Shifting Bases, Shifting Incentives: Property Tax Relief Isn’t Free
In South Dakota, county governments provide public services like snow removal, courthouses, roads/bridge maintenance, and other services related to public safety financed almost exclusively through property taxes. At the same time, school districts are financed through a combination of locally-sourced funds and state transfers.
Given recent changes from the 2026 Legislative Session, this article compares sales taxes and property taxes for funding local services, briefly discusses the channels for redistributing school district financing from SB245, demonstrates the new sets of incentives for county residents and governments from SB96, and concludes with potential joint impacts of the bills. The takeaways are that tax burden shifting within- and across- jurisdictions can be expected, where incentives vary across the state and even in relative proximity for near neighbors.
Property taxes are often criticized, but they remain one of the most stable and least distortionary ways to finance local governments like counties and school districts. Property taxes fulfill theoretically desirable traits of an effective and well-targeted tax since they are tied to immobile tax bases, provide predictable revenue, are difficult to avoid, and align the cost of local services with the location of beneficiaries. Sales taxes, by contrast, are levied on mobile transactions, fluctuate with economic conditions, and can be shifted across jurisdictions through changes in shopping behavior, which gives rise to predictable voting incentives for optional sales taxes.
Dozens of property tax bills went up for debate at the start of the 2026 Legislative Session. Of those, a handful passed, and two stand out as having major implications for property taxation in South Dakota. SB96 allows counties to impose an optional 0.5% sales tax to replace county-level property taxes. SB245 creates a specific fund to collect sales taxes to replace school district-level property taxes which come from the sunset of a sales tax reduction from several years ago, an effective sales tax increase of 0.3% statewide. Calculations for assessed values and policies that determine spending needs are unaffected by these two bills.
Both bills (SB96 and SB245) use sales taxes to replace property taxes at different levels of government. Neither bill eliminates property taxes nor the need to finance local services, which are based largely on local demand. Rather, homeowners will pay lower taxes on property and higher taxes for other types of spending. The net effect for each household depends on the county and school district they live in, the size of the property tax bill, current retail expenditure (which depends on the number of people living in the household), and the retail environment in their immediate area relative to neighboring areas.
Given the characteristics of property taxes relative to sales taxes, the conjunction of bills to ‘relieve’ property taxes should be understood not as a simple reduction in tax burden, but rather as a change in how local public services are financed. Put plainly, property taxes are ‘replaced’ with sales taxes. The economic question is not whether property taxes fall for homeowners on paper, but whether substituting sales taxes for property taxes improves fiscal stability, equity, and long run incentives. Keep in mind, the ultimate total tax burden across all types of taxes depends on the cost of local services, and these bills are designed to reshuffle how those services get financed. The contrast between the two policies underscores how the level and institutional detail at which sales taxes are levied determines whether tax replacement amplifies or attenuates geographic inequality.
Tax Shifting from Replacing Property Taxes with Sales Taxes
At first glance, replacing property taxes with sales taxes seems appealing to homeowners. The idea gets pitched as lower property taxes because somebody else (e.g. a renter, a work commuter, a visiting shopper, a tourist, someone in another school district or county, etc.) is paying some of the burden. Despite the potential upsides for some, there are downsides and tax burden shifting across several margins that are less obvious.
First, local governments value stability in budgets for consistency, but sales taxes are famously volatile. South Dakota experienced this in the last few years, with the news cycles in early summer consistently warning of potential cuts to state spending. Residents tend to prefer stable local government services rather than annual changes as well. Due to revenue caps already in place, the county-level property tax levies will grow at 3% or the rate of inflation, whichever is lower, but the property tax ‘relief’ for these levies from sales taxes is relatively unreliable for household budgeting purposes. Households prefer lower taxes, but they also prefer consistency of services and predictability of annual budgeting, so the potential annual swings of ‘relief’ and services provided present a tradeoff.
Second, sales taxes are paid at the point of purchase rather than the place of residence of the taxpayer. That means sales taxes preferentially benefit a) counties with more shopping options relative to their neighboring counties and/or b) school districts with relatively high education expenses relative to their retail base. Moreover, there is no guarantee that taxable transactions benefit the local area, relative to property taxes which are collected and spent locally. Given South Dakota’s natural geography, distribution of population, and concentration of high-traffic tourism, sales taxes have the potential to increase spatial inequality of local government budgets and the services provided to residents.
