As Missouri enters its bi-annual reassessment process, I think people would be surprised to know just how substantial the difference in taxation is between different types of land. In Chesterfield (a wealthy suburb of Saint Louis where they still have some farms) there is a 56-acre agricultural parcel along the Missouri River that paid only $87 in taxes in 2012. A neighboring 59-acre parcel assessed as commercial land paid 42 times more than that in taxes: $3,651. Even more dramatically, a friend of mine paid more than $7,400 in taxes for 4 acres of residential property nearby. How did this difference become so dramatic? How does 56 acres pay $87 while 4 acres plus a home pays 85 times more than that?
Our state needs to confront the issue of underassessment in rural Missouri. Throughout Missouri, some of America’s best farmland is assessed and taxed at an incredibly low rate. The United States Department of Agriculture calculates all the agricultural property in Missouri at a market value of $74 billion. According to the Missouri State Tax Commission (STC), however, that same land has a taxable value of just $1.7 billion. That means we are setting taxes based on 2 percent of market value. The STC has attempted to partly address this by increasing set assessments for farmland, but the legislature has prevented such action.
Unlike residential, commercial, or even unused agricultural property, Missouri law does not base farm appraisals on market prices. Actively farmed land is appraised and taxed based on a state grading system, not assessment practices. Not surprisingly, that grading system sets assessments that are extremely low. For example, Missouri’s farmland has an average market value of $3,340 an acre. But the best farmland in the state can be valued — at most — at $985 an acre for purposes of taxation. For pastureland, the average value in Missouri is $1,820, but the most it can be valued for taxes is just $195. If your home or business is worth $100,000, it is supposed to be appraised at $100,000. Only farmland gets automatically set at a discount.
Then it gets even more extreme. An assessment ratio is then applied to the value of all property. That ratio is 32 percent for commercial property, 19 percent for residential property, and 12 percent for agricultural property. Your $100,000 home appraisal pays taxes based on an assessment of $19,000. But your $5,000 acre of prime farmland is valued at only $985, and then pays taxes on 12 percent of that, a value of just $118. That is how you get 56 acres of land paying only $87 in taxes.
Why does this matter to the average taxpayer? My purpose here is not to complain about low taxes. In fact, I like low taxes and I do not think farmers should pay high taxes. But if local government in Missouri is going to be primarily based on property taxation, then the system needs to be consistent and fair to all.
Low farmland assessments lead to low property tax bases for rural school districts. That would be fine if it simply meant that rural schools received less and spent less, and it only affected rural residents and children, in accordance with their wishes as voters and taxpayers. However, our statewide school funding formula attempts to equalize school funding. Low rural tax bases mean that income and sales taxes that people pay elsewhere in Missouri, and especially in the heavily populated, high-income portions of Saint Louis and Jackson counties, have more of their taxes transferred to rural schools. What we essentially have is an established system where rural areas pay low taxes yet the suburban taxpayers of Saint Louis and Kansas City subsidize their schools. Ensuring that rural schools have access to adequate education funding is necessary, but the people with high assessments and high taxes should not be subsidizing a system designed around low assessments in the first place.
Missouri needs greater consistency in appraisals and assessments. Market prices should be given a greater role in farm appraisals and assessments, like other types of real property. At a minimum, the new grading system with higher assessment amounts that the STC set should be adopted. If we are going to rely on a system of property taxes, we need to make it a more accurate system.
David Stokes is a policy analyst at the Show-Me Institute, which promotes market solutions for Missouri public policy.