Ranchers such as Dan Lindblom and his son, Dave, can breathe a sigh of relief now that Gov. Mike Rounds has signed HB1005.

The bill, receiving final legislative approval last week, changes the way agricultural property is assessed for property taxes. The governor's office announced Thursday that Rounds had signed the bill.

Ag-land valuation is a complicated issue, but it affects everyone in South Dakota who owns property.

Backers of HB1005 say it will help keep farmers and ranchers on land that is under increasing pressure from development in and around the Black Hills.

"You've got to applaud the Legislature for finally tackling the issue and putting something on the governor's desk," Dave Lindblom said this week as he watched his son Brad feed cattle on their ranch between Rapid City and Hermosa.

The Lindbloms raise cattle on land they lease from the owners of Hart Ranch as well as on adjacent land they own.

HB1005 drops a rule that has protected ag land from soaring assessments because of housing developments and substitutes a method of valuing ag land based on the crops and livestock it can produce.

Without the change, backers say, the soaring taxes would drive farmers and ranchers from land around rapidly developing areas.

If the owners of Hart Ranch had to pay increased taxes under a purely market-based system on the grazing ground, Lindblom said, "They'd have to break it all up and sell it."

Condos replace cows

Lindblom said his father, Dan, and Mark Kieffer of Rapid City were among those who began pushing for a production-based valuation system for ag land 20 years ago.

About 10 years ago, their neighbor to the south, rancher Jim Lintz of Hermosa, joined the battle in the South Dakota Legislature.

Lintz, now a state senator, said Dan Lindblom was among those instrumental in getting the Legislature to pass a rule during the 1990s exempting sales of ag land for more than 150 percent of its assessed valuation from being used to determine future assessments.

But critics said that rule, along with a similar exemption for non-ag land, artificially held down valuations.

150 percent rule

In Black Hills counties, most ag land sales were exempted by the 150 percent rule from being counted toward future assessments for tax purposes.

In Meade County, equalization director Kirk Chaffee said he was lucky to find two of about 60 sales annually that were for less than 150 percent of valuation and therefore could be counted for future assessment.

Critics have vowed to dump the 150 percent exceptions.

HB1005 drops the exceptions and substitutes a system of valuation based on an eight-year average of crop and livestock production.

The result: land used for agriculture generally will continue to be assessed (and taxed) lower than land subdivided for housing and commercial development.

Chaffee said HB1005 could help keep some ranchers on the land in developing areas such as the corridor between Rapid City and Sturgis.

But Chaffee estimates that Meade County ag valuations, which have been held down by the 150 percent rule, will rise about 24 percent under the production system.

He said ranchers in Meade County don't like to see their taxes going up.

"But the difference between going up 24 percent on a productivity basis, compared to increasing 300 percent on a market basis, became kind of a no-brainer," Chaffee said.

The new valuation system will first apply for property taxes payable in 2011.

Opponents to change

Not everyone is embracing the change.

State Sen. Bill Napoli, R-Rapid City, agrees that HB1005 will help agriculture.

But Napoli believes the change to a production system, along with elimination of the 150 percent exemptions for both ag and nonag land sales, will end up with agriculture paying a proportionately smaller share of property taxes statewide than the residential and commercial sectors.

"They're just going to take a beating on this thing," Napoli said of home and business owners.

He said the relative proportions of the property tax burden shared by ag, commercial and residential have remained fairly constant over the years.

But with the 150 percent constraint coming off non-ag land purchases, those assessments will rise quickly, Napoli said. Ag land assessments probably will rise, too, for a few years, he said.

But Napoli says that within a few years, ag valuations under the production system will flatten out, with more of the tax burden shifting to commercial and residential.

He said the Legislature can come back and adjust the formula on which the production system is based or raise the mill levy on agriculture.

"I don't want agriculture to think for one minute that this legislative body is going to let them pay any less taxes in relationship to the other two categories," he said.

The South Dakota Chamber of Commerce and Industry supports the switch to a production-based system, but with reservations, chamber president David Owen said.

He said the chamber and other business groups successfully pushed an amendment that will require next year's Legislature to finish the complicated formula used to determine production values before the system goes into effect.

There are a lot of other factors that could affect the fairness of the system, Owen said.

He agrees with Napoli that the production method will likely flatten out ag valuations in a few years.

Owen said the new system is required to be revenue neutral for only one year.

"How it plays out in the future is anybody's guess," Owen said.

Lintz said there won't be an immediate shift in the property-tax burden statewide, but he acknowledged there could be shifts within individual counties.

He said the ag sector is paying a larger share of property taxes now that it was 10 years ago.

But Lintz said there will be a natural shift in the tax burden to commercial and residential in areas that are rapidly developing.

That shift has already occurred in Meade County because of growth along the Interstate 90 corridor, Chaffee said.

"If you look at the tax base as a giant pie, ag represents maybe 20 to 25 percent of that," Chaffee said. Chaffee estimates that within the next few years, the ag part of the tax base could shrink to about 15 percent.

A major factor in the growth has been the high prices farmers and ranchers can get for land that developers and speculators want, Owen said.

Many ranchers have found that land for condos is worth much more than land for cows.

"We continue to lose ag ground, but we constantly have new houses and new businesses," Lintz said.

He hopes HB1005 slows that trend.

Contact Steve Miller at 394-8417 or steve.miller@rapidcityjournal.com