CAUV Projections, May 2020
Department of Agricultural, Environmental and Development Economics,
The Ohio State University
The Ohio State University
Robert Dinterman1 and Ani L. Katchova2
2020-05-12
Key Findings
The purpose of this report is to provide projections of property tax for agricultural land in Ohio for tax years 2020, 2021, and 2022. The projections apply for all soil types in Ohio enrolled in the Current Agricultural Use Value Program (CAUV) and are grouped by soil productivity indexes. Ohio underwent large legislative changes to the calculation of CAUV values in 2017 which were phased-in over one triennial cycle and the 2020, 2021, and 2022 tax years represent the first full implementation of the new formula for counties in Ohio. Current methodology for calculating CAUV values is explained along with how the projections are constructed. Ohio Department of Taxation (ODT) descriptions of calculations and the Ohio Code of legislation on CAUV are used in this report.
Highlights
- For reference, the average CAUV value for 2017, 2018, and 2019 were $1,153, $1,105, and $876 respectively. However, those values included the “phase-in” procedure and would have been approximately $1,000, $875, and $740 without the “phase-in.”
- Current projection for average CAUV value in 2020 is $665 which would represent a change of -24% from the previous tax year. However, the more apt comparison would be to the most recent triennial update in 2017 and the projection calls for a -42% decrease in average CAUV values for counties receiving updates to their property taxes.
- The projection for the average CAUV value in 2021 is $760 which would represent a -25% change from the previous triennial update. The average CAUV value projections could end up as low as $560 or as high as $900 if actualized prices, yields, non-land costs, and interest rates for 2020 have large deviations from their recent trends.
- The very early projection for the average CAUV value in 2022 is $880 which would represent a 1% change from the previous triennial update. The average CAUV value projections could end up as low as $665 or as high as $1,010 if actualized prices, yields, non-land costs, and interest rates for 2020 and 2021 have large deviations from their recent trends.
CAUV Value Projections for 2020 through 2022
In 2019, the average CAUV value across all soil types was $876 per Ohio Department of Taxation (ODT) and was the final year of the “phase-in.” The “phase-in” resulted from legislative changes in 2017 which altered the formula for CAUV but would not fully incorporate the changes until 2020 and beyond. Without the “phase-in,” the average CAUV value in 2019 would have been $739. The projection for the average value of CAUV in the 2020 tax year is $666 followed by an uptick in the 2021 tax year to $759 and then $882 in the 2022 tax year. The projections are partially based on how the CAUV formula use Olympic averaging3 for certain components and it is possible for a potential high of $922 to a potential low of $497 for average CAUV values in 2020. However, CAUV values will not become official for 2020 until sometime after June but are unlikely to have a substantial divergence from current expected projections based on the currently available data for components which use Olympic averaging. The corresponding high projections for 2021 and 2022 are $900 and $1,008 respectively while the low projections for 2021 and 2022 are $561 and $667 respectively. There is more uncertainty with the expected 2021 and 2022 values because they are missing one or two years worth of values in their formula for the agricultural economy but the high and low projections capture the full range of values CAUV can take on in those tax years.
Projections of CAUV values are based on five major components in the formula which are averaged over a period of five to twenty-five years depending on the specific component: capitalization rate, commodity yields, commodity prices, commodity acreage/rotation, and non-land input costs. The commodities used in CAUV are corn, soybeans, and wheat. Each of these components are projected into the future based on recent trends in order to fill in missing values in the projection of 2020, 2021, and 2022 CAUV values.
While the projection of the CAUV values for 2020 tax year are to decrease from 2019, this is due to firstly from the absence of the “phase-in” as well as trends in the components that make up the CAUV formula. The projections for the CAUV values in the 2020 tax year are for the components of commodity yields, commodity rotation, and capitalization rate to remain largely unchanged from their 2019 values. Input costs are expected to continue their recent decline, although this is counteracted with commodity prices expected to decline by a larger degree in part to a recent low price environment but also due to higher prices dropping out of the calculation. However, the recent trend for input costs falling as well as an expected decrease in the capitalization rate – due to lower interest rates on farmland loans – will reverse the trend of falling CAUV values for 2021 and 2022 as they are expected to rise.
