Michigan Governor Jennifer M. Granholm yesterday vetoed a bill that supporters of the legislation contended would help protect farmers but that opponents said would facilitate more sprawling development. The bill, which the state Senate sent to the governor on April 1, would have adjusted how the value of agricultural land is computed. Its sponsors said this would make the tax system fairer by shielding farmers from the inflationary effects of nearby land speculation and development.

But critics of the bill, including farmland protection advocates and the co-chairs of the governor’s own land use reform council — former Governor William Milliken and former state Attorney General Frank Kelly — urged Governor Granholm to veto the legislation because it would have protected land speculators and developers. They, as well as other opponents to House Bill 4702, said the bill would also rob local governments of needed tax revenue that such commercial development usually provides and accelerate the sprawling suburban development that is paving Michigan’s farmland at a record pace.

In a letter to Governor Granholm last week, the two top former state officials warned that the legislation would provide “reduced taxes to all holders of farmland without ensuring that the financial benefits accrue to those landholders who are committed to keeping the land in agriculture.”

In addition, as the governor considered her options, a national investigation by The Associated Press found that real estate speculators actually benefit more than farmers do from the kind of tax break that HB 4702 offered. The A.P. report found that such attempts to support farms with lower property taxes have actually helped developers across the country avoid millions of dollars in taxes that local governments need and which municipalities often end up charging to other property owners. Upon vetoing the bill, Ms. Granholm cited the problem of extending farmland tax benefits to potential real estate speculators and said the legislation was “not consistent with Michigan's interest in preserving our state's valuable farmland.”

Fighting Sprawl a Messy Business
The choice Ms. Granholm faced on House Bill 4702 demonstrated how politically messy the work of countering sprawl can be. The governor first launched her promised drive to slow the march of convenience stores and traffic congestion across Michigan’s landscape and communities early last year when she formed the blue ribbon, bipartisan Michigan Land Use Leadership Council. She asked its members to investigate the causes and consequences of sprawl and recommend how to solve the problem, and then strongly endorsed its more than 150 recommendations after they were published last August. The governor says the council’s recommendations are keys to building economic prosperity and security while protecting the state’s abundant natural resources.

The land use council put farmland preservation high on its list of best strategies for helping both rural and urban communities fight sprawl. Farmland preservation enjoys strong support from citizens in Michigan and across the country who have voted, often by wide margins over the last year, to raise their own taxes to pay for such programs. The council recommended the state help fund farmland protection programs in Michigan; provide assistance to farmers striving to develop new, more entrepreneurial, value-added farm business models and markets; and protect farmland with lower taxes.

HB 4702 was the first post-land use council legislation aimed directly at farmers. It passed handily in the Legislature, particularly in the Senate, which approved it 33 to 4. Its primary sponsor, Representative Bruce Caswell, said that the bill would make farmland assessments, upon which taxes on land purchases are based, better reflect the value of the land for farming, which is generally much lower than the value for development. The bill reduced the number used to compute a farm’s property taxes after it is sold — known as its state equalized value or SEV — by excluding consideration of the market value of nearby farmland that is sold to developers. These transactions command far higher prices than farmer-to-farmer sales and can drive up the SEV’s for all farmland in a given region.

Fair Break or Unwise Subsidy?
Representative Caswell, a Republican from Hillsdale, said his legislation actually had “nothing to do with taxes” and simply refined how local assessors peg agricultural land values. According to the representative, who served as a local tax assessor for 22 years, the bill would have assured that agricultural assessments reflect real agricultural farmland values. “If someone’s paying a lot more than anybody else would pay, that sale should be thrown out,” the representative said, referring to the high prices farmers often get when they sell to developers. “It shouldn’t be used to justify higher assessments on every other agricultural parcel.”

But critics of the bill said its approach was overly broad and, in the long run, would neither help farmers nor slow sprawling development in Michigan, which lost farmland at a rate of eight acres per hour from 1997 to 2002. In their letter to the governor, former Governor Milliken and former Attorney General Kelley, co-chairs of the Michigan Land Use Leadership Council, said the bill could have subsidized sprawl in rural areas, which increases real estate pressure on farms.

