The Transition from Market Valuation to Income Valuation: Internal and External Shift Analyses for South Dakota

Agricultural land in South Dakota has traditionally been valued for property tax purposes by the market approach. Since this valuation approach relies upon comparable sales data, property values imitate trends in the agricultural land market. Interest in changing the state's market valuation approach to an income valuation approach surfaced in the late 1970's and resurfaced in the late 1990's amidst rising land values, structural changes within agriculture, and employment shifts to other industries. Agricultural land valuation pilot studies gained public attention since South Dakota, in the absence of a state income tax, relies upon sales tax, at the state level, and property tax, at the local level, to provide necessary revenue for public services. The 2002 statewide study addressed whether or not agricultural lands could be valued according to an income capitalization approach without creating any valuation shifts from the present market approach. This paper examines two types of valuation shifts identified during the study: 1) external valuation shifts between agricultural landowners and nonagricultural property owners and 2) internal valuation shifts between crop landowners and range/pasture landowners.