Under the expected scenario, the average CAUV value will continue to decline in 2020 by a similar proportion as the fall in the CAUV values from 2016 through 2019. Grouping soil types based on a productivity index, as seen in figure , can help display how similarly productive soils are expected to decline for the 2020 projections and corresponding rise for 2021 and 2022:
The 2017 through 2019 CAUV values were partially offset by the current provision in the CAUV calculations that phases in the new formula for CAUV, smoothing the adjustment to lower CAUV values over one cycle of property reassessment rather than these declines occurring immediately. The 2019 values had an adjustment factor where only half of the difference was included between the 2018 CAUV value and what the pre-adjusted 2019 CAUV would have been. This also occurred for the 2018 and 2017 values. Figure provides a productivity index grouping of soils over time if the “phase-in” did not exist, which indicates that the expected values in 2021 and 2022 will have similar values to what an unadjusted average CAUV value would have been in 2017 and 2018:
Updates to CAUV values do not occur equally across Ohio as there is a rotating schedule for tax assessments in Ohio. Once every six years, a county receives a full reappraisal of their property with an adjustment in the third year in between. Each county receives an update to their CAUV values for the years a reappraisal or adjustment occurs. About half of the state will receive updates in 2020, a quarter in 2021, and the remaining quarter in 2022. Figure provides a reference for when a county receives an update to their CAUV values:
Current Agricultural Use Value Program Overview
For landowners in Ohio, their farmland’s property tax is not based on the market value of the land but instead through the Current Agricultural Use Value Program (CAUV). The stated intention of the program is to provide a value of agricultural farmland based on expected value from agricultural use and depends on soil type, yields, prices, non-land costs, and capitalization rate (derived from interest rates on farmland) that is used in place of the market value of land.
In 1974, Ohio enacted the Current Agricultural Use Value Program (CAUV) as a tax incentive for farmers to continue agricultural production on their land instead of selling it due to urbanization pressure. CAUV provides an appraisal method for valuing agricultural land by use of only agricultural inputs rather than the market value of land. Throughout the 1970s, other states adopted similar programs of differential appraisal methods of agricultural land and, as of 2014, all 50 states within the US provide some form of differential tax treatment of agricultural land. CAUV reduced the property assessment value to 35% of market value in 1985 with a steady decline to below 14% of market value in 2006. However, since 2006 there has been a rapid increase in CAUV values, which has led to CAUV values being at least half of the market value since 2014. This rapid increase in CAUV values prompted lawmakers in Ohio evaluate the formula used in CAUV calculations and propose changes to the formula to reflect more modern appraisal techniques. The changes, from House Bill 49, were signed into legislation on June 30, 2017 and will be phased-in over a three year period starting with 2017.
No matter what commodity a farmer produces, their CAUV value is determined solely based on their soil type and a formula from the Ohio Department of Taxation (ODT) which aims to represent the expected returns for an average farmer in Ohio. A simplified version of the calculation can be stated as:
The CAUV value is the expected net present value of an acre of land based on expected net income of the land used for agricultural purposes. To determine this, first a historical average of yields and prices for corn, soybeans, and wheat is used to determine gross income. Then historical non-land costs – provided by The Ohio State University Extension – are subtracted from gross income for a measure of net income. And finally, this net income is divided by a capitalization rate based upon historical values of farm interest and equity rates. This CAUV value will vary based upon the particular soil type(s) for a farm.
For agricultural land to be eligible for CAUV, it must either be at least 10 acres devoted exclusively to commercial agricultural use or be able to produce more than $2,500 in average gross income. The general trend for the state of Ohio since the 1980s has been a steady increase in the total acreage enrolled in CAUV, although there have been declines in enrolled CAUV acreage for areas under urbanization pressure as farmland is converted to residential or commercial purposes. When a land owner decides to unenroll from CAUV for this purpose, they must pay a recoupment penalty that is equal to the CAUV tax savings for the previous 3 tax years – i.e. the difference between the market value and CAUV value.
