Johnson, Byron L.

English

Research Papers in Economics

TAXES  AND  THE  FARMER
Byron L. Johnson
Assistant to the Governor of Colorado
As  everybody  knows,  local  governments  raise  the  bulk  of  the
money  they  need from  their own  sources  by  taxing  property,  includ-
ing  farm  property.
The  effective  property  tax rate  is  generally  a little  over  1 percent
-in  urban  areas,  up  to  1.5 percent-of  value.  The data we have  indi-
cate  that farmers  have paid about  1 percent in property taxes on land
and  machinery.
But  the  average  does  not  really  serve  our  purposes,  because  it
conceals  more  than  it  reveals  about  the  impact  of  the  property  tax
upon  the  individual  farmer  in the  individual  year.  The  property  tax
can  be,  and  is,  in  a period  of drouth  or of  low  prices,  a heavy  fixed
burden. I know farmers who teach school, or whose wives  do, in order
to pay  the taxes  to avoid  losing  land which may  for the year be pro-
ducing  almost  nothing.
Yet  the property  tax  is  needed  to support  a  stable  and  relatively
fixed cost-that  of local government-even  though  it must be paid out
of fluctuating  income.
Now  this  is  not  really  a  new  problem,  but  its  impact  has  been
high in our state  in the past few years, when drouth has been coupled
with  low  prices.  And  as  drouth  spreads  or  its  incidence  transfers  to
other  parts  of  the  country,  others  of  you  will  become  increasingly
aware  of  the difficulties  this  can create  for  the farmer.
To be sure, the problem has not reached anything like the severity
of  the depression  and  the heavy  rate  of  tax sales  and  foreclosures  of
those years.  Yet  if this  can  be  a problem  in years  of high prosperity
generally,  what might it become if the economy  suffers  a setback?
RISING  VALUE  OF  LAND
Moreover,  modern  experience  suggests  increasing  presence  of  a
third  compounding  and  relatively  new  element  in  this  analysis-the
changing  and  rising value  of land.
You  can  see  this  most quickly  in suburban  areas.  Farmers  reach
the  point  where  they  can sell for  $8,000 an  acre  the  land for  which
they may have paid  $100  an acre.  I have  seen  land that was  offered
me  just  outside  the  city  of  Denver  at  $560  an  acre  nine  years  ago,
sell  two  years  ago  at $11,000  an acre.  If the  farmer  in  the  suburbs
27is fortunate,  the assessor looks  to present  use, rather  than future  use,
in  fixing  assessed  value-and  the farmer  can  afford  to hold  the land.
If the assessor tries  to evaluate  the land at the value of adjacent lands
which  have  already  transferred  to higher  use,  most farmers would be
forced  to sell.
What  has  been  happening?  We  have  had  inflation  as  a  chronic,
if  not  a  constant,  force  during  the  past  15  years.  It  has  been  sup-
ported  not only  by wars  and by private  if not public deficit  spending,
but  also  by  increasing  population  growth-a  population  or  demo-
graphic  explosion,  if you  will.
This  has enhanced  land as an investment.  Moreover, the changing
technology  of  transportation  has  led  to much  more  widespread  com-
petition for land. Suburbanites need not bunch up along railroad lines,
or even  along  major highway  lines.  The auto permits  any site  within
driving  radius  to  be  considered  a  prospective  home  site,  and  a  pro-
spective  industrial  or  commercial  site  as  well.
Agricultural  land is  now sought, especially  in the vicinity of cities,
by all kinds of investors, home owners, speculators,  and "agriculturists."
But farm  land  anywhere  is  also  purchased  by  corporations  that
operate farms,  for they are anxious  to enlarge or diversify  their hold-
ings.  Long-run  speculation  by  those  who  do  not  need  or  expect  a
current  income  from  the  land  then  supports  its  value  even  during
what the  farmer sees as  "bad years."  There  is a changing  set of values
regarding farm land that certainly is not now reflected  in farm income.
But farm taxes  will reflect this value,  and rise-regardless  of what hap-
pens  to income.
IS  THE  PROPERTY  TAX  FAIR  TO  FARMERS?
Questions,  therefore,  rise  more  and more  insistently:  Is the prop-
erty  tax outmoded?  Is it  unfair  to farmers?
Some of you might well contend that it always  has been outmoded
but refuses to die because no one has found  anything better to replace
it. Perhaps these new forces, coupled with those already operating,  are
creating the unrest that justifies  a re-examination.  Your extension cen-
ters and your experiment  stations-your  agricultural college  faculties-
might well  give this  problem  more  thought.
Part  of this problem  is  described  in Carl Kraenzel's  excellent  vol-
