Changes in the Current Agricultural Use Value (CAUV) Formula for Computing Property Taxes Owed By Ohio Farmers
Since 1973 Ohio has provided a tax adjustment that determines farmland property valuation according to the land’s Current Agricultural Use Value (CAUV) instead of on the basis of its market (or “best and highest use”) value. The CAUV adjustment is employed in order to improve the equity of the property tax with regards to the state’s farmers, as economic trends such as suburbanization can increase the market value of farmland well beyond its agricultural use value. The Ohio Department of Taxation’s Division of Tax Equalization is responsible for preparing the annual CAUV calculations.
The CAUV formula is based upon various factors including farmland utilization, crop prices, and interest rates. Crop prices are incorporated on a 7-year rolling average basis with the high and low value excluded. This method typically minimizes the impact of large fluctuations in agricultural prices. The CAUV formula does not consider the impact of federal farm subsidies.
This article reviews the changes to the CAUV formula over time and the resulting impact these changes have had on local communities. Section 1 provides an overview of the CAUV valuation changes since 2005. Section II outlines the impact these changes have had on residential taxpayers and Ohio school district finances.
Section I. CAUV Valuation Changes from 2005-2021
The tables below provide several perspectives on CAUV valuation change from 2005 through 2021 (2022 data permitting). Data from earlier years is included in some tables.
Table 1: Statewide CAUV Value Per Acre, TY2005-TY2022
|Year||Statewide Value Per Acre||$ Change||% Change|
Source: Ohio Department of Taxation, Tax Equalization Division Annual CAUV Explanations
Table 1 shows the statewide total CAUV value per acre as computed each year by the Ohio Department of Taxation. The statewide average CAUV value per acre was at an all-time low in Tax Year 2005 and increased to what is believed to be an all-time high in Tax Year 2014. The statewide average CAUV value per acre fell for 6 straight years since 2014, reaching $668 in 2020. The statewide average CAUV value per acre has since increased to $999 in 2022.
Table 2 compares CAUV taxable value to the taxable market value (aka “Highest & Best Use” value) of the same property if the CAUV program was not in place (note that these valuation figures are after the 35% Assessment Percentage is applied).
Table 2: CAUV vs. “Best and Highest Use” Property Values, Tax Year 1985-2021
|Tax Year||Avg. CAUV Value Per Acre||State Total CAUV Taxable Value||State Total Highest & Best Use Taxable Value||CAUV % of H&B Use Value|
|% Increase TY85-TY21||153%||176%||292%|
Source: Ohio Department of Taxation PD32 data files, 1985-2020 and CAUV by school district file for 2021. TY22 data is not yet available.
The data in Table 2 show that in tax years 2005-2007, CAUV values were roughly 14% of market value. After increasing steadily since 2006, by tax years 2014-2016 CAUV values had increased to more than 50% of market value. However, as a result of changes in economic conditions, as well as a legislative change to the CAUV formula, CAUV values have fallen significantly since 2016. In 2018 and 2019, CAUV values were roughly 35% of market value, a figure that is consistent with historical valuation levels as shown in 1985 and 1995. However, CAUV values have continued to fall steadily, reaching 22.9% of market value in 2021.
Note that the statewide average CAUV values shown in Table 2 differ from the statewide CAUV value per acre shown in Table 1. The reason for this is that Table 1 shows the CAUV value per acre as computed by the Tax Department annually using the CAUV formula. However, because CAUV values are only updated during reappraisal and triennial update years, the Tax Department’s computed CAUV values are not applied in every county in every year. Thus Table 1 shows computed CAUV statewide value per acre and Table 2 shows actual CAUV statewide value per acre. Because the TY21 CAUV values computed by the Tax Department were still lower than those in 2018, counties that went through reappraisal or update in 2021 would still experience a reduction in CAUV. Because the 2022 statewide average CAUV value computed by the Tax Department is higher than that in 2019, actual CAUV values may increase in 2022.
