New ag land assessment system deemed fairer for all
September 29, 2009
Landowners in South Dakota will be changing the way in which their agricultural land is assessed for taxable purposes, and this has caused concern and confusion, both in how it was assessed in the past and in how it will be done starting in 2010. Misinformation has been spread about the effect it will have, so clarification of the facts and figures should ease the worry of farmers and ranchers statewide, as they see the overall necessity and benefits of the change.
The need to overhaul the system has been glaringly apparent, as land sales in recent years have made the old system totally unusable. A State Legislative committee worked with state agricultural groups to come up with a better system, and with time, the new system will make county taxation much more equitable for all in agriculture.
The old system was based on land sales. Non-agricultural influences were steadily driving up market values for real estate in certain areas and the resulting tax assessments were greater than the actual value of crop and pasture land. Over the years, a variety of laws were adopted in an effort to protect ag land tax assessments from non-ag influences.
State Legislator Larry Rhoden explains, “Part of the problem stems from the 150 percent rule, which has been in place for about 12 years. Its whole purpose was to stop huge increases in assessed values despite the dramatically increasing prices paid for land. This rule was simply that if a land sale exceeded 150 percent of the value of the ag land, the sale was thrown out so it wouldn’t affect the assessments of neighboring ag property. The West River area in particular had most of the ag land sales thrown out, therefore the assessors had nothing to base the values on.
“It’s important to understand why South Dakota ag land is different than other classes of property,” adds Rhoden. “Non-ag people don’t understand it. But it’s simple: you can’t make more ag land and you can’t move it. Housing developments and businesses can move or be moderated by demand. The old system was based on what one person was willing to pay for land, no matter what it would be used for. It had to be fixed. Some urban legislators wanted to repeal the 150 percent rule, and assessments on ranch land in Meade County, for example, would have gone up well over 300 percent. We knew we had to do something as soon as possible to keep that from happening.”
Assessments were based on agricultural land sales, and County assessors had less and less data to work with to make accurate assessments, due to the 150 percent rule. In 2007 there were only 200 market sales of land statewide that could be used in determining the value of over 43.7 million acres of South Dakota agricultural land. In 2008, that figure was down to 121 usable sales.
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Because the old system was so flawed, corrections will be needed as the switch is made to the new system of assessment. Some counties will have ag land owners who will see increases in valuations, while others will see decreases. The legislature included provisions to help in the transition, such as limiting assessment increases and decreases to no more than 10 percent per year. Another provision will protect taxpayers and local school district funds from significant changes in valuations as well.
In each county the new system will use an eight-year Olympic Average of yields and prices to determine the value of cropland, and an eight-year Olympic Average of cash rent on pasture land value. The Olympic average determines the gross revenue per acre, based on an eight year period. The period of 2001 to 2008 is used to determine 2010 values, and the high and low years are thrown out with the remaining six years averaged. Each year, the newest year of data will be added and the oldest year taken out of the formula.
With the above formula, the 2010 assessments for taxes payable in 2011 on agricultural land will be assessed based on the ability to produce crops or support livestock, just as it is in 43 other states. When the system has been fully implemented over the next few years, taxable land valuations will be more in line with the lands true value, creating a more fair, accurate and stable base for assessments. In addition, it will eliminate the disparities in land value assessments from county to county.
An oversight committee made up of legislators, farmers, ranchers, businesses, and a Director of Equalization is working with the South Dakota Department of Revenue and South Dakota State University in implementing the new system.
“This change has been a work in progress for over a decade,” says Rhoden. “Virtually all the ag groups in the state worked hard to get this passed. I’ve never before seen all the ag groups so united on a single issue.”
Undoubtedly there will be some wrinkles to get ironed out in the new system, but, by and large, it is a dramatic improvement over the old one and should make agricultural land assessments and taxation a fairer system for all concerned.