Does Mitchell really have higher property taxes than the rest of the state?

At last night’s Mitchell City Council meeting, an oft-repeated claim was made about Mitchell supposedly having the highest or among the highest property taxes in the state:

Roger Musick, CEO of Innovative Systems, addressed the council Monday and spoke in favor of the proposal. Musick said a city administrator in the city’s government could help reduce the city’s property tax rates, which are among the highest in the state for similar-sized cities.

“I think it’s time for a change,” he said. “We’ve tried it for 100-plus years this way, and the result is taxes that are too high.”

I’ve heard that claim repeatedly since I began working here in 2003, and I did a story on it in 2007 to check the validity of the claim. I found back then that Mitchell’s property tax rate per $1,000 of valuation was actually the third-highest among the state’s largest cities. I also found that the issue was much more complex than many people might have guessed. Brookings, for example, had all kinds of city-owned businesses — including the hospital and the local telecommunications provider — that brought in extra revenue and reduced the burden on property tax payers. Other cities didn’t have that extra revenue.

I hope to have a reporter check again soon on the claim about Mitchell’s high property tax rates, since it’s now being used in support of a proposal to add a city administrator to city government.

In the meantime, in case you’re curious, here’s my story from April 21, 2007:

Wide gap in city property tax rates

Huron has highest in state; Mitchell 3rd

The Daily Republic

The property tax rates payable this year to South Dakota’s 10 largest cities vary widely, from a low of $2.61 per $1,000 of valuation in Brookings to a high of $10.788 in Huron.

Why the large gap? Experts in taxation and public finance cite two main factors: differences in property values from city to city, and the funding that cities get from other sources besides property taxes.

The alternate funding is the easier of the two explanations to understand.

Take Brookings, for example, which has an unusually high number of what are called “business-type” activities. Martin Guindon, the state’s auditor general, said the money Brookings pulls in from those activities may help drive down the city’s property tax rate.

“That’s probably one of the bigger factors, I think,” Guindon said.

Besides the typical city-owned “businesses” such as water and sewer, the City of Brookings owns additional businesses, including the local telephone company and hospital. In 2005 — the most recent year of municipal annual reports available from the state — Brookings’ business-type activities showed a combined profit of about $7 million.

On the other end of the spectrum, Huron’s business-type activities generated a combined profit of about $617,000. It stands to reason, then, that the local government in Huron would require a higher property tax rate than the local government in Brookings. Sales taxes may also play a role — Brookings, for example, collects about twice as much sales tax money as Huron.

Property taxes have been a topic of debate recently in Mitchell, where a task force has proposed raising taxes to help fund the construction of an arena. Mitchell’s current city property tax rate — excluding the rates of the county, school district and other taxing entities — is $5.95 per $1,000 of valuation. The rate has been falling in recent years, and is currently at its lowest level since 1988. Still, it’s the third-highest rate among the state’s 10 largest cities.

Economic conditions, such as the positive ones in recent years in Mitchell, can influence tax rates. That’s where the more complex explanation for the differences in various cities’ rates comes in, and it has to do with the limits the state places on the growth of property taxes from year to year.

Cities and other local government entities can only increase the total amount of property taxes they receive each year by the rate of inflation to a maximum of 3 percent, plus another percentage calculated by dividing the value of new construction by the total value of existing property.

The limitations have a seemingly counterintuitive effect on tax rates: as the total value of all the property in a city goes up, the tax rates go down. Cities with booming economies and rising property values have falling tax rates, while cities with stagnant economies and property values may have rising tax rates.

Michael Kenyon, director of property and special taxes for the state Department of Revenue and Regulation, said Huron’s stagnant economy in recent years may explain why its city tax rate is $10.788 per $1,000 of valuation while the other 10 largest cities in the state have rates of $6.06 or lower.

“Presumably, in cities that have higher levy rates, for whatever reason maybe they haven’t had the growth that some other cities have,” Kenyon said.

To help understand how the property tax limitations work, Kenyon used the example of a hypothetical city with $100 million in total property value. The city’s tax rate is $3 per $1,000 of valuation, so the city collects $300,000 in property taxes.

The next year, inflation is 2 percent and a new subdivision adds $1 million in property value to the city. That $1 million equates to 1 percent of the city’s existing $100 million of valuation.

The city can add the two percentages together and increase its property tax collections by 3 percent, from $300,000 to $309,000.

Before setting the new tax rate, the city has to calculate the change in the value of existing property. That’s where the strength of the local economy comes into play.

If a strong real estate market drives the value of the city’s existing property up by $9 million, that increase plus the $1 million in new construction would bring the city’s total valuation to $110 million.

The previous year, when the city’s total valuation was $100 million, the tax rate was $3 per $1,000 of valuation and the city collected $300,000 in taxes. The city is limited to $309,000 in tax collections the next year, so it must set a rate that will not exceed the limit. At the new valuation of $110 million, the tax rate must be lowered to $2.81 per $1,000 of valuation.

“As valuation increases,” Kenyon said, “to comply with the cap, the tax rate, the levy, has to decrease.”

If the city’s economy had been flat, with no new construction and no increase in the value of existing property, the city’s total valuation would have remained at $100 million. The city could have increased its property tax collections by 2 percent because of inflation, from $300,000 to $306,000. Instead of lowering the tax rate, the city would have been forced to increase the rate to $3.06 per $1,000 of valuation.

Guindon said many other factors, including a city’s spending decisions, may influence tax rates. But he said the impact of property values and property tax limitations may be the best explanation for why Huron’s tax rate is so much higher than the rates in other large cities.

“I think it’s really the economy there and that valuation just not being there,” he said. “You go up there and you see the mall having one or two things in it, that just drives all the way through the economy of a city. Your housing values aren’t there, your strip malls aren’t full, you’re just not generating property value there, and so the levies have to be higher to generate the same amount of revenues.”