Property taxes on land and land use

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Montana State University - Bozeman, College of Agriculture


All fifty U.S. states have some form of property tax relief for agricultural land. Preferential assessment of agricultural land for property taxes distorts the like treatment of equally valuable real property. However, property taxes are administered as a part of the nation's tax system. The effect of preferential assessment for agricultural land must be evaluated within the tax system. A formal model of land values and times of converting agricultural land to urban uses is developed in this thesis. A property tax on land, a rollback tax, an income tax, and a capital gains tax are applied to the model, and the optimal time of conversion is examined. Comparative static results are discussed by simulating the tax rates. Property tax preferences for agricultural land, when administered in a vacuum, delay conversion to urban uses. Rollback taxes, intended to penalize conversion of land out of agricultural uses, have little effect on the allocation of land. Land rents and capital gains are effectively untaxed for land in owner-occupied housing. Property tax preferences are small in comparison with these preferences for land in owner-occupied housing; thus, the tax system's bias is to allocate more land to housing. However, land rents and capital gains are taxed for land in commercial use, allocating land to agricultural over commercial uses. The effect of the property tax is to reduce the allocation of land to commercial uses and to mitigate the bias created by other taxes when land is converted to housing. Thus, the current tax policy does not necessarily promote an inefficient allocation of land.




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