Tax discussion highlights tension between residential and agricultural property owners

The South Dakota Capitol building in Pierre. (Seth Tupper/South Dakota Searchlight)

Testimony to a legislative committee Tuesday in Pierre highlighted a growing divide between the property tax payments of residential and agricultural property owners.

Lawmakers on the state’s Study Committee on Property Tax Assessment Methodology heard from county directors of equalization and lobbying groups.

People who own the house they live in are described as the “owner-occupied” class of property taxpayers. Matt Krogman, lobbyist for the South Dakota Association of Realtors, said those homeowners are bearing the brunt of tax increases.

“We believe we’re in the middle of a shift right now, and the shift is going on the backs of owner-occupied properties,” Krogman said. “And we believe that if something isn’t done to make a change, it’s just going to continue to get worse.”

He cited state Department of Revenue data showing that from 2017 to 2023, the share of statewide property taxes paid by agricultural landowners dropped from 28% to 22%, while owner-occupied landowners’ share rose from 38% to 43%.

One factor for the disparity was the COVID-19 pandemic. South Dakota embraced an influx of remote workers and other homebuyers fleeing pandemic restrictions in other states. According to research by the Dakota Institute , high demand for houses helped push the average list price in the state 36% higher from 2020 to 2023, even after accounting for inflation.

Because tax valuations for houses are tied to the market, some South Dakota homeowners have experienced several years of double-digit valuation increases. And those steep valuation increases have driven their property taxes higher.

Krogman said another factor is that agricultural operations benefit from a productivity-based tax system adopted in 2009 and fully implemented by 2019. He said agriculture’s tax relief has become homeowners’ tax burden.

Scott VanderWal, president of the South Dakota Farm Bureau Federation, defended the productivity-based assessment system for agricultural land.

“While it’s not totally perfect, it’s worked pretty well in the last 14 years,” VanderWal said.

He said some of the explanation for rising homeowner taxes and relatively flat agricultural taxes lies with the ongoing conversion of agricultural land to residential acreages and urban sprawl.

Before the productivity-based property tax change, agricultural land was taxed based on its sale price. That led to internal ag-land disparities when land near urban areas had higher market values than rural land, despite similar productivity. So, the state shifted to a productivity-based assessment, focusing on the land’s agricultural output rather than its sale price.

Some states use a similar model to protect the agricultural economy and prevent excessive tax increases driven by non-agricultural market pressures.

Options for lawmakers

In South Dakota, property taxes serve as the primary revenue source for local governments, including schools, counties and townships. Cities receive both property taxes and sales taxes, and the state receives sales taxes.

In 2023, more than $1.6 billion was collected in property taxes to support local governments: 56% went to schools, 27% went to counties, 13% went to cities, and townships and special assessments received 2% each.

Sanderson said two variables determine property taxes: the locally determined needs to fund schools, cities, counties and other local governments, plus the locally assessed value of owner-occupied, commercial and agricultural properties.

The property values are then taxed at a locally set rate, called a levy, to meet the local entities’ needs — a result of dividing the local need by the assessed valuations.

“That’s it. That’s what a levy is,” Sanderson said. “It is literally the last step in the process. It is the logical, mathematical outcome.”

For example, if the local need is $1 million and valuations are $500 million, the levy is 0.2%; $2 per $1,000 of assessed value.

Local governing bodies such as school boards, county commissions, city councils and township boards determine the financial needs, not the state, Sanderson said. Plus, properties are assessed by local officials, not by the state.

Therefore, Sanderson told South Dakota Searchlight that options for state intervention are largely limited to shifting the tax burden to another property class or finding alternative funding sources.

The state does have multiple roles in property taxes, though. Legislators write the laws that govern the property tax system; they determine the amount of state aid sent annually to schools to reduce the burden on property taxpayers; and state law caps annual increases in property tax collections to an inflationary increase of up to 3% plus the value of new construction, unless a local taxing jurisdiction votes to opt out of those limits.

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According to committee Co-Chair Rep. Drew Peterson, R-Salem, the committee will hear from the public during its next meeting. The committee is meeting throughout the summer ahead of the next legislative session in January.

While the committee debates possible changes to the laws governing property taxes, other taxation discussions are swirling around the state. Voters will consider a ballot measure Nov. 5 that’s intended to eliminate state sales taxes on groceries, but critics say the measure’s wording could extend its impact to other goods and services.

That debate is happening while the state’s consumers are already enjoying a two-tenths of a percentage point reduction in the overall state sales tax rate, which was adopted by lawmakers and Gov. Kristi Noem during the 2023 legislative session and is scheduled to expire in 2027.

South Dakota does not have a property tax measure on the ballot Nov. 5, but nationally, there are nearly a dozen upcoming ballot questions on property taxes, including in Arizona, Florida, Georgia, New Mexico, North Dakota, Virginia and Wyoming. While varying in scope, the measures all aim to reduce taxes for some or all property owners.

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