March 10, 2016
Question: How will the tax reform part of the sales tax increase really work??
Answer: It depends . . . and will happen in several steps today.
Step one – Determining the school general fund levies under current law.
Each year the legislature sets the tax levies that will be used by all school districts for their general fund. Under rules set in place in 1995, the calculations used to set that tax levy have come from a formula that calls for school general funds to increase by 3%, or the rate of inflation, whichever is the lower amount.
The state makes two decisions that determine the amount of taxes all school districts will collect for general fund taxes. The first decision is how much funding schools get for each student that is enrolled in their school; this is the “per student allowance” or PSA. For the current year, it has been right around $4,800 for each student.
The next decision for the state is the amount of the total cost that will come from the state’s general fund and how much will be raised statewide through property taxes. The state has been paying a bit less than half of the total for general funds. Using statewide assessed values and applying the math from enough formulas to run a nuclear power plant, each class of property is assessed the levy for school general fund. This process is known as the annual “Cutler-Gabriel” adjustment. Basically, this process uses increasing property values to reduce mil levies so property taxes are not automatically increased as homes appreciate.
It should be stated clearly – The school general fund is not the only property tax levy that goes to schools and a total property tax bill includes levies by cities and counties and water districts and mosquito control districts (which has the double quandary of being annoyed by both the creatures and the taxes to get rid of them).
Back to Step One - This year’s “Cutler-Gabriel” adjustment (HB 1044) which will reduce the school general fund levy for each classification of property using the current law sets the levies as follows:
Classification Payable this year Payable in 2017
Commercial $8.72/$1,000 $8.29 (-4.93%)
Owner/Occ $4.07/$1,000 $3.87 (-4.91%)
Agriculture $1.56/$1,000 $1.51 (-3.2%)
Using the figures above, the school general fund taxes for a property with a taxable value of $500,000 (which is a large home, medium sized business and rather miniscule farm) would be:
- Commercial - $4,360 this year to $4,145 if taxable value stays the same. If value increases 4%, taxes will be the same.
- Owner/Occupied - $2,035 this year to $1,935 if taxable value stays the same.
- Agriculture - $780 this year to $755 if taxable value stays the same.
Now for step two. And - two.point.one
Step Two - The tax increase passed by the 2016 legislative session will take 34% of the revenue (estimated $40 million in the first year) and use it to lower the property taxes for the school general fund. Estimates offered by the Governor’s office during the session suggested that the general fund levy would be reduced around 10% or so. Using the levies listed above for payable 2017, commercial would go from $8.29 to $7.46 just using the funding from HB 1182.
Step 2.1 - Another half-step just to keep this from being understood. This bill also moves a small tax levy used for teacher retirement over to the general fund. The levy can be no more than $0.30/$1,000 taxable value which is 30-cents/$1,000. This levy is being ended as a separate levy and the amount is being is added to the general fund levy. The amount added will the average used statewide, which as of this writing, will be about $0.23/$1,000. Why? The answer is easy . . . if you always know which shell hides the pea.
At 11 am today a conference committee will meet to hear how much revenue will be available for property tax reductions and set the final general fund levies taxes payable in 2017.
- House members on the conference committee: Mickelson, Cronin, Ring
- Senate members on the conference committee: Peters, Solano, Frerichs
You will receive another issue of Capitol-ism tomorrow showing the levies for next year.
Thank you for your support of the South Dakota Chamber of Commerce and Industry!