As property taxes surge in Montana, some say the state’s tax code is letting luxury real estate owners benefit from a tax break intended to support farms and ranches. The longstanding policy passes sizable tax savings to property classified as “agricultural.” But, critics say it may be too easy for high-value homes to qualify for that tax break. Montana Free Press deputy editor Eric Dietrich dug into this issue in partnership with High Country News and joined MTPR’s Austin Amestoy to explain.
Austin Amestoy Eric, tax policy is always complicated, so let’s take this piece by piece here. Why does this tax break for agricultural property exist?
Eric Dietrich So, the gist of it is that this policy of Montana is that agriculture is good and that the state tax code should make life easier for farmers and ranchers by giving them lower tax bills relative to, like, perhaps a residential use of property and the like. Most people that I’ve talked to at least seem to agree on that values in kind of broad strokes. The concern, though, is that the current system may be letting luxury real estate qualify so their owners could get a tax break that isn’t available to, say, urban homeowners. The challenge, of course, is how how do you write a tax statute that draws a clear line between rural homes and working farms? Because that line can sometimes be a little blurry when you actually look at the way things are going out on the landscape.
Austin Amestoy Well, let’s try to parse the details in the code a little bit here, Eric. How does this tax break work in practice?
Eric Dietrich So, if you own a house in town, it’s probably classified as residential property. That means that the structure and the underlying land, which are valued separately, are both taxed based on their market value. So, how much they would sell for if you were to put that house up for sale. Ag land is different. The structures on ag land are still generally taxed based on market value, but the underlying land gets a discount. It’s valued instead based on productive value. How much money you could theoretically make growing crops or grazing livestock. And that’s a big difference. Typical home lots across the state sell for maybe $200,000 typically, but it’s pretty common for grazing land to be worth more like $100 bucks an acre or so, significantly less.
Austin Amestoy So, Eric, hypothetically, if I own a large house on an ag property and my next door neighbor is classed residential, I would pay less in taxes because my land tax is lower?
Eric Dietrich Yes, we’ve looked at a bunch of situations like that involving specifically million dollar homes of high-value real estate. And in those situations it’s pretty common for people to be paying a couple thousand dollars a year less because of their ag status. One situation we looked at in particular is Governor Greg Gianforte’s Bozeman home — which is an agricultural property — and they found that there’s an 11 acre parcel that has his homesite on it, and that pays a total, according to our math, of about $66 in land taxes each year. And that’s less than pretty much every urban home lot in the state pays. The governor’s office, we asked them about this, of course, and they said that … some of that land is used for barley and alfalfa and some of it is also used to board horses and meals, they said.
Austin Amestoy So what would someone have to do to qualify as ag land?
Eric Dietrich For smaller properties it’s pretty simple you just have to report to the Department of Revenue $1,500 a year at agricultural income. I’ve been told that’s a pretty low threshold. You hear stories talking to people about, you know, properties that qualify with the revenue of, say, a few cherry trees in the Flathead or a few acres of hay. And that $1,500 threshold also hasn’t been updated since the 1980s.
Austin Amestoy Right. So this tax break has been around for decades at this point. But it sounds like lawmakers are looking at this as the Legislature convenes this month.
Eric Dietrich Yeah, there are a few people in the state Legislature that are concerned about this for varying reasons. And they have been working on bills that could tweak the system to make it, as they see things, more fair. You know, for example, the the details are pretty wonky. But one example would be raising that exemption threshold for 40 years of inflation. So $1,500 could become something more like $4,000.
Austin Amestoy Well, what are the prospects for those changes?
Eric Dietrich It’s always tricky to predict the future, but it sounds like people expect that those bills would face quite a bit of opposition, mostly because it’s hard for lawmakers to raise taxes on people, even people who are perhaps benefiting from, you know, what some people would call a loophole. I talked to the lawmaker who sponsored one of those bills Tuesday morning, and she said that she was at that point working on tweaking details in an effort to calibrate the bill into something they can attract enough support to get to the governor’s desk.
Austin Amestoy Once again, Montana Free Press deputy editor Eric Dietrich sharing his reporting with us. Eric, thank you for coming on.
Eric Dietrich Thanks for having me.