Governor’s property tax plan will have unexpected consequences

Gov. Larry Rhoden’s “rifle shot” Thursday to limit the countywide assessed value of owner-occupied residential property to 3% annual growth for five years is a simplistic plan that will create future problems.

Senate Bill 216 as proposed will shift taxes even further onto commercial property and people that own second homes, such as on lakes or in the Black Hills. It perpetuates an already unfair system.

Rather than fix a program that heavily favors agricultural land, this temporary proposal becomes obsolete after the 2031 tax year. Some other legislature will have to clean up the wreckage this creates.

Knee-jerk action already messed up the sales tax system. Let’s not do it with property taxes as well.

Rhoden unveils plan to slow property tax increases for five years

We remember Sept. 28, 2022, when then-Gov. Kristi Noem surprised everyone at a campaign stop in Rapid City by calling for eliminating the sales tax on food.

She argued at the time that the state could afford it, as it had a $115.5 million budget surplus, the unemployment rate was low and resident income growth was solid.

Legislators disagreed with cutting it just on food but did pass a reduction in March 2023 of the state’s overall sales tax from 4.5% to 4.2% for four years, at a cost of $104 million per year. That sunsets in 2027.

At the time, the state opened the session with $423 million in reserves. Much of that was driven by massive one-time federal funding. How quickly things change as legislators now struggle to balance their budget and pay for a new prison.

Why a bad budget year is a good time to mess with property taxes is perplexing. But legislators often defy logic.

Ironically, increasing the state sales tax is one other idea being proposed to provide property tax relief.

As legislators and the governor dive into the issue, they should start with reality.

While commercial and residential property is assessed based on market value, agricultural land is taxed differently.

According to “Property Taxation – A Modern History,” produced by the South Dakota Legislative Research Council, HB 1005 in 2008 “moved the assessment of agricultural land from the market system to a productivity system. This system uses the income value of agricultural property. It is comprised of eight years of data and throws out the high and low income value (Olympic average) as determined by the production of crops for each county.”

The result is a property tax system unrelated to the actual value of agricultural land. SB 216, similarly, eventually will detach owner-occupied residential property from market reality as similar homes may be taxed differently.

In the past five years, South Dakota’s agricultural land values have increased 64.6%, according to a Jan. 7, 2025, report by Farm Credit Services. Twice a year, Farm Credit has its appraisal staff appraise its benchmark farms. South Dakota was up 9.5% in the past year, well above the surrounding states.

Iowa was down 5.1%, Nebraska was down 0.4% and Wyoming was up 2.7%. Meanwhile, the one-year increase in pasture/ranch value in South Dakota was 21.6% while in Nebraska it was 0.4% and Wyoming changed 1%.

The disparity in taxes paid is obvious to real estate appraisers, especially those who work in all sectors of South Dakota’s market.

Here is a quick comparison.

In December 2024, a buyer paid $960,000 for 160 acres of Spink County crop land. The assessed value of that property was $250,984. While land values were increasing nearly 65%, that land’s assessed value went down from its 2020 assessment of $259,287. Taxes payable in 2025 are $1,180.62, about the same as in 2020. Over the last five years, taxes paid were $5,648.60.

Similarly, a 160-acre property in Brookings County sold in February 2024 for $1,552,000. The five year average assessed value was $404,600 and five years of taxes paid were $18,913.

Consider the taxes paid by an owner-occupied residential property owner in Watertown. This home sold for $905,000 on Jan. 3, 2022, and again for $950,000 on July 11, 2024. During the last five years it was assessed at an average of $927,000.

Its average annual tax bill was $10,907, or a five-year bill of $54,535. No wonder residential property owners are revolting.

Next is the commercial sector. In 2022, a strip mall in Watertown sold for $1,100,000. During the past five years, it had an average assessed value of $904,300 and the owner paid about $66,600 in property taxes, an average of $13,320.

One of many side effects of South Dakota’s unbalanced property tax system is that it inflates the value of agricultural land. Investors see it as a great tax shelter and are willing to pay higher prices. That’s probably why Ted Turner is the state’s largest landowner.

Of the agricultural land purchases made primarily in 2023, about 24.2% were by investors, said the 1991-2024 annual land report issued by South Dakota State University.

Now, in addition to protecting agricultural landowners, there is a desire to protect homeowners, especially those with lower incomes. But SB 216 will impact property values in unexpected ways.

Instead of haphazardly making unwise “rifle shot” changes to the property tax system, legislators should correct past mistakes. The sales tax fiasco should be a lesson.