Opt-Out Compromise: Luxury Property Tax?

Let us suppose that the Madison Central school board lacks the political will to advocate at the state level for an income tax. This summer Superintendent Frank Palleria said as much to me, expressing the oft-cited line that the income tax is a good idea but that South Dakotans will never vote for one. (Again, if everyone says that, who's left to voteagainst it?) Comments from board member Mark Hawkes in the Tuesday Madison Daily Leader indicate that attitude persists: he says that the board does not think the legislature will do anything to change the funding formula to help schools in the coming session, and he expresses no initiative to go to Pierre and push for change. The board is stuck in the same old rut.

If we must have a property tax increase, perhaps the board could still be a bit creative about it. Perhaps the board could still find a way to increase the district's revenue without hitting the lower-income people of this community. There are obviously people in the community who can afford higher taxes: just take a look at the huge houses going up around Lake Madison. Perhaps the board could vote for a property tax increase that would target just those big builders.

Specifically, let's impose a "luxury property tax." We could pick an arbitrary value, say $250,000. Every property valued below that amount would see its property tax levy remain the same. However, we would impose a higher levy for every thousand dollars above that rate. Right now, the residential property tax levy is $14.77 per $1000 value. We could tax the first $250,000 of a house's value at that rate. Above that value, we could levy $24.77 per $1000.

So take a $400,000 house. On the first $250,000 of that value, the owner would pay $14.77x250 = $3692.50. On the remaining $150,000 of the house's value, the owner would pay $24.77x150 = $3715.50. The total assessment: $7408.

My numbers are not set in stone. We can certainly debate just what value constitutes a reasonable starting point for "luxury property" and just how much to increase the levy for those higher values. Perhaps instead of a dollar figure, we could use residence status: perhaps we apply the tax only to second homes and vacation homes and exempt primary residences. Perhaps we could apply the tax strictly to new construction, thus encouraging people to renovate and preventing urban sprawl.

Whatever scheme we would choose, a "luxury property tax" would buffer people with older, smaller homes, like retirees who don't have the energy or time to clean a giant house or lower-income workers who simply can't afford new, sprawling digs, from the increased tax burden the school district wants to impose. The people who can spring for an extra 1000 square feet of living space can likely spring for increased property tax as well. Such a luxury property tax rate still isn't the ideal -- ultimately, we should move toward an income tax that most directly addresses the issue of taxing people according to their ability to pay. But a luxury property tax would provide at least a little breathing room for lower-income property holders until we develop the political will to completely reform the state tax system.