Third, sales taxes on non-discretionary consumer staples scale to the size of the household (not the physical size of the house) since larger families buy more groceries, clothing, paper products, and everything else that the typical household needs. That means large households living in small houses get less property tax replacement while paying more sales taxes. While big ticket items pay larger sales taxes in dollar terms, the purchases of luxury items and other discretionary consumer goods are more responsive to taxation, so sales tax projections are more likely to be overestimated if an area is considering a higher sales tax rate.
Fourth, property taxes are more visible, especially for homeowners without escrow accounts or without mortgages since property tax notices arrive as large, periodic bills. The total sales tax burden is less visible because they are paid in small increments over the year and are difficult to keep track of without strict household accounting practices. Infrequent property tax bills make homeowners ask questions and contact policymakers in a way that naturally constrains government growth that cannot be replicated with many, small sales tax transactions. Replacing visible taxes with less salient taxes risks weakening that constraint without reducing the underlying cost of government. Taxpayers also cannot contest sales taxes, compared to property taxes which have well-defined processes for how to do so. Lower visibility and contestability means that people will pay sales taxes more willingly and will be less likely to contact policymakers.
Finally, renters contribute to property tax replacement through sales taxes, widening income and wealth inequality in places with a large volume of sales taxes. Renters do not directly pay property taxes, though they feel impacts from property tax passthrough from higher rent when property taxes on buildings increase.
SB245 – Potential for Cross-School District Financing Spillovers
Relative to prior years and a recent Dakota Institute article, the FY27 General State Aid formula remains unchanged in how it calculates school district funding needs based on enrollment, staffing ratios, salaries, benefits, overhead, and its treatment of Other Local Efforts (OLEs). SB 245 replaces school general fund property tax levies (emphasizing owner-occupied (OO) houses) by dedicating pooled revenue from the retained 0.3% state sales tax to education, which alters the state funding share. OLEs still reduce state aid, but larger fractions of school district funding needs are paid from the state.
That said, the dollar-volume difference in state aid comes from sales taxes paid largely by state residents in retail-heavy areas. As a result, there is reshuffling of who pays and who benefits from the statewide 0.3% sales tax. School districts with more students likely have more taxable sales, but there is no guarantee that those taxes collected in a school district will be proportional to the amount of state aid the district receives.
For reference, in 2024, the Sioux Falls school district had 18% of overall state K12 enrollment and received about 17% of total state aid paid to all school districts. The same year, the Rapid City school district had about 8% of total enrollment and received around 7% of total state aid. The counties comprising these two school districts make up half of total taxable sales in the state, so sales taxes paid in these two school districts will almost certainly finance many other districts as a result of SB245. Sales taxes are collected where transactions occur, but property tax replacement is concentrated where school district needs are large fractions of total local service spending.
As such, residents that either live in school districts with small needs or have large households could contribute to the pool of state aid through sales taxes more than one-for-one of the property taxes being replaced. Vice versa, residents living in school districts with large needs or have small households could expect a more than one-for-one reduction in school district property taxes relative to sales taxes paid. Either way, by design, property taxes paid are less than before, sales taxes paid are more than before to ‘replace’ property taxes, and the net effect depends on location and household structure. Large households utilize more school district services than small households, but the sales taxes paid by these households will not necessarily be spent in the local district as property taxes would.
SB96 – Cross-County Strategic Interactions
An understated institutional feature of SB96 is that counties adopt the optional sales tax through a vote of county residents, while the tax is paid by anyone who shops in the county. This disconnect between who votes and who pays alters political incentives. Counties where voters expect tourists or non residents to bear a substantial share of the sales tax face very different incentives than counties where sales are generated primarily by residents themselves. Having relatively more shopping centers shifts the incentives in ways that are too strong to ignore, suggesting that certain counties will favor adopting the optional tax much more than others.
Generally, adopting SB96 is ‘best’ for residents where sales taxes are difficult to avoid and the county government is inexpensive to operate relative to total economic activity, neither of which necessarily benefits consumers, residents, or the county government. In contrast, adopting SB96 is ‘worst’ where retail activity is thin, mobile, or already concentrated just outside county borders, since residents end up replacing taxes for residents in other counties.
The estimates presented in this section are deliberately conservative and should be interpreted as illustrating magnitudes and incentives rather than providing precise predictions. Taxable sales in the 250 largest cities in the state are used to create county-level sums from the Dakota Institute Municipal Sales Tax Dashboard. These are compared to the most recent year of property tax data from the annual Property Tax Statistical Report, appropriately harmonized to fiscal year 2024 which is payable in 2025. Property taxes are paid in arrears, so too are property taxes ‘relieved’ by sales taxes, meaning that the timing of both tax instruments matters for accurate comparisons. Shares of taxable value and county-level property taxes paid for each category of property are calculated (agricultural (AG), owner-occupied (OO), and other/commercial (OTH)), though property classes are much more relevant for school district property taxes.
