PIERRE - A major change in the way South Dakota values agricultural land for taxes cleared a hurdle Wednesday, but two Rapid City-area senators disagree about the measure's impact.

State Sen. Jim Lintz, R-Hermosa, who supports HB1005, says changing the way farms and ranches are valued, from a market-based system to a production-based system, would protect farms and ranches from rising land prices near fast-developing areas.

"All we are doing is what every other state has done, trying to keep agriculture as a viable entity," Lintz said.

Sen. Bill Napoli, R-Rapid City, however, said that in some counties - Pennington County included - the measure will shift tax burdens to owners of residential and commercial property. And even some farmers and ranchers would pay more, he said.

"County by county, and individually, there could be huge tax increases," Napoli said.

Mil levies determine tax bills, but valuations have an impact on the amount property owners pay.

Lintz and Napoli are both members of the Senate Taxation Committee. On Wednesday, the committee voted 6-3 to send HB1005 to the full Senate with a "do pass" recommendation.

Tax valuation is an arcane subject, but it affects every pocketbook in the state.

Under HB1005, South Dakota State University would determine eight-year average of ag-production income for every county in the state - for pasture land and crop land. Those values would be multiplied by a "landowner share," similar to a net profit, of about 25 percent. That number would be divided by a "capitalization rate," about 6 percent.

The capitalization rate would be set so the change to the new system does not increase or decrease the statewide total value of ag land.

The main purpose of HB1005 is to eliminate the "150 percent rule," a measure adopted in the 1990s to prevent the assessed values of farms and ranches from skyrocketing as nearby land was sold for more valuable development.

Under that rule, if a parcel sells for more than 150 percent of its assessed value, counties cannot use that sale to determine values of other properties.

The result has been that in some counties - Meade and Pennington included - almost no sales of ag land can be used to determine countywide values.

Napoli, however, pointed out that the 150 percent rule also applies to residential and commercial property, which would not get the protection of a production-value system. Those properties would be vulnerable to spikes in real-estate markets.

"Unless we can come up with something comparable for other two categories, which are going to see tax increases, I can't support this bill," he said.

Napoli also said that although the statewide total value of ag land would remain the same, total values of individual counties would increase or decrease.

In Meade County, ag values would increase about 26 percent. (Annual increases would be limited to 5 percent.) That means residential and commercial property in Meade County would decrease as a percentage of the total valuation.

In Pennington County, total ag valuation would decrease about 8 percent. The total value of commercial and residential properties there would increase as a percentage of total county values. Taxes would increase, though only slightly.

Lintz argued that most other states use a production-based system, which bases land's value on its ability to produce income.

Lintz also pointed out that the 150 percent rule - and especially, South Dakota's "non-ag Z" - classification were, in effect, production-based systems. "If production wasn't in law today, this capital would have been stormed years ago because people would have understood you can't go on market values," he said.

A similar measure failed last year, but supporters think HB1005 has enough support to become law.

Almost every agriculture group in the state supports the measure. "This is a change in the tax philosophy of the state - and the right change," Mike Held of the South Dakota Farm Bureau told the tax committee.

The South Dakota Retailers weighed in as supporters Wednesday, and so did the South Dakota Chamber of Commerce and Industry, though with reservations.

If the measure becomes law, it would go into effect for taxes payable in 2011.

First, however, the 2009 Legislature will review the SDSU findings and set the numbers that will determine values.

David Owen of the South Dakota Chamber of Commerce & Industry said his group supported the measure, but he also said he was glad the Legislature would review the plan one more time.

"I've often described the situation as being in the midst of a forest fire, running for your life and getting to a cliff," he said. "Then, trying to decide whether to use the same tools that were used to start it or whether you're going to take a leap of faith."

Gregory County, for example, would lose nearly 30 percent of its ag value. Tax levies would have to increase, and an owner of a property worth $100,000 might see a tax increase of more than $300.

"We're nervous about it," Owen said.

Sen. Jim Peterson, D-Revillo, another member of the tax committee, said the crisis caused by the 150 percent rule was worse. "The tax system we have now is a complete mess," he said.

Contact Bill Harlan at 394-8424 or at bill.harlan@rapidcityjournal.com