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Harvesting Tax Breaks
How tax relief intended to save Kentucky farms helps pave them instead.
One by one, all 50 states established a farmland preservation tax break in the 1960s and ’70s to protect farm families from rising property values.
But some states did a better job than Kentucky of narrowly tailoring their tax breaks to save farms, Richard England, a professor of economics and natural resources at the University of New Hampshire, said in a recent interview.
England has studied farmland preservation tax breaks for decades. He said they’re often abused by large landowners — “fake farmers,” he calls them — who either don’t really farm the land or don’t plan to preserve it.
Land-use data cast doubt on whether the tax breaks succeeded in their stated purpose. Cities and suburbs displaced more than 40 million acres of rural land over the past 50 years, even as rural landowners were heavily subsidized to keep their properties undeveloped, England said.
In a report published last year, England identified states’ farmland preservation tax break policies that he admires. They include:
▪ Proof of farming: In Texas, South Dakota, Montana and Alaska, landowners must show that a substantive part of their income is from agriculture. They have to submit income tax documents as proof. Other states, including Ohio and Rhode Island, set a smaller threshold of $2,500 in farm income.
Kentucky does not require proof of farming.
▪ Hefty penalties: Delaware, Idaho and Indiana collect as much as 10 years of deferred property taxes at market value when farmland is converted to other uses, such as a shopping center. In Vermont, land getting the tax break faces a penalty of as much as 20 percent of its market value if it’s developed. These penalties are often referred to as “clawbacks.”
Kentucky does not impose penalties.
▪ Swift disqualification: Arizona strips agricultural land of the tax break if the owner requests a rezoning for some other use; if he files a development plat map or plants survey stakes; or if he brings in a utility service not required for farming. Nebraska forbids land inside a city limits from getting the tax break unless it has a conservation easement that permanently prohibits development.
Kentucky does not provide uniform guidance to county officials on when to disqualify land. In Fayette County, officials say they don’t end the tax break until the Jan. 1 after a development plan is filed for a parcel and workers break ground for construction.
▪ Large tracts: Nevada, South Dakota and Washington state require a minimum of 20 acres to grant the tax break. It’s 25 acres in Vermont and 160 acres in Montana.
According to the U.S. Department of Agriculture, the average size of an active farm in Fayette County is 160 acres. Yet in Lexington, and most of the rest of Kentucky, the tax break goes to any tract with at least 10 contiguous acres once classified as agricultural.
“Ten acres is awfully small to automatically give this exemption,” England said. “How many 10-acre farms are there, really, that you’re not even going to ask any questions? That seems a little ridiculous.”
The American Farmland Trust, a nonprofit in Northampton, Mass., that advocates for productive green space, is less critical than England about the overall usefulness of farmland preservation tax breaks. But the Trust agrees with him that tax breaks make sense only “as long as the land is being used for agriculture and is truly being farmed,” said Jennifer Dempsey, who manages the Trust’s Farmland Information Center.
“The commonsense approach would be to have people apply for the exemption and show that they’re farming,” Dempsey said. “The idea of any state automatically enrolling land because of its history as a farm, without any idea what its current use is — that doesn’t make sense. It’s not accomplishing what the state wanted. It just shifts the tax burden to everyone else without protecting the land.”