only two or three who try to do that.”

‘Unequal tax burden’

Once the rules were gone, most PVAs adopted a “don’t ask” policy and settled on a 10-acre minimum for automatically awarding the tax break.

“When the statutes were changed to get rid of the income requirements, that’s when they (the PVAs) got rid of the applications,” said Crawford of the Revenue Department. “I think that whoever was in charge at that time, the commissioner or whoever, just decided, ‘Well, if there are no income requirements, if they have 10 acres or more and they had been farming the property, let’s just go ahead and give them the agricultural value.’”

Having opened a gaping loophole in the law 24 years ago, the General Assembly shows no interest in closing it this winter.

Rick Rand

“I guess it couldn’t hurt to look at it,” said House budget chairman Rick Rand, D-Bedford. “But I do know the agricultural community is always suspicious about changes to anything in regards to their tax liabilities. So I just don’t think this is anything that’s likely to happen.

It’s true that farmers might not respond well to anyone touching the tax break, not even to reinstate the original rules, said Bob Barton, whose family grows corn, soybeans and tobacco along the Fayette-Scott county line.

“Farmers are totally independent. They all think the next Summit is going to be built on their property, even if they’re 20 miles outside of town, and they don’t like being told what to do with their property,” Barton said.

That said, many Lexington farmers have agreed to permanently preserve their land by joining the city’s Purchase of Development Rights program, which pays farmers for conservation easements. About 250 farms covering nearly 29,000 acres are in the PDR program.

Travis Fritz worked at the Fritz Farm, at Nicholasville Road and Man o’ War Boulevard, in April 2001. Charles Bertram

“Strengthening the law would probably work in the farmers’ favor, to be honest with you, because we’re interested in productive land, and there’s nothing less productive than a 10-acre lawn,” Barton said. “Even if a developer just agrees to let someone farm his land for a few years while he’s waiting to start construction, a lot of young farmers would jump at the chance.”

If lawmakers won’t act, reform could be forced by a lawsuit alleging that property assessments are unfair, said Kathryn Moore, who teaches property and tax law at the University of Kentucky. A 1984 Kentucky Supreme Court decision involving the Fayette County PVA, Dolan vs. Land, held that all property must be assessed fairly so “the tax burden will be equally shared.”

Under this approach, a vacant commercial lot awaiting development on Nicholasville Road should not get a break that’s withheld from an identical lot on Greendale Road. A small cottage with a tiny yard on Woodland Avenue and a grand house with a 10-acre lawn on Delong Road should be valued using the same method.

“It seems to me that if two people have exactly the same property used exactly the same way and you give one the exemption and not the other, that’s not a uniform standard,” Moore said. “I think there’s a good argument to be made there.”

John Cheves: 859-231-3266, @BGPolitics

Linda Blackford: 859-231-1359, @lbblackford

Part 1 of 3

Sunday: Why a $13 million development property was taxed only $1,755

Monday: Low taxes on 10-acre lawns means others pay more for schools

Tuesday: Dozens of Lexington development properties get farmland tax break