PIERRE, S.D. – Sen. Sue Peterson, chair of the Senate Taxation Committee, summed up what others on the panel seemed to think in rejecting a proposed state sales tax increase in exchange for a reduction in local property taxes.

'I do have concerns that we're trying to do too much all at once,' said the Sioux Falls Republican.

The failed proposal, Senate Bill 99, tabled by Senate Majority Leader Jim Mehlhaff, would have increased the sales tax to 6.2% and use the receipts to create a local replacement fund to lower property taxes.

The idea was one of more than two dozen floated as a potential solution to skyrocketing property taxes that has been driven in large part by a 26% increase in the median home price in the state over the past five years.

Looming over the property tax reform debate is the hotly contested race to secure the Republican nomination for governor.

News Watch broke down the various proposals and spoke with tax policy watchers to get a sense of the challenges and opportunities of the ideas being floated.

Rhoden: Let counties decide Gov. Larry Rhoden, the incumbent, has proposed allowing individual counties the option to decide to replace property taxes with a half-cent sales tax increase.

A county could vote to adopt the measure or hold a referendum. The Union Center rancher has argued his plan is more equitable as it would allow counties that generate more foot traffic, and therefore typically hold higher property values, the opportunity to see a decrease in their property tax bill.

Johnson: Relief for homeowners

U.S. Rep. Dusty Johnson, South Dakota's lone representative in Congress, announced a plan that would allow first time homebuyers to be exempt from paying property taxes for two years and provide a $400 property tax credit to owner-occupied properties using funds from a planned increase in the statewide sales tax, which is set to rise from 4.2% to 4.5% next year.

Johnson argues Rhoden's plan, rather than being equitable, increases inequalities by favoring more prosperous counties instead of providing a uniform statewide solution.

Doeden: Eliminate all property taxes

Toby Doeden, an Aberdeen businessman, has a more direct plan: eliminate all property taxes in South Dakota.

Doeden has suggested a consumption tax targeting 'luxury items' could be used to replace property taxes, although it is unclear if the revenue from such a tax would fill the estimated $1.8 billion budget hole that would be created if such a move were to materialize.

Comparisons to Prop 13 volatility Tax policy observers on both sides of the political aisle cautioned about the history of substituting property taxes for more sales taxes on grounds it would add fiscal uncertainty for municipalities and greater economic inequality statewide.

'The challenge with using a sales tax to replace property taxes is that sales taxes are much more volatile sources of revenue,” Rita Johnson of the Institute of Taxation and Economic Policy, a left-leaning think tank, told News Watch. 'Sales taxes go up and down with the economy. If there's a recession, sales tax receipts will decline.'

She cited the property tax debate in California in the 1970s as an example of the pitfalls of trading lower property taxes for a more robust sales tax regime.

In 1978, amid a backlash toward surging property taxes brought on by inflation, Californians passed Proposition 13, which capped property taxes at 1% of assessed value and limited annual assessment increases to 2%.

While ostensibly meant to relieve homeowners, the law has been cited as a major factor behind California's housing crisis as it disincentives home ownership mobility and encourages maintenance delays on infrastructure projects, given a reduction in local funds. All the while, California today has the highest state sales tax rate in the country, at 7.25%.

Reduced government accountability with sales taxes Abir Mandal of the Tax Foundation, a right-leaning research outfit, agrees with Rita Johnson that sales taxes are less predictable and more unevenly distributed than property taxes, while adding it could leave the door open to a decline in government accountability.

He pointed out that South Dakota counties are already bound by certain levy restrictions on property taxes and that a possible way to reduce the burden for homeowners could be expanding those restrictions to include school districts, which are currently exempt.

South Dakota News Watch is an independent nonprofit. Read, donate and subscribe for free at sdnewswatch.org. Contact politics and statehouse reporter Alexander Rifaat: 605-736-4396/ alexander. rifaat@sdnewswatch.org.