The problem, according to farmland preservationists, was that anyone purchasing agriculturally classified land, even development companies and real estate speculators, would have benefited from the bill’s suppression of farmland’s state equalized value. Developers would benefit from the lower SEV number for the entire time their property remained undeveloped. In effect, opponents of the bill argued, this would have subsidized those who purchase land and hold it for years before actually converting it to strip malls or subdivisions. They add that the legislation would also have suppressed overall property tax revenues to local governments.

Who Needs It?
Pat Norris, an agricultural economist at Michigan State University, said that tax laws as currently written already provide ample protection for farmers. Proposal A, the 1994 law that dramatically changed the way local governments can levy property taxes, has greatly slowed yearly increases in taxable value, allowing most farmland owners to pay on only 60 or 70 percent of the actual SEV in their area.

A more recent law now prevents farmland property taxes from “popping up” to higher SEV levels when one farmer sells land to another if the purchaser signs an affidavit stating that the land will stay in agricultural use.

“If the objective is to help protect farmers and farmland,” Ms. Norris said of HB 4702, “then it is redundant to existing laws and it opens up a lot of room for speculation because buyers can have lower taxes without ever having to sign an affidavit saying they will keep the land as qualified agricultural property.”

Sally Akerley, a tax assessor for Peninsula Township, a largely agricultural area near Traverse City, agreed that farmers who sign affidavits already have strong protection from escalating SEVs and that HB 4702 actually helps a different group of farmland owners. 

“In the end it will surely be the developer who is getting some breaks,” she said, adding that the SEV on agricultural land will not increase very much if assessors cannot include higher-priced farmland sales. This is why critics of the bill say it would not only help developers, but also make it more difficult for local governments to collect appropriate taxes from developers to cover the costs of sprawl, such as expansions in infrastructure and municipal services.

Evidence from The Associated Press investigation supports the concerns of Ms. Akerley and Ms. Norris. It concluded that more harm than good comes from generalized farmland tax breaks. Rather than help farms stay in business, The A.P. found that low-tax farmland schemes encourage speculators looking for low-cost ways to purchase and hold on to land that they eventually subdivide or pave with strip malls and parking lots.

Other States Have Other, Better Methods
Scott Everett, the Lansing-based regional director of American Farmland Trust, a national farmland preservation organization, said other states have found much better ways of helping farmers while controlling sprawl-inducing land speculation.

For example, he said that Maryland and California offer farmland tax breaks, but both also charge a conversion fee when developers turn farmland into housing tracts and shopping malls. Maryland charges 5 percent of market value; California charges 12.5 percent of market value. He said such “conversion fees” deter speculator abuse of farmland tax benefits and provide local and state treasuries with revenue to counter the new costs that come with sprawl.

Although farmland preservationists urged the governor’s land use leadership council to recommend that the Legislature establish such conversion fees, the council instead recommended a much milder approach to reducing subsidies to developers with farmland tax breaks, called “recapture fees.”

Proponents of farmland preservation are not very enthusiastic about recapture fees because they only require developers who take advantage of farmland tax breaks to pay back some or all of the taxes they avoided. This amounts to a zero-interest loan of the money they were able to retain for uses other than paying taxes until they actually begin developing a property. The Michigan Legislature has yet to consider such fees.

While working on HB 4702, the Senate did consider the kind of conversion fee that Mr. Everett supports, but rejected it by a 22-to-17 margin. According to Mr. Everett and other farmland protectors, conversion fees are the most effective way to prevent speculator abuse of tax benefits meant to preserve farmland. The fees, paid by the owner that plats or otherwise converts the land to nonfarm use, provide both a deterrent to speculation and needed revenue for local governments and farmland protection.

Counties, townships, and municipalities often must raise taxes to cover costs of extending sewer lines and other improvements that sprawl forces onto a community but which initial land developers do not pay for. Conversion fees also provide funds needed to develop and implement programs, such as farm business diversification and land conservation, that help many communities build stronger rural and urban areas.

Patty Cantrell directs the Michigan Land Use Institute's entrepreneurial agriculture project. Reach her at patty@mlui.org.