Table 3 on the following page provides a third perspective on CAUV valuation change over time. This table shows CAUV value as a percent of total agricultural property value (note that not all agricultural property qualifies for CAUV). Table 3 shows that CAUV comprised about 20% of agricultural value in 2005 and 2006 and increased steadily each year thereafter until 2016 when CAUV property exceeded 60% of total agricultural value. CAUV value as a percentage of total agricultural property values has fallen steadily since 2016, reaching 40.1% in 2021. Looked at another way, 63.3% of the growth in agricultural valuation in Ohio since 2005 has been due to increases in CAUV valuation.
Table 3: CAUV Compared to Total Agricultural Property Value, 1995-2021
|Tax Year||State Total CAUV Taxable Value||State Total Taxable Agricultural Value||CAUV as % of Ag. Value|
Source: Agricultural values from Ohio Dept. of Taxation SD1 data files, 2005-2021. TY22 data is not yet available.
Table 4 computes how much CAUV taxes for K-12 schools in Ohio have increased since 2005. CAUV taxable valuation has increased by 257% from 2005 through 2021 and estimated CAUV school taxes have increased by 305% over the same time frame. However, since 2016 CAUV taxable value has decreased by 45% and CAUV school taxes have decreased by 49%.
Table 4: Estimated CAUV School Taxes, Tax Year 1985-2021
|Tax Year||State Total CAUV Taxable Value||Statewide Avg. Class I School Millage Rate||Estimated CAUV School Taxes|
|% Increase TY05-TY21||257%||13.6%||305%|
Source: Class 1 Millage Rates from Ohio Dept. of Taxation SD1 data files, 2005-2021. TY22 data is not yet available.
Tables 1 through 4 clearly show that CAUV values increased from 2005 through 2016 and have fallen since 2016. By each measure shown – CAUV value per acre, CAUV as a percentage of market value, CAUV as a percentage of agricultural value, and estimated CAUV school property taxes – CAUV values are currently in between the record low values from 2005 and the record high values from 2016. At the same time CAUV acreage has remained largely the same over the past 25 years, increasing by only 1.1% from 15,866,403 acres in 1995 to 16,044,458 acres in 2020.
Section II. Impact of the HB 49 Changes to the CAUV Formula
In addition to directly lowering CAUV values, the HB 49 CAUV formula changes also impact residential taxpayers and Ohio school district finances.
1) Tax Shifting from Agricultural Taxpayers to Residential Taxpayers
First, as shown in Table 4 above, agricultural taxpayers will experience lower property tax bills as a result of the reductions in their taxable property value due to the HB 49 CAUV formula changes. However, any reductions in CAUV values will necessarily lead to increases in taxes paid by residential taxpayers. This effect operates through two channels. The first channel is through what are known as “fixed-dollar” property tax levies. These are generally bond levies and school district emergency levies. These levies are designed to raise a designated amount of revenue annually, regardless of how property values change from year to year. Therefore, decreases in agricultural values, all else equal, will mean that tax rates on fixed-dollar levies will have to increase in order to generate the necessary revenue. This means that taxes will go up on all other property in the district, including residential property.
The second channel by which residential taxpayers are impacted is through the HB 920 tax reduction factors. HB 920, which was enacted in 1976, was designed to insulate Ohio property taxpayers from escalating tax bills resulting from inflationary increases in property values. This is done through a complex mechanism of “tax reductions factors” which serve to effectively reduce effective property tax rates on voted levies after property reappraisal increases values. To give a simplified example, if the real property in taxing district increased by 10%, the tax rate would adjust downward by approximately 10% so that the total amount of property taxes collected in the taxing district remained roughly the same (tax revenues from new construction are allowed to rise under HB 920, unlike the fixed-dollar levy case). HB 920 also works in reverse: if property values decrease then property tax rates will adjust upward (although with some limits) in order to keep the total amount of property taxes collected the same. Finally, HB 920 only applies to “real” property (land and buildings) and not to the Tangible Personal Property (equipment and fixtures) of public utilities.
