Agricultural tax breaks bring unintended results

Many who claim the breaks actually intend to develop, not farm, the land.
ASSOCIATED PRESS
Millions of dollars in property-tax breaks intended to preserve farmland are going instead to companies that bulldoze farms to build housing subdivisions, malls and industrial parks, an Associated Press investigation has found.
It's happening from coast to coast, costing local governments badly needed revenue or forcing them to increase the taxes of other property owners. The breaks can be enormous. Without them, landowners would typically pay two to 400 times more in property taxes.
In most states, the tax breaks date back to the 1950s and '60s, when lawmakers became alarmed at the rate at which farmland was disappearing under concrete and asphalt.
But loopholes in the laws are producing unintended, though perfectly legal, consequences.
How it works
Here's what's happening: A developer buys land with the intention of building on it. During the years when he readies the property for construction -- preparing architectural plans, acquiring financing and permits, even building roads and laying water pipe -- he runs some cows or cuts some hay. Then he claims the tax break. Because of the loopholes, often even a pretense of farming can be enough to qualify.
Usually, the tax break ends only after construction of buildings begins; sometimes, it doesn't even stop then.
In Polk County, Iowa, which includes the city of Des Moines, about 10 percent of those claiming farmland tax breaks are actually identified on the tax rolls as developers. Jim Maloney, county assessor, said most of the others are also developers and speculators.
All over the country, local officials offered similar accounts.
"We have a lot of wannabe farmers who are out there trying to farm the system rather than the property," said Alaska State Assessor Steve Van Sant.
Initial goal
Every state offers some type of tax incentive to protect land from development. In some states, only working farms are eligible. In others, the breaks apply to agricultural land whether it is being farmed or not, and some also include timberland or other open space.
"The whole idea was to encourage people to keep their land in agricultural use," said Talbot D'Alemberte, who sponsored one such law as a member of the Florida Legislature in 1972.
One factor driving development was property taxes, legislators throughout the country thought. Encroaching development increases land values, causing property taxes to rise. This, in turn, increases pressure on cash-strapped owners to sell to developers.
States tried to relieve that pressure by taxing threatened land according to what it is used for rather than what it could sell for. Although the tax breaks have been a welcome relief for working farmers, they have done little to slow the pace of development, according to numerous studies by think tanks and universities.
For example, Jane Malme of the Lincoln Institute of Land Policy in Cambridge, Mass., reviewed farmland tax breaks in all 50 states and found that they have done little to preserve farmland.
Many local officials have reached the same conclusion. Broward County, Fla., has lost 62,000 acres of agricultural land to development since 1972 and has only 7,600 acres left. There, the land-preservation tax break "has not slowed development an iota," said Gaylord Wood, attorney for the appraiser's office. But it cost the county $13 million in taxes last year.
Back-billing
To discourage owners from taking the tax break and then developing their land, some states back-bill landowners at the normal tax rate, sometimes tacking on interest, if they develop the land.
But 20 states, including Florida, don't back-bill at all. In eight others, back-billing is limited to three years or less of back taxes -- but developers and speculators often hold land longer than that before building.
Texas back-bills 5 years and tacks on 7 percent in annual interest. That hasn't deterred Hewlett-Packard from taking the tax break on 175 acres of woods across from its 9,000-employee complex in Houston.
The company says the land may eventually be developed, and local officials are convinced it will. For now, Hewlett-Packard manages the property as a tree farm, saying it produces a "nominal" income. Thus, it qualifies for the agricultural land tax break, saving the computer giant about $500,000 a year. Although the county may eventually recover five years of that with interest, Compaq, which Hewlett-Packard absorbed in 2001, began receiving the tax break 14 years ago.
Of course, many property owners who receive the tax breaks have no intention of developing their land. President Bush, for example, receives the agricultural tax break for his 1,582-acre ranch in Crawford, Texas, saving $23,679 last year on what would otherwise have been a $44,617 tax bill.
Developers are unapologetic. "The way they tax is what you use it for," said Bob Schroder, vice president of Arlinghaus Builders. "It's not who owns it or what you might do with it someday. It's what you do with it now."
Some local officials have tried to fight back, seeking to limit tax breaks to those with no obvious development plans. Often, however, loopholes complicate enforcement efforts.
In Florida, Orange County appraiser Bill Donegan is scrapping with the Hilton and Hyatt hotel chains over two parcels totaling 71.1 acres adjacent to the county convention center on a commercial strip between Walt Disney World and Universal Studios.
The hotel companies have planted saplings and call their parcels tree farms, but it's difficult to imagine them remaining so for long. At current market prices, it would take more than 20,000 years for tree farms to recover the $67 million Hilton and Hyatt paid for the property.
At stake in the dispute: whether the companies' annual tax bill will be $200,000 or $1.24 million.