What’s Driving Property Tax Changes in South Dakota?

Kyle Kopplin - April 12, 2024
What’s Driving Property Tax Changes in South Dakota?

In South Dakota, property taxes make up around 75% of local government tax revenue and about 25% of the overall state and local tax revenue (U.S. Census Bureau 2021 Annual Surveys of State and Local Government Finances (2021 State & Local Government Finance Historical Datasets and Tables)). As a result, most local services at the school district, town/city, and county levels are financed through property tax revenue. These services vary from road maintenance and snow removal to supporting local school systems. Of the $1.5 billion raised in property taxes in the most recent South Dakota Department of Revenue Tax Statistical Report, around 25% collected was from ag-zoned property, over 40% was from owner-occupied property, and the rest was other property types (South Dakota Department of Revenue Property Tax Statistical Report (Property Tax | South Dakota Department of Revenue (sd.gov)). This article highlights geographic trends in property tax rate changes at the county level over the last few years and speaks specifically about the South Dakota property tax system. Other fiscal districts, like cities and school districts, also collect tax revenue, but counties may be of particular interest because property is commonly assessed for taxable value by the county assessor.

Due to South Dakota laws implemented in 1997, local districts are capped at increasing property tax revenue in most places. To compensate, another provision at that time was an increase in state funding for education spending, partially offsetting one of the largest spending categories for local fiscal districts. Taken together, state transfers help bolster schools, local districts can easily project revenues, and taxpayers do not have to bear the burden of additional school spending through property tax increases. The South Dakota Department of Revenue Tax Statistical Report suggests that these changes in the late 1990s kept property tax revenue around $1.5 billion instead of an estimated $2.1 billion without the changes. Property tax revenue is calculated by multiplying the taxable value times the millage rates from each district. As such, revenue can change either by changes in the tax base or changes to the tax rates. Any district can collect property tax revenue up to the previous year’s revenue plus an adjustment for inflation each year. Changes in nominal revenue due to inflation are further limited to a maximum of 3%, measured by the Consumer Price Index (CPI). New construction increases the revenue cap since the market value typically increases from that activity, and tax rates automatically adjust to prevent exceeding the cap. Tax revenues can vary dramatically across districts but tend to be consistent within districts over time due to the revenue cap.

The overall tax base is the market value of all property within a designated district. The effective taxable value is usually around 85% of the market value, but this varies widely across South Dakota and by zoning. Assessment ratios are the ratio of taxable value to market value. For example, a property with a market value of $200,000 with an assessment ratio of 0.85 would imply the county is assessing the property at $170,000 for tax purposes. In areas where there are fewer properties, fewer transactions, or highly unique characteristics, there may be more variability in the assessment process due to less available data or expert opinions of market value. County assessors are free to deviate from 85% based on funding needs or differences in policy so long as they do not exceed the revenue cap. If counties have higher (lower) assessed values, that would lead to higher (lower) assessment ratios and would have to be offset by lower (higher) tax levies to get the same revenue. In this way, analyzing assessment ratios and tax levies can be informative about how market values are changing over time.

Tax levies are imposed by the various fiscal districts encompassing a property, and most property owners pay taxes to several taxing districts. Levies are often measured in millages which are per thousand as opposed to percentage rates which are per hundred. Since all South Dakota counties have millages between 0 and 10, using thousands is easier to interpret than hundreds. Millages and rates are otherwise qualitatively interchangeable, especially when analyzing differences across time or in percentage terms. For example, if a county has a millage levy of 7.00, the tax paid is $7 for every $1,000 of taxable value payable to the county. That would be the same as a tax rate of 0.70, paying $0.70 for every $100 of taxable value. If there was a 10% increase in the levy, the millage would increase to 7.7 which is the same as a rate increase to 0.77. In either case, the tax payment payable to each fiscal district would be the taxable value of the property times the property tax millage rate or percentage rate imposed by each district, and the overall tax payment would be the sum of those district-specific payments. Most counties send annual property tax notices early in the calendar year to property owners where the levies from each district are listed.

Effective taxable values can vary based on exemptions that can reduce a district’s millage rate or a property’s taxable value. In South Dakota, owner-occupied status is one such alteration to taxable value. Owner-occupied units have lower effective property taxes relative to similar nearby units where the owner does not occupy the property that would otherwise be valued the same. Ag-zoned property also has lower effective taxable value than nominal taxable value. Assessment ratios vary by district and have recently averaged around 0.60 for ag-zoned property and around 0.85 for non-ag-zoned property, though individual counties can vary quite a bit from these averages and there are a few outliers like Ziebach and Oglala Lakota. This means that the average ag owner pays just over two-thirds of the taxes that would otherwise be imposed on their property if they did not have agricultural zoning (the ratio of assessment ratios for ag and non-ag). It is common for that fraction to be as low as a half as in Harding, Custer, Lincoln, Minnehaha, Moody, Miner, Union and others, and the fraction can be even lower in some cases. Hughes is an example of a county whose assessment ratios are close to the state averages, perhaps unsurprisingly since its county seat is also the state capitol.

