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Reprint from Alabama's TREASURED Forests
Current Use Taxes in Alabama
by L. Louis Hyman, Alabama Forestry Commission
All property taxes are based on the value of the land (ad valorem). That
value is based on two main estimates, the market value of the property
and the investment value of the land. The market value is based on what
similar tracts are selling for, and includes the development potential of
the property as well. It might be a pasture now, but it could be used for
a shopping mall, so the market value would be higher than for land without
that development potential.
Most property taxes are figured using the market value. The assessed value
of your house is based on what other houses in your neighborhood are worth.
The value of your forest land is based on what nearby forests are worth.
One major difference in Alabama is that timber is exempt from property
taxes, with taxes paid only on the bare land value.
The other way to value property is as an investment. How much can I expect
to make from the land and how much is that income stream worth. The
current use system in Alabama uses the investment model to find the value
of the tract based on its present land use. It assumes that farm land and
forest land will produce a stream of income that can be capitalized to
determine a land value.
Prior to 1978, all property was valued for taxes based on market value. A
lawsuit begun in 1969 challenged the way taxes were assessed. Properties
were assessed at between 9 and 30 percent of their market value, based on
a mix of laws, regulations and traditions. This system was declared
unconstitutional, throwing the system back on an old law that set the
assessment at 60 percent of market value. This would have the effect of
tripling property taxes. In response, the Legislature passed a
constitutional amendment that set up 4 classes of property with different
assessment rates. Homes, farms and forests were put into Class 3, with a
10 percent assessment. Homes would be taxed based on 10 percent of their
market value.
The amendment also allowed for an investment based valuation based on the
current use of the property. In 1982, the legislature passed the Current
Use Act, which governs the valuation of homes, farms and forests. The law
said that taxes should be calculated using "the value of the eligible
taxable property, based on the use being made of that property on October
1 of any taxable year, provided that no consideration shall be taken of
the prospective value such property might have if it were put to some
other possible use." Applied to homes, the tax is based on the use of
the site for residential housing, not on its potential to tear down the
house and replace it with a factory or store.
The impact of this rule on forest land is that it lowers the taxes owed
on lands close to a town, so as to allow the owner to keep it in forest,
instead of having to convert it to commercial or residential property to
pay the taxes. In fact, the legislative intent was just that. "Alabama is
particularly concerned about the preservation of its agricultural and
forest property and seeks through its property tax structure to preserve
such property by providing additional preferential tax treatment for such
property."(Wiessinger v. White, 733 F.2d 802 (11th Cir. 1984) )
How Current Use Works
Current use valuation is based on the productivity of the land. The law
breaks agricultural and forest land into 10 soil productivity classes.
These classes are then grouped into 4 value classes. The value of a farm
is based on average income from major crops, less cost of production. This
net income is then capitalized, converted into land value, by dividing it
by a standardized interest rate. Under the Alabama current use law, the
standard rate is the ten year average of interest rates on new loans by
the Farm Credit Bank of Texas, which funds federally endorsed farm loans
in Alabama. This interest rate is decreased by 4.5 percent before it is
used in the calculations.
All current use values cannot fall below an initial floor value, the 1981
current use determinations, and cannot increase to a level that is more
than a ceiling that increases by 3 percent per year, starting with the
1981 values.
Forest land on the other hand, is valued using a fixed formula:
Growth X (Price - Expenses)
Farm Bank Interest Rate - 4.5%
In this equation, there are two fluctuating variables, price and interest
rate. The price used is the weighted average pulpwood stumpage price for
Alabama for the previous calendar year. The Alabama Forestry Commission
calculates this price using Timber Mart South reports for Alabama for pine
and hardwood pulpwood. The averages are weighted using the consumption of
pulpwood shown in the severance tax reports. For the 1995-1996 tax year,
the AFC consolidated 1994 prices. We found an average statewide price of
$30.17 per cord for pine pulpwood and $16.65 per cord for hardwood pulp
wood, with a weighted average price for all pulpwood of $24.76. Over the
last few years, this average pulpwood price has been steadily increasing.
The Farm Credit Bank loan rate has varied greatly over the last 20 years.
By using a 10 year average, this variation is dampened. The ten year
average new loan rate through 1994 was 10.38 percent. Over the last five
years, this rate has steadily declined.
The other factors used in the formula are fixed in the law. Each forest
land value class is assigned a productivity rate, ranging from 1.38 cords
per acre per year for "good" land, to 1.05 cords/acre/year for "average"
land, to 0.75 cords/acre/year for "poor" land, to 0.60 cords/acre/year for
"non-productive" land. The expense ratio is also fixed at 15 percent of
income.
Current Use Valuations for Tax Year 1995
Using all these factors, the current use valuations for tax year 1995 can
be calculated for each value class. These are:
Good Forest Land $494 per acre
Average Forest Land $375 per acre
Poor Forest Land $268 per acre
Non-productive Forest Land $214 per acre
These are all increases above the floor rates established in 1981; in the
case of "average" land, an almost $100 per acre increase. Why did this
increase occur? The answer lies in the formula and the relationship of
value to price and interest. The formula value is directly related to
income, as stumpage prices go up, the land value goes up. The formula
value is also inversely related to interest rates, as interest rates go
up, land value comes down, as interest rates go down, land values go up.
Through the 1980's, timber prices were level or falling and interest rates
were rising. Since about 1990, these trends have reversed, as a result the
current use formula values have been increasing.
While this is a major increase in appraised value, it is below the ceiling
value set in the law, based on a 3 percent increase in value per year
since 1981. The ceiling value for 1995 was $403 per acre for "average"
forest land, and $529 for "good" forest land.
Impacts on Landowners
The current use value is used to calculate the tax base of the property.
This is the assessed value of the land, which is 10 percent of appraised
value. The assessed value times the millage rate determines the property
tax owed. The 1993 current use value of $275 per acre of average forest
land produced an assessed value of $27.50. At the state average tax rate
of 30 mills (0.030), the land had a tax burden of $0.825 per acre. For
1995, the new current use rate of $375 produces an assessed value of
$37.50 and an average (at 30 mills) tax of $1.125, an increase of 30 cents
per acre.
The current use valuation is optional to the landowner. You can elect to
use fair market value at any time. According to a study done by the
Alabama Cooperative Extension Service in 1992, the average forest land
value in Alabama is about $300 per acre. If the current use rate is higher
than the fair market value of the land, the taxpayer can switch back to
market value. In many rural counties, in fact, the market value of forest
land was less than the old current use floor rate. Check with the county
tax assessor and see if this switch will benefit you.
Forest lands near developing areas may find that the current use rates are
still less than the market values for their lands. In that case, it pays
to stay with current use.
The purpose of the current use valuation is to help landowner keep their
lands in forest and agriculture and not have to convert their lands to
meet their tax burdens. The changes in the valuation reflect that forestry
is becoming a strong investment, with potential income increasing and costs
and interest rate coming down. This is good news. As forestry as an
investment becomes stronger, it is increasing the value of not just the
trees, but the land base as well. As these trends continue, the TREASURE
in your forest will continue to grow in value.