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PLAIN ECONOMIC SENSE
For release after November 30, 1998
Column 357
California Property Tax Incentives for Farmland Preservation
By Mark A. Edelman
Extension Public Policy Economist
Iowa State University Extension to Communities
California is one of the most experienced states when it comes to using property tax incentives for farmland preservation. The California Williamson Act was enacted 1965. Its passage was in reaction to the explosive population growth in California following World War II and the subsequent loss of productive farmland in strategic production areas of the state.
In a nutshell, the Williamson Act provides tax relief to farmers and ranchers who contract with local governments to restrict their lands to agricultural and open space uses for at least 10 years.
Each year in which the preferential assessment is received automatically renews the no development agreement for another year. So if a farmer sells to a developer and signs a notice of nonrenewal, the developer must wait 10 years to convert the farmland and the property tax assessments increase to a market value basis over that period.
Not all farmland in California is covered by the restrictive agreements and property tax incentives. First, the program is optional for local government and not all local governments participate. Second, local governments designate the agricultural preserve zones that constitute the farmland it wishes to target for preservation. So, not all of the land in a county is eligible for the property tax incentive. Third, the program is voluntary for farmland owners and not all farmland owners in the agricultural preserve wish to participate.
Having said this, a speaker at a recent national conference indicated that about half of California's farmland is under the Williamson Act. Depending on the location, the farmland covered receives between a 0 to 50 percent reduction in property taxes compared to market value.
The state of California provides $35 million per year to local government in the form of "subvention payments."
This partially compensates local government for the cost of administering the act and the consequential loss of property tax revenues as farmland shifts from market value to use value assessment. The subvention payment formula also includes a built-in incentive that reimburses local government more for protection of prime agricultural lands in comparison to other open space lands.
Recently, California has implemented what has become known as the "Super Williamson Act." This law allows greater tax benefits for farmland owners if they agree to 20-year no-development contracts. In addition, there are state grants to convert Williamson Act land to permanent preservation easements. Finally, transfer of development rights has been incorporated into California law. This allows developers to swap Williamson Act land near prime development areas for purchase of permanent easements of farmland in local agricultural preservation districts.
What is the difference between the Iowa and California property tax incentive system? Iowa essentially provided the property tax reduction to all farmland owners without requiring a 10-year no-development contract in return. Iowa's preferential use-value assessment system actually encourages farmland conversion and provides lower property taxes based on use value for all farmland, while the California system targets about half of the state's farmland for preservation and lower property taxes based on use value.
Perhaps the most ardent debate would revolve around whether any of Iowa's farmland should be taxed at market value and if so which farmland should be targeted for preservation. Farmland owners have gotten used to property taxes based on use. Iowa farmland assessments based on use value are likely to be about 30 percent of market value. The suggestion of having some farmland owners paying market value property taxes when their farmland is targeted for development may send shivers up the spine of some policymakers. Rural communities and interest groups interested in creating more housing and economic development may not like the idea of increasing land-carrying costs. On the other hand, local governments would see additional valuation and an opportunity for new revenue from the policy change.
Alternatively, California recently enacted a "Super Williamson Act" that increases the tax incentives provided in return for a longer no-development contract and/or permanent easement. Iowa could adopt this approach by making no changes in the current assessment system, but pledging additional property tax relief for farmland owners if: (1) their land is targeted as a priority for preservation by state and local land use plans and (2) if the owners agree not to develop the property for 10 years, 20 years or permanently. The loss in local revenue would be debated as to whether the state should share in the costs and replace part or all of the loss in local property tax revenues.
Edelman is a professor of economics and an extension public policy specialist at Iowa State University.
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