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Published July 15, 2013, 10:54 AM

Disagreement over new method for taxing SD farmland

As corn and soybean prices have soared to unprecedented heights in recent years, South Dakota farmers have made more money than ever.

By: Josh Verges, Forum News Service

SIOUX FALLS, S.D. — As corn and soybean prices have soared to unprecedented heights in recent years, South Dakota farmers have made more money than ever.

And thanks to lawmakers who in 2008 rewrote the rules for assessing the value of agricultural property, farmers don’t have to spread that wealth around when property tax bills come due. Instead, it’s home and business owners who are seeing higher tax rates to pay for public schools and city and county government, while farmers get lower tax rates for land assessed at less than half its worth on the open market.

“The current formula is designed to produce a low number” for taxing ag land, says Sen. Al Novstrup, R-Aberdeen. “You’re asking somebody else to make up the difference, or you’re underfunding government.”

The 2008 legislation, sponsored by then-Senate Majority Leader Dave Knudson and 10 lawmakers with backgrounds in farming or ranching, directed county assessors to quit using sale prices to determine the taxable value of ag land. Instead, farmland was to be assessed through a productivity formula that considers crop yields and prices, and cash rents would determine values for ranchland.

But the new law included limits on how fast ag property values could grow each year. So despite farm income doubling from 2009 to 2011, assessed values and taxes paid in the following years grew at a much slower rate.

According to the latest figures from the U.S. Department of Agriculture and South Dakota Department of Revenue, all the ag land and buildings in the state last year were worth $61.1 billion, but were taxed as if they were worth $27.1 billion.

That $34 billion of invisible ag value is greater than the assessed value — $28.4 billion — of all the owner-occupied property in the state.

Farmers got another gift in 2009 when the Legislature segregated ag land for the first time in the state aid formula for K-12 schools. Business leaders were concerned growth in non-ag property values would outpace farmland, so lawmakers locked in agriculture to pay 18.45 percent of the local share for education.

When agriculture’s assessed property values grew — although at a much slower pace than their real values — levies went down. Meanwhile, home and business owners were seeing little to no growth in the value of their properties and paying higher tax rates for education.

“We kind of thought the opposite of what actually happened was going to happen,” says Jim Terwilliger, an economist with the state Bureau of Finance and Management.

Terwilliger found that the 2009 law alone will save agricultural property owners $12.6 million and cost utilities and home and business owners $13.2 million in 2014.

“Hindsight’s 20/20, but ag has definitely benefited with the levy reduction compared with the other two types of property,” he says.

Disagreement

Despite the huge gap between the taxable values of ag land and what buyers are willing to pay for it, there is a sharp disagreement among lawmakers about whether anything needs to change.

Sen. Larry Rhoden, R-Union Center, a rancher who has helped shape the productivity system since 2008, says if anyone is getting a raw deal, it’s ag property owners.

South Dakota farmers and ranchers are paying more in property taxes than they were in 2010, and the rate of growth in taxes paid is projected to exceed that of home and business owners starting this year.

“They’ve gone up more dramatically than they should have,” he says of ag taxes. “To say that we’re not paying our fair share, that’s a misnomer.”

Rhoden had plenty of company in this summer’s first meeting of the ag land assessment task force.

Sen. Jason Frerichs, D-Wilmot, a farmer and rancher, says it’s appropriate to give agriculture a break on property taxes, especially for education.

Homeowners deliver students to their local schools and businesses need a skilled workforce, he said, while farms demand little of a school district.

Rep. Jim Peterson, a Democrat and farmer from Revillo, was surprised to learn that while ag land now is segregated on the general fund side of school funding, farmers do not get the same benefit on their local school district’s capital outlay levy. He says he’s seen big increases on his own property tax bills.

“That’s what’s important: the check you write, not just one mil levy.” he says.

“I really question if this provision has really worked the way we intended it to.”

Although not everyone is happy with the way productivity has been phased in, there is wide agreement that the old system was not working.

County assessors tried to use arms-length land sales to determine ag land value, but too few sales qualified. That’s partly because the law required throwing out all sales that exceeded 150 percent of the assessed value.

With only 200 qualifying ag land sales statewide in 2007, half the counties had one or zero sales for comparison. That contributed to wild variations in ag land assessments among counties with similar climates and soil quality.

So, South Dakota joined the more than 40 states that use a productivity system for ag valuation. Although none do it exactly the same way, wide gaps between market and assessed values are common.

Members of South Dakota’s oversight task force have not shown an interest in going back to market-based valuations, but they might suggest more tweaks to the system. Helseth, the Minnehaha County official, said productivity would work well without caps on annual growth.

“If it’s allowed to work, it’ll work,” he says.

Sen. Novstrup now says that the Legislature simply instead should lift the artificial limits on the productivity formula, allowing ag land values to more accurately reflect the income they generate for their owners.

“We don’t need to go back to market,” he says. “We just need to change the things inside the productivity formula to produce a number that’s not laughable.”

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