Property Tax Reform; What’s the Problem?

• It’s Complicated
• It’s Confusing
• It’s Boring

Plus, none of the property tax money goes to the state. 

Owner Occupied property taxes are increasing in many communities around the state which is putting political pressure on public officials to . . . DO SOMETHING!  The answer seems obvious, just lower the tax rate and collect less revenue from homeowners and poof, problem solved.

Not so fast.  Owner Occupied properties brought in more than $708 million dollars in revenue in 2023 which means any meaningful reduction will have a price tag of close to $150 million to achieve even a 20% reduction. 

To reduce taxes for any class of property there are only three possibilities:

• Find new money
• Shift taxes to other taxpayers
• Reduce budgets

What’s Possible?

New Money – Also known as new taxes.  New taxes need a 2/3rds vote, which is like being taken on a snipe hunt.  New revenue worked back in the early 1990s when Governor Janklow took $100 million in video lottery money (a new tax) and put it into the school funding formula and reduced property taxes for Owner Occupied and Agricultural properties by 25%.

Tax Shift – HB 1019 (Rep. Venhuizen, R-S Falls) – Would increase the state sales tax from 4.2% to 5% which will raise approximately $280 million dollars which will be used to reduce property taxes.  This reduction will be achieved by reducing the school “general fund” levy from $2.679/thousand to zero, and the “special education levy” from $1.488/thousand to zero for a total levy reduction of $4.167/thousand of taxable value.   Homeowners will still pay property taxes for counties, cities, bond payments and mosquito districts.   But reducing the school general fund and special education levies to zero and replacing the property tax revenue with the money from the increased sales taxes will achieve a reduction in Owner-Occupied property taxes of nearly 35%.  This is a tax shift from property taxes to sales taxes.

Budget Reductions – Those most familiar with the budget don’t believe that there is $200 - $280 million that can be cut from the state budget without harming schools, law enforcement or public employees. 

Why Not Freeze or Limit Increases in Assessed Values (and Taxes).

First let’s start with the fact that all homeowners hope their home’s value will increase over time.  It is the largest investment most people will make in their lifetime.  But, higher values will bring increased taxes under our current system which is based on value.

How do you allow home values to increase and keep taxes down?  One answer that has been proposed would be to limit the amount of assessed value that a home can be increased.  This idea usually would have the taxes on a home significantly increase after it is sold to new owners. 

This would change that tax system from one based on values, to one based on the price paid at the time of purchase.  Additionally, this system would see an increase in mil levies because the value of the tax base would be artificially low.  Thus, new homeowners would get hit twice, once as the assessed value of their new home soared to the purchase price and second by mil levy rates that are artificially jacked up.  Welcome to South Dakota.

Arbitrarily suppressing assessed value distorts the tax system, and over time may render it unfair at best or totally unworkable at worst.  South Dakota learned this lesson with the 150% rule.  To keep unusually high prices for agricultural land from increasing taxes on all farms, using the comparable sales model, the decision was made to ignore sales that were more than 150% of the current assessed value.

After a while some counties had no sales that they could use to update the value of farms and those values fell to ridiculously low values rendering the property tax system unfair.  This led to the creation of the productivity system which led to significant tax increases for farmland in many counties.

There will be other ideas proposed.  Watch this space to understand those.