Land Values Higher, Taxes Will Follow

UNL’s most recent survey found land values in Nebraska were up 16 percent on average compared to last year. A Federal Reserve Bank of Kansas City fourth quarter survey of commercial bankers found land values were up 21-32 percent compared to the prior year depending on the land classification. Rising land values have many implications for agricultural landowners, some good and some not so good. Higher property taxes in the future is one of the not so good.

In Nebraska a market or sales comparison approach is used to set assessed values on agricultural land. County assessors build sales files of arm’s-length transactions with verification by the Property Assessment Division of the Department of Revenue. Sales files contain information for land sales over a three-year period. For example, assessed values in 2022 are based on transactions which occurred between July 1, 2018, and June 30, 2021. The use of three years of sales data creates a time lag between price movements in land markets and movements in assessed values. Using three years of sales data also smooths changes in assessed values from year-to-year.

Figure 1 plots percentage changes in USDA average statewide per acre value for land and buildings since 1993. Also shown are percentage changes in the statewide assessed value of agricultural land over the same period. Note the time lag in changes in assessed values compared to USDA market values. In 2012, the USDA average value increased by more than 30 percent, the high for the period. However, the increase in assessed values did not peak until 2014. Likewise, the USDA average value experienced its largest decrease in 2016. Assessed values did not see a similar decline until 2019.

What does this portend for future property taxes? While assessed values for 2022 are still in the process of being established, expect the average assessed value for agricultural land this year to rise, perhaps 3-5 percent. Land values were largely stagnant in 2019 and 2020 which provides a counterweight to higher priced sales occurring in the first half of 2021. But as sales from those years are dropped from the sales file, they will be replaced with higher-priced sales from the latter half of 2021 and first half of 2022. Meaning increases in assessed values will accelerate in 2023 and subsequent years. Landowners know too well that value increases also mean higher taxes. Expect the peak growth in assessed values to occur 2-3 years following the peak in the actual market. And, while the time lag works to slow the realization of higher assessed values and taxes when land markets move higher. It also works to slow the realization of lower values and taxes when markets turn lower. It’s all part of the good, the bad, and ugly of assessed values and taxes.

Figure 1. Changes in USDA Land Values & Assessed Values, 1993-2021