CAUV Value Formula
For each of the over 3,500 soil types (\(s\)) in Ohio, a particular year’s (\(t\)) CAUV value is calculated as the soil’s net income divided by the capitalization rate:
\[ CAUV_{s,t} = \frac{NOI_{s,t}}{CAP_t} \label{eq:cauv} \]
where \(CAP_t\) represents the capitalization rate and \(NOI_{s,t}\) represents the net operating income based on revenues less non-land costs for corn, soybeans, and wheat.
Net Operating Income
Net operating income, \({NOI_{s,t}}\), captures the average returns to an acre of land under normal management practices which is adjusted by the state-wide rotation pattern of commodities. In other words, a net income for corn, soybeans, and wheat is calculated for each soil type and then these net incomes for a given soil type are averaged in proportion to the state-wide acreage of harvested corn, soybeans, and wheat. This can be defined as:
\[ NOI_{s,t} = \sum_{c} w_{c,t}\times(GOI_{s,c,t} - {nonland}_{s,c,t}) \]
where \(c\) denotes the commodity type, which is either corn, soybeans, or wheat which represent the dominant commodities in Ohio and \(w_{c,t}\) is commodity’s share of state production. \(GOI_{s,c,t}\) is the gross operating income for a soil type and is calculated for each of the commodity types (corn, soybeans, and wheat) based on yields and prices. \({nonland}_{s,c,t}\) is the non-land costs associated with each commodity type. Both of these variables are further explained in the following sections.
Rotation
Each commodity’s share of state production is based on a 5-year average of total acres harvested between the three commodities – with weights summing to 1. This is done by summing up the total harvested acreage for corn, for soybeans, and for wheat over the past six years ignoring the current – i.e. 2019 value for CAUV calculations uses 2014 to 2018 harvested acres. Once summed up, each commodity is then assigned their share of total harvested for the entire state based on those past six years ignoring the current.
These data are from the United States Department of Agriculture (USDA) Crop Production Reports. Typically there is an August, September, October, and November forecast for Ohio’s corn, soybeans, and wheat acreage with the finalized values occurring in January of the following year – i.e. 2019 harvested acreage was finalized in January 2020. The values calculated for CAUV are lagged one year – i.e. the tax year of 2019 CAUV values for commodity rotation percentages are based on the 2015 through 2019 harvested acreage.
The values for rotation used in ODT calculations since 2010 are displayed in the following tables along with the values used in our 2020, 2021 and 2022 CAUV value projections. Projections indicate a slight shift towards soybeans at the expense of corn.
