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Agricultural taxes in Montana.

How much do Montana's farms and ranches contribute to tax revenues in Montana? Agricultural property taxes are about 16 percent of all property taxes in the state, but farms and ranches pay less than 1 percent of the income taxes. Whether this is too much or too little depends in part on one's view of what constitutes a "fair" tax system.

One notion of fairness holds that taxes should be based on ability to pay. Broadly speaking, this principle suggests that those with greater ability to pay should pay more taxes than those with less ability to pay. Many taxes, including sales, income, and most property taxes, conform at least partially to the notion of ability to pay.

A second notion of fairness is that taxes should be paid according to benefit received. That is, those who receive greater benefits from government services should pay more taxes than those who receive fewer benefits. Many user charges such as college tuition, hunting licenses, and campground fees fit the idea of paying according to benefit. Motor fuel excise taxes also provide an approximation to benefits, since fuel use is related to distance traveled and to weight.

The benefit approach creates an incentive for citizens to lobby only for those programs for which they are willing to pay. Benefits are sometimes hard to determine, however. For example, how should one assign the benefits of national defense or a program to aid the needy?

With these comments as background, consider agricultural taxes. Montana property taxes are levied in a three-step process. First, the assessed value of a property is determined. Agricultural land's assessed value is based on its productive value in agriculture, while most other property is assessed based on market value.[1] Typically, productive value is less than market value, especially where agricultural land is located near growing population centers.

Some see this preferential assessment of agricultural land as a violation of the ability-to-pay principle. Others argue that farmers and ranchers are often strapped for cash, even if the market value of their properties is large. Still others see preferential assessment as a means to retain land in agricultural use - although whether it has that effect is open to question, especially in much of Montana where alternative uses are few.[2]

Second, taxable value is a fraction of assessed value. For most agricultural land this fraction is 3.86 percent, the same as for residential property. Thus, either agricultural or residential land assessed at $100,000 would have a taxable value of $3,860. But taxable value for agricultural implements, like most other business equipment, is more than twice as high, at 9 percent of assessed value.[3] Taxable values for livestock are 4 percent of assessed value.

These variations in taxable value rates are difficult to reconcile with the ability-to-pay approach, since taxpayers with the same dollar value of assets will pay different amounts in taxes depending on the type of asset owned. In addition, taxes on business equipment are often shifted to customers in the form of higher prices, or to employees as fewer or less attractive employment opportunities.[4]

The third and final step in determining property taxes is to multiply the local jurisdiction's mill rate times taxable value. Agricultural property is subject to the same mill rate as all other property in a district, but mill rates vary from district to district.

Table 1 provides data for fiscal year 1996. The taxable value of agricultural land was about $150 million, and the property taxes levied on it amounted to $50 million.[5] The taxable value of agricultural implements was $64 million, and taxes were $21 million. Livestock added another $27 million to taxable value, and $9 million in taxes. Finally, farmsteads - one acre plots together with the residential improvements on them - contributed $75 million of taxable value and $25 million in taxes.

Altogether then, Montana farms and ranches comprised 17 percent of the total taxable value in the state. By way of comparison, the largest share of taxable value was other residential property (excluding the farmsteads) at 31 percent, followed by utility property at 27 percent.

Agriculture's share of the tax base varies a great deal from county to county. In Garfield County, for example, agricultural land, livestock, and equipment constitute close to 80 percent of the total tax base. In Mineral County, on the other hand, these account for less than 2 percent of taxable value.

Property taxes levied on agricultural property totaled $106 million, or 16.2 percent of all property taxes in the state. This is slightly below agriculture's share of taxable value because mill levies tend to be lower in rural areas.

Turning to Montana income taxes, Table 2 shows the amounts reported on Form 1040 for the years 1990 through 1994.[6] Net farm income ranges from a loss of $64 million to a gain of $32 million, while total income from all sources ranges from $7,530 million to $9,543 million. Thus, net farm income was less than one-half of 1 percent of income declared on individual tax returns in every year.

