Make sure the property tax solution isn’t worse than the problem

Property taxes are too high.

This is a nearly universal sentiment, and not just in South Dakota. Around the country there have been a range of proposals designed to lower property taxes. Unfortunately, many of these proposed solutions are worse than the problem.

Eliminating property taxes altogether sounds attractive until we consider the alternatives, which would likely include an income tax. Freezing valuations initially seems appealing, but doing so would result in identical homes on the same street being taxed at different levels depending on when they were purchased, not what they are worth.

Lawmakers propose sales tax increase to provide property tax relief for homeowners

Artificially freezing valuations also leads to greater inefficiencies in collections (more bureaucracy), additional county and state staff, and buying and selling decisions based on tax rates and not the free market. It’s a “solution” that’s worse than the problem.

Property taxes are a product of local funding needs. All of our property tax dollars stay local; they pay to heat school buildings, fund county services, and fix infrastructure in cities and towns. Our property tax dollars aren’t used to pay the governor’s salary, cover increased Medicaid costs, or fuel Highway Patrol vehicles. State government does not collect or spend any property taxes.

The amount we pay in property taxes is the result of a simple formula: NEED = VALUATION x LEVY.

NEED is the funding level set by our local governing boards – county commissions, school boards, townships, etc. VALUATION is the fair market value of property, determined by our county assessors. And the LEVY is set by our county auditors; it’s the rate calculated when dividing need by valuation. It’s more complicated in practice, but that’s the principle.

So why is it so hard to lower property taxes? Because there are only three ways to do it:

1. Reduce the need. One way to lower property taxes is to reduce funding for local schools, counties, cities, etc., the entities supported by our property tax dollars. However, few taxpayers have specific proposals for reducing funding for these entities, or do not engage at the proper venues, such as school board or county commission meetings when the year’s budget is set. And some proposals that would significantly lower property taxes (consolidation) often prove unpopular.
2. Shift the burden. Another option is to shift the burden to another class of property. All three classes – owner-occupied homes, agricultural, and commercial – help “fill the bucket” to pay for local needs. So to reduce owner-occupied property taxes, agricultural and commercial taxpayers must make up the difference to “fill the bucket.” But small business owners already pay the highest tax rate of all three classes, and commercial and ag property taxes have also increased substantially in the last 15 years, so many don’t support this option.
3. Find another funding source. If we don’t want to cut funding to local entities, or have farmers and small business owners pay more, the only other way to reduce owner-occupied property taxes is to find another way to pay for it. Historically, lawmakers have done this by substituting state funds (sales tax dollars) for local property taxes in the school funding formula (because property taxes only make up about half of school budgets — the state kicks in the rest). Governor Bill Janklow used this tactic in the 1990s and Gov. Dennis Daugaard took a similar approach in 2016. Legislators will debate a related idea in 2025.

Recent increases in owner-occupied property taxes, most noticeably in the greater Sioux Falls area and the Black Hills, have been driven in large part by historic increases in the value of homes.

It’s not uncommon to see a home purchased for $200,000 in 2010 and worth $400,000 in 2020, to be valued at $600,000 or more today. Families in these circumstances have seen their net worth grow exponentially. And individuals with homes that are more valuable today are seeing that increased value reflected in their property taxes. When my home is worth more, I pay more. In some places, the rate of increase has begun to slow down. Yet even as property tax rates stabilize, calls for property tax relief seem unlikely to cease.

There may be ways to adjust the current process or create new programs to assist those unable to afford their property taxes. Certainly, the Legislature will have no shortage of conversations. As lawmakers weigh the options, we all need to make sure that the property tax solution is not worse than the problem.