ume,  The Great Plains in Transition.
Farmers  are  willing  to  assume  their  share  of  the  tax  load,  but
would  like  to  see  a  way  of  doing  it  that  does  not  sink  them  in bad
28years.  Farmers  could pay taxes  generously when  harvests,  and prices,
have done  well by them.
If  you  grant,  even  tentatively,  the  hypotheses  set  forth  above-
where  do we  go? What better ways are there?  Are  there  any we have
not  already  examined  in  the  past?  I  would  like  to  list  and  explore
briefly  several  avenues  that  may  be  worthy  of  closer  study  to  help
place  the  tax  load  on  farmers  more  equitably  and  more  efficiently
for the economy.
1.  RESERVE  FUNDS  accumulated  by local  governments  is  an  old
idea  but  worth  another  look,  at  least.  Theorists  have  always  been
attracted  to  it,  but  practicing  politicians  tend  to  be  skeptical.  They
have  reason  and  experience  on  their side.
The  natural forces  of political  life  all work  against the use of  this
technique.  Terms of office  are short-frequently  only two years,  rarely
over  four  years.  Reserves  are  difficult  to  build  under  these  circum-
stances.  Those  who would  control  the  reserve  want  to win  the  next
election.  Hence,  they are tempted  either to cut taxes  rather than build
the reserve-or  to spend  the reserve  on  some  public project  that will
win  voter  acceptance.  Present  benefits  look better  than future  hypo-
thetical  needs.
Finally,  there  will  be  a  reluctance  to  admit  that  poor  years  lie
ahead.  We  like  to  think that the  best is  really  the average.
You  may  well  re-examine  the reserve  fund  idea.  The  1951  New
York City Finance  Study contained  a proposal including  some elabo-
rate devices  to protect such  a reserve.  But I still have little confidence
in it  for  the  average  (and  there's  that word  "average"  again)  rural
county.
2.  DEFICIT  SPENDING.  If we  cannot  save  when  rich,  perhaps  we
could  refrain  from  borrowing  except  when  we  are  poor.  Unhappily,
that  is  the  worst,  and  least  likely,  time  to  borrow  successfully.  The
loan,  if  it  is  made,  requires  pledging  of  real  estate.  Moreover,  bond
holders want  to be  paid on  a predictable  schedule.  If the second  year
is  worse than  the first,  debt  service  simply  becomes  a further  burden
to be  carried.  I  see  little  hope  in  deficit  spending  to  cut  the  burden
of  oppressive  taxes  during  low-income  years.
3.  INCREASED  STATE  AND  FEDERAL  AID  FOR  THE  MORE  COSTLY
LOCAL  SERVICES.  The  strong  argument  for  grants-in-aid  is  that  they
couple  the  superior  money  raising  power  of  the  central  government
with  the happier  administrative  situation  of decentralization.
Parenthetically,  we find a growing  campaign  from such sources  as
NAM  and the Foundation  for Economic  Education  to  do  away with
29grants-in-aid.  Those  who woVld  do so  must remember  that one  alter-
native  to  grants-in-aid  is  to  centralize  the  service  fully,  so  that  the
local  community  would  have  no  direct  voice  in  schools,  highways,
welfare,  and health-the  big four  in the  grant-in-aid  field.  I have  had
my  say  about  grants-in-aid  in  my  thesis,  published  10  years  ago  by
the Social  Security  Administration.
To  be  more  specific:  State  aid for  schools  (and  federal  aid if  it
ever  comes)  might  carry  a  larger  share  of  the  cost,  and  reduce  the
burden  of  education  upon  the  local  tax  base.
Many  states  still  carry  a  very  low  percent  of  the  load.  Here  is
the  single  biggest  area  for  cutting  local  taxes.  Local  governments,
from their own  sources,  paid  5.8  billion  dollars  for  public  education
(largely  out of  property taxes).  State  and federal  outlays  for educa-
tion  came  to  5.4  billion  dollars,  or  less  than  half  of  the  total  cost.
Or,  take  roads  and  streets:  With  the  new  federal  program,  we
have  excellent  provisions  for  state and  federal financing  of the major
highway  system.  But highway user  revenues,  even though  shared with
counties  and other local units of government,  fall short by  1.3  billion
dollars  of  covering  the  annual  costs  of  local  roads  and  streets-and
this  burden  still  falls  on  the  local property  tax.
Many states still require a local contribution to the public assistance
programs.  Many others  do not,  or require  it only  for the smaller pro-
grams.  Nonetheless,  here  again is an area where further  state financial
participation,  and  possibly  abandonment  of  local financial  participa-
tion,  which  now  totals  500  million dollars,  would  also  help  cut local
property  tax loads.  Fortunately,  the extensions  of  Old Age  and  Sur-