As if the above paragraph were not complicated enough, a 1980 Constitutional amendment separated real property into two classes. “Class 1” real property is that owned by residential and agricultural taxpayers. “Class 2” real property is that owned by business and commercial entities. Because property inflation is computed separately for Class 1 and Class 2 property, the property tax rates are also typically different for Class 1 and Class 2 within each taxing district.
The tax shifting that will result from the CAUV formula changes contained in HB 49 occurs because agricultural and residential property are both in Class 1. If CAUV values decrease, HB 920 will cause the property tax rates of all Class 1 taxpayers within a given taxing district to increase. Agricultural taxpayers will generally receive a net tax reduction in their property taxes owed because their decrease in property value will typically be larger than the increase in tax rates. However, residential property owners will experience an increase in taxes owed because their values are remaining the same, yet their tax rates are increasing as a result of the CAUV value decrease triggering the district-wide increase in tax rates.
The magnitude of this tax shift will depend primarily on 2 factors:
1) The degree to which CAUV values are decreased (the larger the decrease in CAUV values, the larger the increase in residential property taxes).
2) The mix of agricultural and residential property in the taxing district (the larger the share of agricultural property, the larger the increase in residential taxes).
In 2017, the Ohio Department of Taxation simulated the impact of the HB 49 CAUV formula changes in 8 counties. The results of these simulations showed that, as expected, the greater the proportion of agricultural property in the county, the larger the tax shift to residential taxpayers. In counties with a reasonably large share of agricultural property it was not uncommon to find taxing districts where residential taxes increased by more than 10% as a result of the HB 49 CAUV decreases. Note also that the Tax Department simulations underestimated this effect because they did not take into account the changes that HB 49 made to reduce the valuation of conservation land.
2) Reductions in Tax Revenue for Schools and other Local Governments
While the HB 920 tax rate adjustment factors will generally function in a way that adjusts Class 1 effective tax rates upward in response to CAUV decreases in order to maintain property tax revenue collections at the existing level, there are two exceptions to this.
The first is the case of inside millage. The Ohio Constitution allows for the imposition of 10 mills of property taxes that can be imposed without voter approval. These 10 mills are often referred to as “unvoted” or “inside” mills. Inside mills have been allocated by counties across different units of local government. School districts typically have between 3.5 and 5 inside mills. Inside mills are pertinent to this discussion because they are exempt from HB 920. This means that when property values increase, inside mills generate more tax revenue, and when values decrease inside mills will generate less tax revenue. Thus, as HB 49 reduces CAUV values, all units of local government that have inside millage will experience a decrease in tax revenue.
The second exception to the “residential tax shift” scenario is when the millage rate of an individual property tax levy cannot adjust upward by a large enough amount to offset the decrease in valuation and preserve the original level of tax revenue. This scenario occurs when the tax rate increase necessary to offset the decrease in CAUV value would cause the millage rate of the levy to exceed its originally voted millage rate. Under Ohio law the effective millage rate of a voted levy cannot ever exceed its initially voted level. In this case the local government unit (be it a school, library, township, or other entity) would experience a reduction in tax revenue as result of the CAUV decrease.
The discussion of points 1) and 2) above demonstrate that there are only 2 possible outcomes of the HB 49 CAUV changes on local taxes:
1) residential taxpayers will pay higher taxes
2) local governments will see a reduction in tax revenue.
In the case of local governments that have both inside mills and voted levies (such as school districts) both of these effects could occur simultaneously.
3) Adverse Impact on Future Tax Levy Yield
A third effect of the CAUV decreases contained in HB 49 is that future property tax levies will not generate as much local revenue as they would prior to the change in the CAUV formula. This means that a higher millage rate will be required to generate given amount of tax revenue for a library, school district, township, or other local government entity. In essence, this is really a second tax shift, as residential and business taxpayers will now pay slightly higher property taxes than they would have without the lower CAUV values. However, for agricultural taxpayers whose properties qualify for CAUV the higher millage rate will be offset by their decrease in taxable property value.