South Dakota revamps property tax system

Aug 6, 2010

In 2010, South Dakota joined the crowd, becoming the forty-third state to base the ag property tax system on productivity rather than market value. Landowners saw the first phase of the change in the property valuations that were sent out in March. The change is for the 2010 tax year, payable in 2011.

According to Michael Kenyon, the director of property and special taxes with the South Dakota Department of Revenue and Regulation, this change was made to distribute the property tax burden more equitably across South Dakota’s ag producers.

The system previously in place had been rendered mostly ineffective, Kenyon said, by legislative action in the mid-1990s that limited the sales that could be used to find property valuations. "The reason for these actions was that non-ag influences, like hunting rights and development pressure, were starting to drive up all the ag land values in the state," Kenyon said.

The legislature enacted three rules in 1998 that limited the sales that could be used for figuring valuation. The rules excluded three types of sales: ag land of less than 70 acres; ag land that was purchased for at least 150 percent of what the land should be worth, based on a formula using cash rents; and ag land that sold for at least 150 percent of its assessed value.

"These three changes ruled out most of the ag sales in the state. In 1998, we had 1,426 sales to use for figuring ag land valuations. In 2008, the last year of using the old system, we had about 100. That figures out to less than one and a half sales per county, which doesn’t give an accurate valuation," Kenyon said.

When the problems with the sales-based valuation system came to light, the legislature started studying the issue. Kenyon said they studied it for several years before passing HB 1005 in 2008, which ordered a change from the sales-based to the production-based valuation. The bill was passed with support from all the ag groups in the state.

The plan for making the change was the result of an effort by the Ag Land Advisory Task Force, made up of people from the legislature and from agriculture and business communities. They studied the current system and consulted with several other states that have been using a production-based system.

The task force decided the best method to make the change would be for the South Dakota Department of Revenue and Regulation to contract with the South Dakota State University Economics Department to come up with a "productivity value" or "formula value" that would be used to figure average property valuation for each county. These formulas rely on data collected by the USDA’s National Agricultural Statistics Service via surveys of farmers, ranchers and agribusinesses.

The formula depends on the total yield and commodity prices of each crop in a county, and the total number of acres of cropland as determined by soil types. The non-crop ag land formula is based on cash rents paid in each county. The prices and yields or cash rent rates used for these formulas are an Olympic average of the previous eight years’ numbers. This means that before the average is figured, the highest and the lowest numbers are thrown out, leaving six years to determine the average.

The state determines the rate at which cropland and non-crop ag land should be valued and the director of equalization in each county applies the formula and makes adjustments for individual parcels of property that may fit in one category according to soil type, and another category according to use.

For example, in Fall River County in western South Dakota, the terrain varies from irrigated farmland to steep and rocky timberland. Terry Halls, the director of equalization for Fall River County, said she’s going to make some adjustments to values because even though the soil type may designate it as cropland, it may be inaccessible for farming. "We are going to take a look at those situations this year," Halls said. "If the landowner feels there is something wrong with his valuation, we will go and look at it and make adjustments if they are necessary."

Kenyon said the directors of equalization have been briefed on all the changes and should be completely up to speed on the new system and its requirements. The directors of equalization are responsible for making adjustments if they are warranted, he said. If the landowner is not satisfied with the adjustments the director of equalization makes, he can follow the appeals process from the local board of examiners to the county board of examiners, then the consolidated board of equalization, the office of hearing examiners, and finally the circuit court, if necessary. For the 2010 tax year, Fall River County had three landowners appeal their property tax valuations.

Bill Slovek, a cow/calf producer in west-central South Dakota who pays taxes on 14,000 acres, says he knows of a few landowners who appealed their valuations. The primary complaint he’s heard is that the soil type says their property is cropland, but it is still in native grass or rangeland, which means the producer is paying cropland taxes from rangeland income. "We’re already losing our grassland and rangeland as it is," Slovek said. "This is only going to add to the problem."

Joyce Dragseth, the Brookings County director of equalization, says she’s made some adjustments to property based on differences between soil type and actual use, but it is up to each director of equalization to apply the new system as they deem appropriate for their county and circumstances.

Mary Worlie, the Brown County director of equalization, said she adjusted more than 3,500 parcels after the change to the productivity system was implemented. This satisfied most landowners, though five of them took their cases to the office of the hearing examiner. Most of the adjustments, she said, were based on township recommendations, easements or flooded farmland.

From what he’s seen, Slovek thinks the new system is a positive change. "The old system was definitely outdated. I don’t think anyone can argue that we needed to do something different," he said. "With more than 40 states already using this type of system, we aren’t trying to reinvent the wheel. But every time you have a change, you’re going to have some problems. We can’t expect to get it just right the first time."

"People have to be patient and, if they have ideas for improving the system, they need to come forward to their legislator or director of equalization," Slovek said. "I think we’re on the right track, but probably need to make some changes. I hope we can do that and not throw the baby out with the bath water."

Slovek didn’t see much change in his property tax valuations with the new system, and doesn’t expect to see much change in his taxes either. He figures he pays about $2 per acre—or about $85 per day—in property taxes. While that sounds like a lot, he said he’s not complaining. "We’re pretty lucky in our part of the world." — Maria E. Tussing, WLJ Correspondent