(SOUTH DAKOTA SEARCHLIGHT) – Estimates of homeowner savings abounded recently as South Dakota lawmakers and Gov. Larry Rhoden approved property tax reduction legislation.

It’s been difficult, however, to find two other estimates: 1) the extra money consumers will spend to fund reduced property taxes with higher sales taxes, and 2) the net savings for homeowners after their extra sales tax spending is subtracted from their property tax savings.

South Dakota Searchlight’s effort to answer those questions led to these estimates: The average South Dakota homeowner’s total savings if they receive both forms of property tax relief could be $1,080 annually. Meanwhile, the average South Dakota household could spend $360 more per year if subjected to both sales tax increases. When it’s all said and done, that’s a net yearly savings of about $720 for homeowners.

To learn how Searchlight arrived at those rough estimates, keep reading. But first, a bit about the new laws.

The new laws

One of the new laws allows the statewide sales tax rate to return to 4.5% next year, after a temporary reduction to 4.2% since 2023. The revenue from the increase will be allocated to the school funding formula to reduce the amount of property taxes schools need from local homeowners.

The other new law allows counties to impose their first-ever sales tax at a rate of up to 0.5%. That revenue will go toward credits to reduce the county’s portion of homeowner property taxes.

Estimating property tax savings

To estimate average property tax savings for homeowners, Searchlight asked the state Department of Revenue for the average assessed value of owner-occupied homes in the state. The department did not provide that figure.

But it did provide the total taxable value of all owner-occupied properties for taxes payable this year: $62,211,360,002.

The department also provided the total number of owner-occupied properties in the state: 253,263.

Dividing the total taxable value by the number of owner-occupied properties yields an average value of $245,639.

“However,” the department said, “this number may include both houses and additional structures such as unattached garages.” The department added that the impact of those additional structures on the average valuation is minimal.

The owner-occupied classification, which lowers the levy applied to an owner’s primary residence, can be applied to a single-family dwelling, an attached or unattached garage, and the parcel of land where a home stands. The new property tax reduction law applies specifically to single-family dwellings.

To account for the minimal impact from additional structures, Searchlight rounded up to $250,000 as the average taxable value of homes in the state.

Revenue from the increase in the statewide sales tax rate is expected to reduce property taxes by $1.683 for each $1,000 of a home’s taxable value, according to the state Bureau of Finance and Management. For the average home with a taxable value of $250,000, that’s about $420 of savings.

Homeowners’ savings if their county enacts a 0.5% sales tax to fund property tax credits will vary across the state, because counties have different property tax rates and varying levels of potential sales tax revenue. But the Governor’s Office has estimated that the average savings will be $660. The office arrived at that number by taking the total, estimated new revenue generated if every county implemented the plan, and dividing it by the number of owner-occupied properties, which should approximate the average savings per homeowner.

Thus, the total annual property tax savings for the average homeowner receiving both forms of relief would be $420 plus $660, which adds up to $1,080.

Estimating extra sales tax spending

To arrive at an estimated extra amount of spending for the average South Dakota household (meaning a house or apartment) on higher sales taxes, Searchlight first needed an estimate of the average household’s annual sales-taxable spending.

Searchlight spoke with the Dakota Institute, a nonprofit economic research and analysis organization in Sioux Falls. The institute suggested dividing the total of certain categories of taxable sales (excluding categories that are likely purchases by businesses) by the state’s 382,302 occupied housing units (including apartments), resulting in an estimate of about $82,000 in annual taxable spending per household. However, institute CEO Jared McEntaffer noted many of those purchases were still probably made by businesses and tourists, so the true average is lower.

Gov. Larry Rhoden’s finance commissioner pointed Searchlight to a U.S. Bureau of Labor Statistics report stating that the average U.S. household spent $77,280 in 2023. Sales tax does not apply to some expenses, such as prescription drugs or mortgage payments. After subtracting such categories of spending that are unlikely to be taxed and adjusting for inflation since 2023, Searchlight settled on $45,000 as the estimated average annual sales-taxable spending per South Dakota household.

If that average household is subjected to both of the new sales tax increases, it would be the equivalent of an additional 0.8% tax. On $45,000 of spending, that would be $360 of extra sales taxes annually.

In a household subjected to only the 0.3-percentage-point statewide sales tax increase (without a county sales tax), that would be $135 of extra sales taxes annually.

Estimating net savings, and complications

If the average homeowner saves $1,080 annually on property taxes from both forms of relief and spends $360 annually in extra sales taxes, that homeowner’s annual net savings would be $720.

Homeowners in counties that do not enact a sales tax for property tax relief would receive, on average, the $420 in property tax relief from the statewide sales increase and spend $135 on higher sales taxes, for a net savings of $285.

Those are rough estimates. Actual situations will vary widely across the state. Household spending varies by income. Homes in rural areas are typically valued lower than in urban areas. Counties have different property tax rates, called levies. Some counties may choose to enact a sales tax for property tax relief, and others may not. In counties that do adopt a sales tax, the amount of revenue available for property tax relief will vary. And people who live in counties that do not adopt a sales tax will likely travel and spend money in counties that do.

And, for households that rent rather than own their home, it’s all just a sales tax increase.

South Dakota Searchlight is part ofStates Newsroom, the nation’s largest state-focused nonprofit news organization.

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