As with many local fiscal policies, the actual effects depend on geography, market structure, product substitutability, and taxpayer mobility rather than design choices or language of the statute. Put differently, potential benefits and incentives are grossly unequal despite the uniform ‘choice’ to adopt the county-level sales tax from SB96. Taken together, all these features imply that any analysis likely understates both the potential revenue from sales taxes and the complexity of local adjustment.
In the figures, each cell represents the net benefits to each county either adopting all of the optional sales tax or none of it (though there is nuance with the sliding scale from 0% to 0.5%). The benefits themselves are expressed in percentage of property tax replacement for each class of property (OO, AG, and OTH). If OO property taxes can be completely covered by the sales tax, AG and OTH receive the difference. The estimates here assume AG is given priority over OTH, but that will ultimately depend on local decisions, if applicable. Residents/voters ought to consider the choices of other residents/voters from other counties, and the amount of public data should allow residents in each county to know the others’ potential incentives.
The specific comparisons are chosen to highlight different possible dynamics across South Dakota. Each figure shows how much property tax replacement each county could receive under different combinations of adopting SB96. Granted, these counties simultaneously compete with all their neighbors, so these examples are intentionally narrow for tractability of the incentive structures. A more comprehensive conclusion follows in the next section. When feasible, consumers would choose to shop in no-sales tax counties to avoid paying taxes, so the analysis incorporates some reductions in potential sales taxes (and therefore SB96 property tax replacement) in scenarios where one county adopts the tax and an adjacent county does not. The 0.5% sales tax may be small (i.e. $0.50 per $100 spent), but the incentives are still real, especially across millions of individual transactions.
Minnehaha vs Lincoln
Sioux Falls counties (Minnehaha and Lincoln) have about 40% of taxable sales in all of South Dakota, consistently draw from a large region year-round, are relatively small in square miles, and are at the intersection of two interstates. In this example, consider how consumers choose to substitute their retail spending to lower taxes tax areas, and Sioux Falls is one of the easiest places to do that.
Sioux Falls is unique due to being the largest retail hub and being comprised of two different counties. In Sioux Falls, a substantial share of property tax replacement under SB96 would ultimately be financed by county residents themselves, either directly or through routine commuting and retail activity. Some replacement would be from tourists, other travelers, or the surrounding region. The county boundary is roughly 57th Street, with Minnehaha to the north and Lincoln to the south, where Minnehaha County contains the overwhelming majority of the City of Sioux Falls. In this example, the assumption is that the metro does not lose the taxable sales or tourism, but the two counties compete for sales taxes (and therefore property tax replacement) by setting sales tax rates.
Figure 2 shows incentives based on payoffs for Sioux Falls counties. A rough 90-10 split for taxable sales is used here, which aligns closely with county boundaries but may not necessarily reflect actual sales geography. Still, the voting incentives in this example would not change under other reasonable splits.
Residents of Minnehaha always have an incentive to adopt the optional sales tax since property taxes are mostly (if not entirely) replaced. Without the sales tax, there is no replacement of property taxes. Lincoln County has a smaller retail base, and Minnehaha County is an extremely close alternative with many of the same options. Plainly, residents can get almost all of the same retail goods in Minnehaha as Lincoln, but Lincoln does not have everything that Minnehaha has.
If Lincoln adopts the optional sales tax and Minnehaha does not, Lincoln loses a large portion of its sales tax base to Minnehaha given the ease of driving across the city to avoid the sales tax. If both counties adopt the sales tax, Lincoln keeps its share of the sales tax base and replaces more property taxes with sales taxes than any alternative. Minnehaha has more to gain by adopting the sales tax in any scenario, and Lincoln has more to lose from not following suit given their relative size and proximity.
Minnehaha vs Moody
Sioux Falls draws taxable sales from its surrounding region and has fundamentally different markets than its surrounding areas. For example, Moody County is much smaller, has almost no alternative for the shopping variety in Sioux Falls (e.g. Moody has no Empire Mall, no Costco, many fewer restaurants, fewer big box stores, less variety in most retail sectors, etc.), and has relatively little tourism. Moody residents likely shop heavily in Minnehaha for specific products, and there is little opportunity to substitute their retail behavior as a result.