About one-half of Montana's agricultural land is held by partnerships, family and other corporations, or in estates, trusts, etc. Income from this land would not show up on Form 1040 as farm income, and so Table 2 understates the contribution of agriculture to income taxes. But if taxes from these other farms and ranches are similar to those from sole proprietorships, income taxes paid by all farms and ranches are still probably less than one percent of the statewide total.[7]

Returning to the benefit principle, most studies indicate that agriculture pays more in property taxes than it receives in services.(8) The main reason is that about 60 percent of property taxes fund K-12 education, which primarily benefits families with children in school. While many farm and ranch families do have kids, the taxes they pay are high in comparison with those paid by owners of residential property. Similarly, owners of commercial, industrial and utility property also appear to pay more in taxes than they receive in benefits. On the other hand, Montana farms and ranches pay so little in income taxes that they may be net beneficiaries of state services.

A final perspective may be gained by comparing Montana's situation with other states. Agricultural land has historically received some sort of property tax preference in every state. Montana's effective rate of tax on agricultural land tax as a percentage of market value is about average. Taxes on farm equipment are higher than average, both because Montana taxes them more heavily than land, and because many states don't tax personal property at all.


Montana's property taxes on agriculture have sometimes been criticized because agricultural land is assessed at less than market value. Rationales for this preference include providing relief to farmers and ranchers, and attempting to stave off development. Perhaps more convincingly, agricultural property tends to pay more in property taxes than it receives in benefits from local government services. Furthermore, Montana's tax system is rife with preferences and penalties for various sources of income or types of assets. If property were truly to be taxed on market value, utility taxes would be cut by two-thirds and business equipment (including agricultural implements) by more than one-half.

Finally, 37 percent of personal income in Montana ends up being taxable, because of a plethora of modifications, exclusions, exemptions and deductions. Amidst this extensive array of incentives, aid to the needy, and just plain pork, it is very selective to focus on the preference for agricultural land while ignoring the rest.
Table 1
Agricultural Property Taxes, Montana

FY 1996
(Millions of Dollars)

 Taxable Value Taxes Levied

Land 150.6 50.3
Implements 63.7 21.4
Livestock 27.4 9.0
Farmsteads 75.5 25.4

TOTAL 317.2 106.1

Agricultural as % of
all property 17.3% 16.2%

Source: Montana Department of Revenue, unpublished data.
Table 2
Personal Income Taxes, Montana

Income Reported on Form 1040
(Millions of Dollars)

 1990 1991 1992 1993 1994

Farm $32 21 27 7 -64

TOTAL $7,530 7,963 8,631 9,068 9,543

Farm as %
of total 0.4% 0.3% 0.3% 0.1% -0.7%

Source: Montana Department of Revenue, Biennial Report, 1992-94 and
unpublished data.


1 Productive value is determined by a capitalization formula approved by the legislature. Values are to be revised in a three year reappraisal cycle similar to that for residential and commercial property.

2 See John Mackenzie, Use Value Assessment, in Ralph E. Heimlich, ed., Land Use Transition in Urbanizing Areas, The Farm Foundation, Washington, DC, 1989.

3 The 1995 Montana legislature directed that taxable values for business and agricultural equipment be gradually reduced from 9 percent to 6 percent of market value beginning in fiscal year 1997.

4 The taxable value of utility property is even higher - 12 percent of assessed value. These taxes are in turn passed on to customers via a utility's "rate base."

5 Property taxes exclude Sewer Improvement Districts, and Fire and Miscellaneous Districts, because data are not available by property type.

6 These data are for full year residents only.

7 Note that these figures refer only to farms and ranches. Businesses which sell inputs to farm operators and/or buy their products also pay taxes, so agriculture's total contribution to Montana taxes is larger than that indicated above.

8 See, e.g., Mark Hagerty, Costs of County and Education Services in Gallatin County, Montana, Local Government Center, MSU-Bozeman, 1996.


Douglas J. Young is professor of economics at the Department of Agricultural Economics and Economics, Montana State University, Bozeman, MT.
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Author:Young, Douglas J.
Publication:Montana Business Quarterly
Date:Sep 22, 1996
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