Last week we explored how property taxes can shape our cities in unintended ways—especially when they're not aligned with our planning goals. This week, we will explore an example based on Josh McCarty’s work at Urban3 that spotlights how a particular tax subsidy allows property developers to cheat the system and alter the rural landscape.
The Agricultural Tax Subsidy
As long as there have been taxes, there have been tax loopholes, and property taxes for farms are no exception. The agricultural tax subsidy, present in some form in most states, offers a property tax break or an alternate method of assessment to encourage agricultural land use. This detail in the tax code can be a welcome relief for small-scale farmers, but can also be used nefariously by developers who purchase farmland to flip it for a profit.
Land development is complicated. There are permits to be secured, financing tools to be used, and unpredictable market forces that often cause sites to sit empty for years, waiting to be developed. Meanwhile, the sale of farmland triggers a reassessment of its taxable value. Since the land has been purchased by a developer, it's, obviously, re-valued as a developable lot—and that means the tax bill goes up, too.
This is a basic part of our tax system, but some developers seek ways out of heightened tax bills for their new property. They may pursue Tax Increment Financing (TIF) and other other financing measures to delay the costs while they prepare to build. However, these strategies come with their own set of problems, as Strong Towns has written about before.
Many developers also find and utilize loopholes to get out of paying their required taxes altogether. Which leads us to the story of a wealthy family who sold their farm, and the developer who exploited an agricultural tax subsidy to keep it all together—and that developer’s eventual arrest while struggling to manage the whole scheme.
A $100,000 Heist
By the time they met physician-turned-developer Dr. Glenn Stewart, the Saloom family had owned over 200 acres of farmland in Lafayette, Louisiana for generations. As suburban development crept southward from downtown over the years, their property tax bill remained negligible while the value of neighboring land increased. Until 2009, when they sold 13 acres of their land at the price of $7 million to Stewart.
Stewart’s intentions were clear—he wanted to develop the Saloom family farm. No crop could possibly explain such a high selling price. And soon, he announced his plans to create Parc Lafayette on the site, a luxury “lifestyle center” including shopping, apartments and a hotel. He attempted to develop it as a TIF project, but his request was denied by the City-Parish Council.
So he turned to another option. Stewart shrewdly filled out an agricultural land use application for his taxes to be filed under use value rather than fair market value. Louisiana vaguely stipulates that agricultural properties must be a least three acres in size or have produced an average gross annual income of $2,000 or more for the preceding four years. For properties larger than three acres in size, according to the president of the Louisiana Assessors Association, “the law is we have to put it in use value” if it simply has hay and animals on it. The assessor just uses aerial maps to verify that agricultural activity is taking place when the request for use value is made.
As a result, Stewart threw some hay bales on the property and payed less than $100 in taxes over two years while he waited to harvest the profits from his luxury development. He got away with nearly $100,000 in quasi-legal tax evasion compared to the commercial rates he would have otherwise paid after purchasing the land.
The local assessor estimates that the owners of 4,085 acres of similar property across Lafayette pay a total of about $9,000 in taxes per year. If the land were assessed under fair market value, that number would be closer to $1,500,000, which amounts to roughly 2% of total tax revenue for the City-Parish.
What if your local government proposed spending 2% of its budget protecting farmland, but didn’t have a stringent definition of what a farm is? The line between a bona fide farm and Stewart’s "farm", which should be easy to draw, has been blurred to the extent that they are both treated equally under the law. Hypothetically, the waiting phase for development permits and financing can be prolonged indefinitely, meaning that developers may escape paying an appropriate amount of taxes for years.
But the real issue is less about Glenn Stewart—or any particular individual—than it is the effectiveness of our tax law itself. As it now stands, Stewart was initially denied his TIF, but found a way to get an even sweeter deal. And other developers can and will do the same.
From a behavioral economics perspective, our tax system rewards non-development just as much as it values the active farms that grow our food. When assessors and planners failed to unify their goals in Lafayette, a door was left open for unintended consequences—and one of those consequences was a bunch of useless hay bales on a vacant lot near the most valuable land in town.
Three Billboards Outside Lafayette, Louisiana
This matter was brought to public eye in 2011, when the local newspaper The Independent published a cover story on the relaxed regulations around farm tax exemptions. Stewart reacted in a highly unusual manner. Instead of keeping his head down and going about his business, or even just calmly defending his actions in the local press, he did the opposite: he rented several billboards in town and used them to accuse the Independent’s publisher of covering up a DUI arrest.
The actual details of that story are too trivial to repeat. The billboards were just a small part of a wider harassment campaign that finally reached a crescendo at the 2012 Mardi Gras parade. Stewart, in a not-so-shrewd gesture, paid to put a float in the the parade specifically to publicly flaunt his hatred for the newspaper, complete with a banner trumpeting the alleged DUI cover-up for every parade-goer in town to see. Understandably angry, the publisher’s stepdaughter walked up to the float and started ripping up the banner. Stewart decided to double down. He then bombarded the third-grade school teacher, hurling jello-shots at her before climbing down from the float and punching her in the face. And then he pulled out his phone and took pictures.
Stewart was, of course, arrested and convicted for his actions, to which he responded by tripling down and suing the police department for arresting him. That lawsuit was quickly dismissed and his lawyers were sanctioned. In the end, Stewart faced 12 months of supervised probation, a $500 fine, and was finally forced to pay the appropriate commercial tax rate for his land.
But this story is more than a lesson about indefensible violence and the dangers of letting your emotions get the best of you. Crazy Mardi Gras brawls aside, Stewart's meltdown stems from something much simpler: how policy aligns within the branches of our local government. Other states have closed similar loopholes by locking agricultural tax exemptions into a time-specific period; if a developer turns around and builds on their farm, they’re required to pay back the taxes they owe.
If planners pay attention to property taxes and assessors pay attention to planning, they can intentionally guide their community towards solutions for their problems instead of shrugging their shoulders and allowing bad actors to get their way.
Next week, we'll use Urban3’s technology to map and visualize the effects of Prop 13 in California on property tax disparities.
(Top image source: Urban3)