A lucrative tax break
Investigators for the state legislature will examine how Kentucky officials annually forfeit taxes on $36.6 billion in property values under the farmland preservation tax break, a subject highlighted in February by a series of stories in the Herald-Leader.
The Program Review and Investigations Committee selected the farmland preservation tax break and three other issues Thursday for in-depth examinations out of about 50 subjects proposed by lawmakers. Reports are expected to be published on each issue by the time the 2017 General Assembly begins in January, with an eye toward legislation that could address problems uncovered in the reports.
Rep. Ruth Ann Palumbo, D-Lexington, who sits on the committee, proposed a statewide study of the tax break because she suspects that it’s being misused in some cases to the benefit of property owners who aren’t really farmers.
“I believe our schools are being shortchanged. And it’s a matter of fairness and equity to the taxpayers,” Palumbo said.
The tax break, approved by voters in 1969, was meant to protect family farms from encroaching development and rising land values. It keeps property assessments far lower than fair cash value on “agricultural land.” However, the legislature later stripped the tax break of restrictions, such as an annual application process that required proof of farming income and a three-year tax penalty imposed if farmland was developed.
As a result, the Herald-Leader found scores of examples around Lexington of development properties that enjoy the farming tax break although they are about to become a shopping center or a subdivision, and suburban homes surrounded by vast lawns that count as agricultural land, knocking as much as 40 percent off their tax bills.
In one notable example, The Summit at Fritz Farm, an upscale shopping center under construction on Nicholasville Road, was assessed with an agricultural value of just $169,800, although the property sold last summer for $13 million. Its 2015 tax bill was $1,755, roughly the same as what’s owed on nearby family homes. The Summit property once was a farm, and even with bulldozers tearing up its soil, it had not yet lost its preservation tax break.
Because of the tax break, Fayette County alone 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.
Locally elected property assessment administrators are responsible for deciding what land is worth for tax purposes. However, several PVAs told the Herald-Leader that they would welcome stricter guidance from the state Revenue Department on how to define farmland under the tax break. That is the primary focus of the legislative investigation Palumbo proposed.
Palumbo filed a bill during the 2016 General Assembly that would have limited the tax break to property “currently” used for farming, excluding houses and lawns as well as properties rezoned for commercial or residential use, sitting vacant as they await planned development. The bill was assigned to the House budget committee March 2 but saw no further action.