Houses under construction on Oct. 28, 2022, in Harrisburg. (John Hult/South Dakota Searchlight)
PIERRE — Fifteen years ago, Aberdeen Republican Senator Al Novstrup railed repeatedly against a proposal to tie ag land property taxes to crop production instead of land values.
Detethering property taxes from the sticker price of the property itself was a deviation from reality, he argued, and one that would upset the tax apple cart in perpetuity.
The change happened anyway. Starting in 2011, the valuations slowly began to step away from land prices and toward crop sales. By 2018, ag land values – and property tax rates by extension – were wholly based on the value of crops produced.
Novstrup went another way on Wednesday morning in the Senate Taxation Committee.
That was the day he cast the deciding vote on Senate Bill 167, which would cap increases in the value of a home for property tax purposes at 3% per year.
This time around, Novstrup said, he was being asked to move another of the three categories of property tax assessments – homes, commercial properties and ag land – away from reality.
“What do you do with a system that’s fundamentally broken by one third? Are you better off breaking the other third? Or are you better off keeping it in place?” said Novstrup, who said he came to Wednesday’s meeting prepared to vote down SB 167. “I’ll be voting for this bill, because a system with two subsets that lost touch with reality is probably better than one.”
Novstrup was joined by three other committee members in the 4-3 vote to send the bill to the Appropriations Committee.
The committee backed the bill in spite of opposition from the state Department of Revenue and 11 lobbyists, representing retailers, schools, counties and economic development officials.
Revenue Department Secretary Mike Houdyshell said the bill would result in an immediate $16 billion dip in property valuations, which would translate to $47 million less for schools.
The state would be forced to pick up the tab.
“I don’t think the schools are going to take a $47 million haircut,” Houdyshell said.
Counties also rely on property taxes to fund operations, and several opponents decried the possible impact to those governing bodies.
Sen. Herman Otten, R-Tea, argued that the massive property tax hikes seen in his area – tied to outsized growth in home prices since 2020 – need to be addressed.
“I have three growing communities back home where values are shooting through the roof. Taxes are going up,” Otten said. “I have to support them.”
Sponsor: Tax hikes unsustainable
Sen. Jack Kolbeck, R-Sioux Falls, sponsors the bill in the Senate. The goal is to stabilize property tax increases for those on fixed incomes, and to offer relief to those who’ve seen home prices skyrocket thanks to population growth and inflation.
The bill does two things. First, it resets the base value of owner-occupied homes to 2020 levels for people who lived in their homes at that time, sets the value for those who purchased their homes between 2021 and Oct. 31, 2024, at the market value at the time of purchase, and sets a market rate value as the baseline for homes purchased after Nov. 1, 2024.
Secondly, it caps annual valuation increases at 3% from those base rates for all homes.
It wouldn’t require property owners to be paid back for taxes they’d already paid, he said, but would offer relief into the future.
“This protects and safeguards our long-term South Dakotans and our elderly,” Kolbeck said.
Other supporters talked of heavy tax burdens in their home areas. Lisa Janeiro of Keystone collected stories and letters from her neighbors, who knew she’d be in Pierre in a different capacity, as a lobbyist for Concerned Women of America.
“Most of their valuations are going up from 25-100%,” Janeiro said.
She read off several statements and letters from people who’ve been “penalized” for simply living near homes sold to new residents at above-market prices.
“We are being taxed into homelessness,” Janeiro read from one statement. “We are sincerely concerned about our survival.”
Rep. Trish Ladner, R-Hot Springs, told the committee that the recent changes to the state’s population have put a strain on long-term residents.
“When the COVID pandemic hit, you drove people out of densely populated areas to rural red states,” she said, and many of those new residents came from states with higher incomes and more buying power.
South Dakota should protect those who built South Dakota “with the sweat of their backs and brows,” she argued.
Opponents: Proposal unconstitutional, unfair
Houdyshell, the revenue secretary, said the bill is “fundamentally unfair,” as it adjusts base valuations by looking at the date of the property sale.
His neighbors, who moved in after him, would pay more through no fault of their own, he said. The state constitution demands fairness, he said.
“Just depending on where you happened to buy your house at a certain point in time, you will be treated differently,” Houdyshell said.
Just as important, he said, is that other entities would be forced to make up the difference in funding if the bill becomes law.
“This is an area that’s very complicated. You start moving pieces around, it’s like Jenga and things can start falling apart,” Houdyshell said.
This is an area that’s very complicated. You start moving pieces around, it’s like Jenga and things can start falling apart.
– Secretary Mike Houdyshell, state Deparment of Revenue
Lobbyists for the schools argued that the change would hurt the state, which would need to find ways to continue funding education at mandated levels. Lobbyists for the counties and economic development officials offered similar arguments.
Nathan Sanderson of the South Dakota Retailers Association argued that adjusting the law to favor one group of property owners is unfair and imbalanced.
“The structure that we’ve got in place is equally unpalatable,” Sanderson said. “We’d ask that you keep that equally unpalatable system in place.”
Rebuttal: System is already unfair
For his rebuttal, Kolbeck gave his time to Rep. Dennis Krull, R-Hill City. Krull presented the committee with figures on property tax growth since 2018 to make the case that a shift in property tax burden has already taken place.
“It’s shifted to owner-occupied,” Krull said.
More legislative coverage
Owner-occupied property taxes have increased nearly 41%, he said. For commercial properties, the increase was 35%; for ag land, the increase was 1.5%.
SB 167 is about adjusting taxes in favor of those hurt the most, he said.
“Who’s standing up for the taxpayers? Who’s standing up for the homeowners? We are,” Krull said. “This bill is our chance to show them that we’re doing something.”
That was among the arguments that won over Sen. Brent Hoffman, R-Sioux Falls. He said the fairness issue wasn’t convincing, as several areas of growth are capped already. Growth in teacher salaries and the state’s retirement fund are tied to inflation, Hoffman said, a nod to Ladner’s earlier testimony on those topics.
“It’s difficult for me to buy the argument that this would be unconstitutional given that there are already limits in other areas,” Hoffman said.
Otten, the senator from Tea, said he understands the potential for unintended consequences. But, he said, it’s impossible to get tax policy exactly right, and the bill starts an important conversation.
“I think we need to do something to get some help out there,” Otten said.
Debate on the bill forced Committee Chair Jim Stalzer, a Sioux Falls Republican, to push back debate on two bills that aim to repeal the state’s sales tax on food, either by legislative fiat or the endorsement of a ballot measure asking voters to do the same. A citizen group is already aiming to put such a question on the ballot.
Those bills, from Sioux Falls Democratic Senator Reynold Nesiba, are scheduled to see debate on Friday.
GET THE MORNING HEADLINES DELIVERED TO YOUR INBOX
Our stories may be republished online or in print under Creative Commons license CC BY-NC-ND 4.0. We ask that you edit only for style or to shorten, provide proper attribution and link to our web site. Please see our republishing guidelines for use of photos and graphics.