SD Bill Advances: Counties Could Cut Property Taxes with Local Sales Tax

County Sales Tax Plan Advances in South Dakota as Statewide Cut Stalls

PIERRE, S.D. – A proposal allowing South Dakota counties to levy a sales tax to offset property taxes advanced Wednesday at the state Capitol, while efforts to maintain a temporary statewide sales tax reduction failed to gain traction.

The county sales tax plan, championed by Republican Gov. Larry Rhoden, would permit counties to impose a sales tax of up to half a percent. The revenue generated would be dedicated to reducing the county’s portion of property taxes on owner-occupied homes, delivered as credits to property owners.

The Senate Taxation Committee unanimously approved the bill, sending it to the full Senate with a “do pass” recommendation. Jim Terwilliger, Rhoden’s budget commissioner, testified in support of the measure, emphasizing its optional nature and targeted approach.

“It’s optional,” Terwilliger said. “It’s targeted at the areas of the state that need property tax relief the most.”

The governor has identified areas experiencing rapid in-migration, such as greater Sioux Falls and the Black Hills, as prime candidates for the tax relief. These regions have seen home prices and property taxes rise significantly and also benefit from substantial tourism revenue.

Currently, South Dakota counties are prohibited from imposing a sales tax. They rely primarily on property taxes, a funding model shared by public schools. The state government, in contrast, depends heavily on sales tax revenue. Cities in South Dakota can levy both property and sales taxes, with the state’s base sales tax rate at 4.2%, supplemented by up to 2% at the city level, and an additional 1% on specific goods and services like alcohol, restaurant meals, lodging, and event tickets.

Under the proposed legislation, county commissioners would have the authority to implement the sales tax, subject to potential petition for an election by residents. Any sales tax revenue exceeding the amount needed to offset owner-occupied property taxes would be allocated to reduce property taxes on agricultural and commercial properties.

Concerns regarding equity were raised during the committee hearing. Nathan Sanderson, Executive Director of the South Dakota Retailers Association, cautioned that imposing a county sales tax could result in shoppers from neighboring counties facing higher taxes without receiving the corresponding property tax benefits.

Statewide Sales Tax Reduction Effort Fails

Simultaneously, state Sen. Chris Karr, R-Sioux Falls, failed in a renewed attempt to make a temporary statewide sales tax reduction permanent. Lawmakers lowered the state sales tax rate from 4.5% to 4.2% in 2023, with the reduction scheduled to expire in 2027. Karr’s effort to eliminate the sunset clause previously failed in 2024 and 2025, and a reconsideration motion on Wednesday also fell short, with a vote of 16-17.

The debate over tax relief comes as U.S. Rep. Dusty Johnson, a Republican candidate for governor, has proposed utilizing revenue from the scheduled sales tax increase to fund statewide property tax credits for homeowners.

Property Valuation Bill Advances

In a separate development, the House of Representatives passed a bill aimed at altering how owner-occupied and commercial property is valued for tax purposes. The bill, sponsored by Republican Majority Leader Scott Odenbach of Spearfish, passed 38-29 and will now be considered by a Senate committee.

The legislation proposes shifting from assessing property values based on annual increases to using an eight-year market average, excluding the highest and lowest values within the county. Proponents argue this approach would mitigate the impact of rapidly rising valuations. The bill also includes provisions to prevent a tax shift to agricultural land and places the responsibility on school boards to adjust budgets if necessary.