As with Lincoln, it is in Moody’s best interest to follow whatever Minnehaha decides to do, with the incentives shown in Figure 3. Here, the reason for following the larger county is because there is little option to substitute retail activity. That said, the potentially losses from not following Minnehaha might be smaller for Moody than Lincoln due to a) having fewer substitutable markets and b) being slightly further away. Granted, Lincoln still has larger benefits due to being a retail hub itself.
Sanborn vs Jerauld
Figure 4 shows two rural neighboring counties which are comparable in geographic size and have very little tourism. Jerauld County and Sanborn County are situated close to (but not on) the I90 corridor to the south as well as Beadle County with Huron to the north, both drawing retail and tourism activity. Some of the largest towns are Wessington Springs (population around 800) in Jerauld and Woonsocket (population around 650) in Sanborn.
Compared to each other, Jerauld has a smaller county-level property tax levy, has slightly less OO property as a fraction of that levy, and has more than double the taxable sales of Sanborn. Both have less to lose to each other than previous examples, but Jerauld has much more to gain by adopting the tax regardless of what Sanborn does due to those factors all working in its favor.
Pennington vs Meade
The Black Hills region has concentrated tourism, but that activity is seasonal and highly dependent on economic conditions across the country. Pennington County generates about 17% of South Dakota sales taxes and has fundamentally different markets than its neighbors (as with Minnehaha/Lincoln and their smaller neighbors).
In Figure 5, Meade County could be expected to suffer larger losses of sales taxes from adopting the optional sales tax if Pennington does not (than vice versa) since there are certain shopping opportunities that are only available in Rapid City (e.g. Uptown Rapid Mall, Sam’s Club, Rushmore Crossing, etc.). In addition to many fewer shopping alternatives, Meade has a large influx of (targeted) tourism at the end of the summer, which is more sensitive to annual trends (and Sturgis Rally years ending in 0 or 5) than the rest of the Black Hills. Meade has around 25% of the property tax levy that Pennington has, but Meade has only around 8% of the sales tax volume.
Pennington has more to gain than its neighbors from adopting the sales tax for the same reasons as Minnehaha, but Pennington has much less to gain than Minnehaha for a few reasons. While Rapid City is the shopping hub of the area, tourism is seasonal and cyclical, and Pennington County is much larger and more geographically diverse than the Sioux Falls counties.
In the Black Hills, a larger share of sales tax revenue used to replace county property taxes is plausible from out of state visitors rather than local residents, though there is less replacement overall. This distinction matters for both determining who pays the tax (e.g. homeowners, renters, tourists, commuters, etc.) and enumerating the incentives. So while Minnehaha’s sales tax would primarily reshuffle tax burdens among local residents, Pennington’s sales tax would allow county property tax replacement to be financed relatively more by external sources. Tourists tend to be less aware of any county-level differences in sales taxes, meaning they are less responsive to tax rate differences than local residents.
The point of these four examples is not whether sales taxes can work to replace property taxes (they do, by design), but rather how the mobility of the tax base determines who stands to benefit the most from the optional sales tax. A key takeaway is that the county with the larger sales tax base sets the tone, and smaller surrounding counties have incentives to follow.
Major Takeaways from Strategic Interactions due to SB96
Generally, counties with the most to gain from SB96 have similarities across relative retail activity, geographic location, size of county budget needs, variety of county services, current financing strategies, and proportions of property classes.
First, small county-level property tax levies can come from relatively little spending, relatively few local services, few projects being funded through property taxes, or limited bond issues (e.g. Jerauld, Campbell, Hand). Second, counties with large sales tax volume relative to the size of the county government budget can come from a single retail hub that services a large region (e.g. Huron in Beadle), high through-traffic along corridors (e.g. Chamberlain in Brule), seasonal tourism, or seats of government with many commuters (e.g. Pierre in Hughes). Third, counties with small OO shares relative to other classes mean larger percentage benefits from OO-prioritized replacements from SB96 (e.g. Hyde, Corson, Perkins). Last, counties with relatively few retail/sales substitutes have the least to lose from behavioral shifting away from counties that adopt the sales tax. SB96 preferentially benefits retail hubs and counties that are less expensive to govern (e.g. with less diverse need or limited variety of local services).