| Year | ODT Value | USDA Acres Harvested | AVG Acres Harvested | Projected |
|---|---|---|---|---|
| 2010 | 39.0% | 3,270,000 | 3,210,000 | 37.5% |
| 2011 | 38.6% | 3,200,000 | 3,216,000 | 37.4% |
| 2012 | 38.6% | 3,650,000 | 3,220,000 | 37.5% |
| 2013 | 38.7% | 3,740,000 | 3,268,000 | 38.0% |
| 2014 | 38.6% | 3,480,000 | 3,276,000 | 38.0% |
| 2015 | 40.0% | 3,260,000 | 3,468,000 | 39.9% |
| 2016 | 40.2% | 3,300,000 | 3,466,000 | 40.0% |
| 2017 | 40.0% | 3,150,000 | 3,486,000 | 40.1% |
| 2018 | 39.0% | 3,300,000 | 3,386,000 | 39.0% |
| 2019 | 38.0% | 2,570,000 | 3,298,000 | 38.0% |
| 2020 | - | - | 3,116,000 | 37.2% |
| 2021 | - | - | 3,103,568 | 37.0% |
| 2022 | - | - | 3,082,338 | 36.9% |
| Year | ODT Value | USDA Acres Harvested | AVG Acres Harvested | Projected |
|---|---|---|---|---|
| 2010 | 51.0% | 4,590,000 | 4,448,000 | 52.0% |
| 2011 | 50.9% | 4,540,000 | 4,470,000 | 52.0% |
| 2012 | 51.1% | 4,590,000 | 4,492,000 | 52.2% |
| 2013 | 51.2% | 4,490,000 | 4,476,000 | 52.0% |
| 2014 | 52.0% | 4,690,000 | 4,546,000 | 52.7% |
| 2015 | 52.6% | 4,740,000 | 4,580,000 | 52.7% |
| 2016 | 53.0% | 4,840,000 | 4,610,000 | 53.2% |
| 2017 | 54.0% | 5,090,000 | 4,670,000 | 53.7% |
| 2018 | 55.0% | 5,020,000 | 4,770,000 | 54.9% |
| 2019 | 56.0% | 4,270,000 | 4,876,000 | 56.2% |
| 2020 | - | - | 4,792,000 | 57.2% |
| 2021 | - | - | 4,825,122 | 57.5% |
| 2022 | - | - | 4,844,583 | 58.0% |
| Year | ODT Value | USDA Acres Harvested | AVG Acres Harvested | Projected |
|---|---|---|---|---|
| 2010 | 10.0% | 700,000 | 900,000 | 10.5% |
| 2011 | 10.5% | 850,000 | 912,000 | 10.6% |
| 2012 | 10.3% | 450,000 | 886,000 | 10.3% |
| 2013 | 10.1% | 640,000 | 864,000 | 10.0% |
| 2014 | 9.4% | 545,000 | 808,000 | 9.4% |
| 2015 | 7.4% | 480,000 | 637,000 | 7.3% |
| 2016 | 6.8% | 560,000 | 593,000 | 6.8% |
| 2017 | 6.0% | 460,000 | 535,000 | 6.2% |
| 2018 | 6.0% | 450,000 | 537,000 | 6.2% |
| 2019 | 6.0% | 385,000 | 499,000 | 5.8% |
| 2020 | - | - | 467,000 | 5.6% |
| 2021 | - | - | 458,917 | 5.5% |
| 2022 | - | - | 429,210 | 5.1% |
Non-Land Cost
The non-land costs are calculated as 7-year Olympic averages for typical costs of producing each commodity (corn, soybeans, and wheat). The Farm Office at The Ohio State University Extension conducts annual surveys for costs of production which serve as the yearly estimates that are used in the 7-year Olympic average. Budgets for a commodity marketing year are generally released in October of the prior year and then finalized in May of the marketing year – i.e. the 2020 marketing year was initially released in October 2019 and will likely be finalized sometime after May 2020. These budgets will include both fixed (machinery, equipment, labor, etc.) and variable (seeds, fertilizer, chemicals, hauling, etc.) costs involved in producing corn, wheat, or soybeans and each of these individual components are averaged for use in CAUV calculation.
Prior to 2015, the non-land costs were lagged one year – i.e. tax year 2014 used the values from budgets in 2007 to 2013. From 2015 onward, the current year values are included in the non-land cost calculations. Because of the nature of an Olympic average, the non-land costs used in 2019 CAUV is bounded between a “high” and a “low” value by averaging the previous 6-years after dropping only the highest or lowest value respectively. In the event that the “high” value of our projected non-land costs occur, then this is where the 2020 non-land costs are all the lowest values in the previous 7-years which causes the CAUV to be a higher value. The opposite is true for the “low” value in that the non-land costs are all 7-year highs.
Our projection of non-land base costs for corn is $503; for soybeans is $332; and for wheat is $305 per acre for 2020. For 2021, our projections are $485 for corn; $319 for soybeans; and $289 for wheat. And for 2022, our projections are $473 for corn; $310 for soybeans; and $274 for wheat. The historical and projected values for each commodity are displayed in figure :