SD Department of Revenue and Regulation

Property and Special Taxes DivisionPhone: (605) 773-3311

445 E. Capitol AvenueFax:(605) 773-6729

Pierre, SD 57501-3185

January 16, 2009

TO:Tax Committees

FROM:Michael Kenyon, Director

Property and Special Taxes Division

RE:How Productivity Valuation Works

The 2008 Legislature passed several bills to begin the process of valuing agricultural land using the productivity method. Productivity valuation is a fundamental change in the philosophy of how we value ag land. Instead of using sales of comparable property to determine the value, ag land will now be valued based upon its ability to produce.

Here are the basics of the new valuation system:

  • For cropland, the productivity value will be determined using countywide average yields and statewide commodity prices over several years. For pastureland, the productivity value will be determined using cash rents.
  • The formula will use an 8-year “Olympic average” of the data to determine the values. In Olympic averaging, the high and low years are not used.
  • The legislation required that the switch to productivity valuation (1) neither increase nor decrease the total amount of statewide ag value the first year; and (2) minimize any shift between crop and pasture ag values.
  • The basic formula is [gross revenue] x [landlord share percentage] / [cap rate] for the assessed value.The landlord share percentages are 35% for cropland and 100% for pastureland. The cap rate is 6.6%. So, ifa county hasa gross revenue of $100 an acre for cropland, the formula would produce a value of $530.30 an acre ($100 x .35 / .066). This is the assessed value; the taxable or "equalized" value is 85% of the assessed value.
  • The formula will produce the starting point for the assessed value. The local assessor will still be required to make adjustments based upon topography, rocks, etc.

Although the statewide amount of ag value will be the same as the status quo, some counties will experience significant increases or decreases in ag valuation. Two sets of maps are included with this summary.The first set of maps are labeled “2008 Equalized Dollar Per Acre” and show the current average taxable value per acre in each county (total ag, and then crop and pasture values). The second set of maps are labeled “Productivity Equalized Dollar Per Acre” and show what the values would be under the productivity system (total ag, and then crop and pasture values).

Comparing the maps shows one of the problems productivity valuation is intended to fix –the dramatic differences between counties. For example, cropland in Sully County is currently about $245 an acre higher than its neighbor, Hughes County. The change to productivity valuation will decrease values in Sully County and increase values in Hughes County. Productivity valuation would lower the difference between the two counties from $245 an acre to about $64 an acre. This creates a valuation system that is more fair and consistent between counties.

To prevent sudden large changesin ag values, the Legislature limited county-wide ag value increases or decreases to no more than 15% a year. In addition, measures were taken to ensure that schools and local governments would not see increased or decreased revenue from the changes in ag valuations.