An interesting wrinkle to property tax revenues given the revenue cap is that the composition of tax revenue can change if more aggressive tax levies are imposed on certain categories of property and eased on others. Counties also vary in the types of zoned property they contain so larger fractions of taxable property might be ag versus non-ag. If counties are at the revenue cap, we might expect changes in the revenues from some categories to perfectly offset changes in revenues from others. This is a useful tool for county assessors to change the types of property that generate more tax revenue while still adhering to the revenue cap. It might also be a way to adjust to changing market conditions if market values are changing more rapidly across different zoning categories. For context, between 2012 and 2019, property values generally rose, the growth accelerated in 2021, and values have slightly leveled off more recently. The major three property types are Ag, owner-occupied, and a miscellaneous category for all others. The assessment ratios give us part of the story about market conditions across zoning categories, and we would need more information like the taxable value of every property in each county by zoning district to determine the extent of the compositional effects. Coordination or compositional impacts between overlapping or across adjacent fiscal districts is unlikely in South Dakota since each district has its own revenue cap.

The first pair of maps, Figures 1 and 2, shows the county-specific non-ag-zoned and ag-zoned assessment ratios. Taken together, these images might suggest how different counties are trying to affect revenue compositions through zoning. Ag assessment ratios are generally higher closer to the Missouri River and are lowest in and around the Black Hills. Other trends are low ag assessment ratios in counties bordering Montana and Wyoming to the west and counties bordering Minnesota and Iowa to the east. Union County has notably low assessment ratios and borders both Iowa and Nebraska.

Low assessment ratios near bordering states might be an attempt to attract agricultural economic activity to South Dakota through property tax exemptions or a reallocation of revenue compositions toward non-ag properties that offset to adhere to the revenue cap, depending on the county. For non-ag property, many counties have assessment ratios near the 85% effective taxable value benchmark used by many county assessors. Counties in north central South Dakota tend to have high ag ratios as well as high non-ag ratios.

Ziebach is an example of a county whose assessment ratios are dramatically different based zoning which likely implies that a larger fraction of the revenue composition is coming from ag-zoned property, with an assessment ratio of 189.1, than non-ag property, with an assessment ratio of 6.3. Another interpretation is that there is simply less ag property to collect revenue from so the assessment ratio is higher to gather more tax revenue from the existing property, but that interpretation is unlikely for Ziebach. Oglala Lakota has the opposite pattern with an ag ratio of 18.4 and a non-ag ratio of 147.7.

Black Hills counties are geographically diverse, especially Pennington and Meade, containing both dense National Forest and open plains from west to east. Pennington and Meade have ag ratios of 26.2 and 38.6, respectively, paired with non-ag ratios of 89.8 and 82.7, respectively. Minnehaha and Lincoln make up the City of Sioux Falls and are extremely comparable in terms of assessment ratios: 41.8 and 42 for ag, respectively, and both are at 85.4 for non-ag. Ag ratios are usually lower than non-ag ratios, but Dewey, Haakon, Jackson, Mellette, Perkins, and Ziebach have higher ag ratios than non-ag ratios.

Figure 3 reports the county-level property tax millages across South Dakota. A millage of 3.00 would mean that $3 per $1,000 of taxable value is paid in taxes (as opposed to a rate which would be expressed as $0.30 per $100). For context, the average millage for South Dakota counties was 2.96 in 2021, the lowest was 1.469 in Hand, and the highest was 7.454 in Bennett. These taxes fund County General budgets and make up more than 90% of tax revenue for county governments in South Dakota. Property tax levies tend to be lower in the central and north central parts of the state closest to the Missouri River. In contrast, the highest property tax levies tend to be in counties along the western state borders, along the I29 Corridor, and along the I90 Corridor within commuting distance of Sioux Falls. The southern parts of the Sioux Falls metro in Lincoln County has a substantially lower levy, 1.929, than in Minnehaha County, 2.812. Even though those two counties have extremely similar assessment ratios, their levies still vary. With the exception of Lake County at 2.472, counties containing South Dakota Board of Regents universities have relatively high property tax levies that are substantially above average (Brookings at 3.923, Brown at 3.598, Clay at 4.337, Lawrence at 3.966, and Pennington at 4.141) likely due to education spending being a larger portion of county-level expenditure.

Figure 4 shows percentage changes in county-level property tax levies by county from 2016 to 2021. Percentage changes add more context than the rates themselves because we can see how dramatically county governments are changing their behavior over time relative to their own policies in the past. Consistent with rising property values since 2016, most counties have reduced their property tax levies to adhere to the revenue cap. While that general trend persists, counties still have some flexibility to alter the composition of revenues between zoning categories if property values are growing at different rates among those categories.

Counties in north-central South Dakota have had the most dramatic property tax levy declines. Because of the revenue cap, this also gives us some information about how market values and assessed values might be increasing since values and rates are offsetting. Lower growth rate declines are paired with low agricultural assessment ratios in counties like Pennington and Meade seem to be offering some relief from slower growth rate declines to their ag-zoned property owners. This might be consistent with altering revenue compositions so that non-ag owners and others are taxed at higher fractions of their property’s market value.

Property taxes play a critical role for county governments since many South Dakota counties rely solely on property tax revenue to provide essential services. Economic developers and current property owners are usually aware of these differences, but other potential property buyers should be aware of the differences in property tax rates across otherwise similar areas of South Dakota as well. While differences in property tax rates or assessment ratios might not be the largest determining factor of choosing where to locate within South Dakota, there are clear patterns that emerge which have the potential to speak toward the attitudes of the county governments across the state and their preferences for the composition of tax revenues.