Academic journal article Agricultural and Resource Economics Review

Land Development and Current Use Assessment: A Theoretical Note

Academic journal article Agricultural and Resource Economics Review

Land Development and Current Use Assessment: A Theoretical Note

Article excerpt

This paper jointly models a landowner's decision to develop a parcel and the option to enroll that parcel in a current use assessment program. The analytical results highlight different factors that influence the effectiveness of a current use program in delaying development. The results also underscore the difficulty a local government might have in influencing the behavior of the landowner. Except for altering eligibility rules, a local government employing current use assessment has but two policy tools: a penalty for development and the property tax rate.

Key Words: current use assessment, development penalties, land-use change, pecuniary and non-pecuniary benefits, property taxation, use value

During the 20th century, state and municipal governments in the United States witnessed an ongoing conversion of agricultural land and other forms of open space to metropolitan uses. As Morris (1998) has noted, "Since 1957, every state has responded to development pressures by allowing or requiring preferential property tax treatment of farmland, and in some states other open space land.... [T]he most common policy assesses the land at its value in its current agricultural or open space use" (p. 144).

Such policies are known as current use (or use-value) assessment. With the sole exception of Michigan, every state employs some form of a current use assessment program. Because they are so wide-spread, we believe current use programs must be acknowledged in developing a theory that relates property taxation to land use patterns.

This study focuses on the tax treatment of properties that are first enrolled in and then later with-drawn from current use assessment. In 15 states, the landowner enjoys a lower property tax bill while the parcel is enrolled and suffers no penalty when the property is withdrawn. In seven states, however, the owner has to pay a land-use change tax if a parcel is withdrawn from current use classification. This tax is typically equal to a percentage of the property's market value at the time of withdrawal. In another 27 states, the owner pays a recapture penalty equal to the property tax savings (plus interest charges) during the years immediately prior to withdrawal from the program.1 These variations in tax treatment suggest the need to consider how the structure of current use programs might affect the timing of development.

We use an intertemporal model to analyze a landowner's decision to develop a parcel of land enrolled in a current use assessment program. Our model highlights different factors that might affect the degree to which such a program preserves undeveloped land. The results also underscore the difficulty faced by a local government in influencing the behavior of the landowner. Except for altering eligibility rules, a local government employing current use assessment has but two policy tools: a penalty for development and the property tax rate.

The structure of our model closely follows Anderson (1993), who also models a landowner's choice of development time (D).2 We extend his work by adding several important features. First, we add specific functional forms to the trajectory of rents for developed and undeveloped land. While this feature makes our model more restrictive, it offers further insight into the comparative statics, which have unambiguous signs.

In addition, our model explicitly allows for the possibility that landowners value the nonpecuniary benefits of their land. This feature is central to the policy discussion on current use assessment and should be included in the model. Lawmakers justify tax benefits for agriculture and land preservation in terms of preserving family farms, the rural landscape, and areas of historic value; however, these benefits may not be reflected in market prices. To the extent such nonpecuniary values accrue to individual landowners, we wish to investigate the degree to which they affect a current use program. …

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