vivors  Insurance  will help  reduce  the burden  that must  be borne  by
public  assistance.
The new  federal  aid for  medical  care  to public  assistance  clients
is helpful, but even more support for local health centers  in the public
health  field will help  cut  local costs.
Proposals for a general purpose  grant from the central authorities
have  received  modest  attention  in  the  United  States  and  have  been
used in both Canada and Australia. While theoretically  attractive, there
is not much likelihood of their use in the United States except possibly
to  replace  the  present  pattern  of  aids,  which  I think  to be  unlikely.
4.  STATE  RESERVE  FUNDS have somewhat better possibilities than
local ones, but some of the same pressures  operate  as listed under the
local  reserve  funds.  Experience  suggests  that  these  may  have  their
place.  Colorado  has  just written  a  provision  into  its  constitution  for
30assuring  its  old  age pension-and  5 million  dollars  is  constitutionally
earmarked  for this  purpose.
5.  INCOME  TAXES.  Couple  any  of  the foregoing  with wider  reli-
ance upon  state  and federal income  taxes,  so that the farmer will pay
when  he  has  the money-not when  he  does  not have  it.  No one  ever
went  broke  trying  to pay an income  tax!  But many have  gone  broke
trying  to  pay  property  or  sales  taxes.  The  farmer  needs  to  be  sold
further  on  the income  tax,  and  show  greater  willingness  to  accept  it.
While efforts  at averaging to achieve equity have been abandoned,
the  farmer  might  well  as  for  a  long  period  carry  forward  losses  to
make  the  tax fairer.
6.  THE  CLASSIFIED  PROPERTY  TAX  should  be given a new review.
Possibly we could treat farmers more equitably by devising a property
classification  system  that  will  place  the  burden  more  effectively  on
the  productive  property  and more  lightly  on  property  yielding  little
or no income.
For example,  a city residence  is potentially an investment property.
A  rural  residence  is  only  valuable  as  farm  workers  may  need  it  for
housing.  Placing  equal  taxes  on  them  actually  encourages  absentee
farming,  or  "suitcase  farming."  The  classified  property  tax  also  has
other  virtues  than  its  potential  contribution  to  the  central  problem
here  raised.
7.  DEFENSE  COSTS.  I cannot  close  this  discussion  without  draw-
ing your attention to the  primary factor in our present public  finance
-the exceedingly high cost of military spending. For the past 18 years,
we  have had  pressures  not  to do  many  things  that the  public  would
normally  try  to  do  because  we  could  not  afford  higher  taxes  when
taxes  were  so  high for military  purposes.
A  community,  and  a  nation,  cannot  forever  go  on  this  way.  At
some point we have to face the rightful  demands  of the civilian econ-
omy-which is, after all, the basis  of the military economy  as  well. We
cannot  afford  to  do  without  adequate  schools  and  colleges,  decent
roads  and  highways,  proper  health  care,  public  institutions  that  can
turn  their  inmates  into  useful  citizens,  and  all  the  other  apparatus
that any  civilized  government  must have  to meet  the  demands  of  its
citizens.
We have  been  shirking  the other  duties or  doing them  in  a  nig-
gardly way  because we  want  to go  first  class  in a military  way.  How
thoroughly  prepared  must  we  be  for  total  destruction?  Or,  as  one
bitter  critic  has  put  it:  "Let  the  H-bomb  not  be  the  final  sequel  in
which  all  men  are  cremated  equal."
31To put it affirmatively:  In  a world where many have  long looked
to us as the epitome of the achievements  of both democracy and tech-
nology,  might we not be truly more secure  if we  devoted  a large part
of our resources  to meeting  human  need,  both  at home  and abroad,
and  less  of it to plotting  for  the awful destruction  of  human  life  that
the  atomic  age has  made  so  devilishly  possible?
Farmers,  like  mothers,  are  creative  people whose  job  is  to bring
life  into the world-not to destroy the possibility  of life.
If we  could operate  from  our faith rather  than from  our  fears  in
answering  these  questions,  then  we  could  make  the  solution  of  the
other  problems  with which we  have  dealt  much  simpler.
Tax  policy  cannot  be  divorced  from  the  times  in which  we  live
and from the great assumptions  by which we live. If we could success-
fully  challenge  and constructively  change  some of those  assumptions,
we  could  devise  a  better  tax  system  not  only  for  farmers  but  for
everyone  else  as  well.
32

TAXES AND THE FARMER

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Research Papers in Economics