On the other extreme, SB96 is the least beneficial under opposite conditions, along with some others. These include when sales taxes are low relative to the county’s general funding needs (e.g. Harding, Miner, Hanson), retail activity has many close geographic substitutes (Moody, Union, Turner), county property taxes are already low or represent a small share of total property taxes (i.e. the benefits are small but the political optics are high) (e.g. Bon Homme, Deuel, McCook), tourism traffic is high but tourism spending is not based on retail staples (e.g. Custer, Fall River, Meade), or the property tax base is heavily agricultural (e.g. Sully, Harding).
These characteristics, paired with tourism, present a complex picture of how residents of counties might interact with each other to compete for property tax replacement. Counties with strong tourism exposure could have slightly less reliance on their own resident tax base but may ultimately receive fewer benefits due to cyclicality. At the same time, metro counties without heavy tourism face more internal tax shifting among their own tax base.
Another consideration is the composition of the voting population. If there are a majority of homeowners relative to renters, SB96 has a larger chance of being adopted. Moreover, counties like Minnehaha and Pennington have larger fractions of sales taxes from commuters of nearby counties, so there is a greater disconnect between who can vote on the tax and who ultimately pays the tax. So, for example, Meade residents receive no say in Pennington’s likely adoption of the sales tax and have few alternatives for retail beyond Rapid City.
Quick Diagnostics and What to Look For
To determine whether one county has a strategic advantage over another to adopt the optional sales tax from SB96, a quick summary measure using taxable sales and property tax levies is useful. Find the ratio of sales taxes, find the ratio of property taxes, then the ratio of the two (sales ratio/property ratio) is a standardized metric. If this new ratio is greater than 1, the numerator county has greater incentive to adopt the county-level sales tax. For example, in Pennington and Meade Counties, the ratio of sales is 13/1, and the ratio of property is 4/1, so the ratio of the two is 13/4, greater than 1, so Pennington has a greater incentive than Meade to adopt the optional sales tax.
Similarly, to determine whether residents in a school district will be net beneficiaries or net donors from SB245, the ratio of state aid received to taxable sales volume is a standardized metric. The higher the state aid and/or the lower the sales volume, the more likely residents of the school district benefit. That said, household size still matters within school districts to determine impacts on particular households.
The interaction between SB96 and SB245 is no trivial matter since county and school district boundaries rarely align in South Dakota. In fact, there are more than twice as many school districts as counties, so the typical county contains pieces of several school districts. The best hypothetical scenario for property tax replacement and school district financing would be residents that live in a county with a high volume of retail activity to replace county property taxes while also living in a school district with very high state aid to draw sales taxes from other areas to replace school district property taxes.
Naturally, the opposite characteristics could be a hypothetical worst case – living near a county with relatively higher retail while also living in a school district with relatively higher retail activity or lower state aid to the surrounding school districts. These circumstances draw property tax replacement away from residents via different mechanisms (e.g. school districts in counties bordering Minnehaha or Lincoln that provide most retail staples and some variety to a smaller region). Since both Sioux Falls and Rapid City school districts will be contributing largely to the amount of state aid paid using sales taxes from SB245, this reinforces their incentives to adopt SB96 to replace property taxes at the county level.
SB96 has the potential to shift the county-level tax burden away from those in the most expensive (i.e. highest assessed value) houses, who also have the most potential benefits in dollar terms through property tax replacement. At the same time, SB245 has the potential to shift school district tax burdens onto relatively high-retail, low-enrollment school districts and make K12 spending on every district more sensitive to statewide (and national) economic conditions. The largest burden of statewide school financing in percentage terms gets put on residents in school districts where education is a small portion of the economic activity. Both bills shift the burden onto high-retail households using different mechanisms, which can be renters and households with dependents (e.g. children or elderly adults), while shifting taxes away from homeowners with no dependents.
In some ways, having both bills is more neutral for tax burden shifting than having either alone in retail-heavy areas, but the overall net effect depends on incentives regarding optional adoption of SB96. The geographic combination of school district and county is critical to any resident’s net benefits.
The takeaway is not that property tax replacement is inherently economically desirable (or undesirable), but that replacing property taxes with sales taxes changes who pays, how reliably revenue is raised, and how local governments are constrained. For many homeowners, the apparent ‘relief’ arises not from lower government costs, but from substituting a stable, visible tax with one that is more volatile, easier to avoid, and less closely tied to residency and access to local public goods (e.g. students enroll based on location, and school districts are funded by households who live there). Property taxes remain well suited to financing local services precisely because they are difficult to avoid and are transparent to taxpayers. Policies that change property tax payments by expanding reliance on sales taxes should therefore be evaluated by more than ‘relief’.
