The impact of preferential farmland taxation on local public finances

Preferential taxation of farmland, which typically takes the form of use-value assessment (UVA), is a staple of local property tax systems in the United States. Under UVA, farmland is taxed according to its hypothetical value in permanent agricultural use, as opposed to its full market value, which may include capitalized future development returns that have yet to be realized by the landowner. A common criticism of UVA is that the preferential tax treatment of farmland adversely affects local property tax revenues, with other landowners footing the bill. We leverage the staggered timing of UVA adoption across states to estimate how these policies have affected various sources of local government revenue. Results broadly indicate that UVA adoption led to net reductions in property tax revenue, which were offset by transfers from state to local governments. At the state level, we find suggestive evidence that transfers were funded through increases in state-levied tax revenues, including sales taxes and corporate income tax rates, and reductions in state highway spending.