Printer FriendlyVeto Letter HB 1197
March 10, 2009
The Honorable Timothy Rave
Speaker of the House
500 East Capitol Avenue
Pierre, SD 57501-5070
Dear Speaker Rave and Members of the House of Representatives:
I herewith return House Bill 1197 and VETO the same. House Bill 1197 is An Act to allow
single-family dwellings that are under construction or listed for sale by contractors to be
classified as owner-occupied single-family dwellings for the purpose of taxation.
Homeowners who have "owner-occupied" tax status receive an annual tax reduction on their
school general fund property tax levies. The difference in the levies between "owner-occupied"
and residential property not occupied by the owner is $4.68/$1,000 of taxable value. This means
the "owner-occupied" status saves the owner of a $100,000 home $468 in property taxes a year.
HB 1197 would give the "owner-occupied" tax status to contractors who build spec houses that
are not occupied by anyone.
If HB 1197 becomes law, then the contractor who builds spec houses would receive the
"owner-occupied" status on up to four unsold houses. In addition, it is clear each of the "houses"
could be a four-plex, or a total of 16 units, an interpretation confirmed by the Attorney General.
The contractor would receive the special tax reduction status for each "house" for up to 2 years.
This bill treats spec house builders better than actual "owner-occupied" homeowners. Here's
how. With passage of HB 1002 in 2005, the legislature limited the owner-occupied classification
to the owner's primary residence. Prior to that change, property owners could have both their
main home and, for example, a vacation home in the Black Hills, classified as "owner-occupied".
The 2005 legislature required a property owner to pay the higher tax rate on everything except
their primary residence. If HB 1197 passes this year, it would give the "owner-occupied" tax
status to spec house builders on up to four houses, not one, and each of them could be a
In giving spec house builders these special tax reductions, HB 1197 would actually shift taxes
from the spec house builders to everyone else who is paying property taxes. The taxes associated
with changing the status for the spec house builders do not simply disappear. The taxes must be
paid by someone. Spec house builders will pay less taxes and all the rest of the taxpayers will
pay more taxes.
Here's how that works. If HB 1197 becomes law, the lost revenue will have to be made up by
adjusting the levies during the annual Cutler/Gabriel process that is in state law. The state
currently pays 57 percent of the cost of K-12 education; the remaining 43 percent is "local effort"
and it is paid by local property owners. The Cutler/Gabriel process determines the levies needed
to generate the "local effort."
So, for each $100,000 of "spec house value" transferred to owner-occupied status by HB 1197,
there is $468 of property taxes that has to be made up by other property owners. Nothing in
HB 1197 requires the state to make up the lost revenue and increase its share of the cost of K-12
education. So, HB 1197 gives a tax break to spec house builders that must be paid for by actual
homeowners, our farmers and ranchers, and our main street businesses.
Proponents of the bill say it will not shift taxes because these are new structures that have not
previously been taxed. However, the bill states "Any contractor that has constructed or is
constructing a single family dwelling . . ." Thus, it is clear, the bill will apply to the existing
inventory of houses owned by spec builders, which are currently taxed at the higher levy rate.
Further, as new spec houses are built, the bill requires them to be taxed at the lower levy rate,
continuing the shift to other property owners.
No proponent of this bill has provided any estimates as to how much this tax shift from spec
house builders to the other property owners will cost. I do not believe it is appropriate to give
spec house builders a property tax break, paid for by all of the other property owners in the state,
without any idea of the cost.
Providing more property tax reductions to South Dakotans is an excellent goal, but it should be
done for all South Dakota property taxpayers or, at least, a very large number
of property taxpayers, not just people who build spec houses.
Therefore, for all of these reasons, I respectfully request that you concur with my action and
sustain my veto.
M. Michael Rounds
cc: The Honorable Dennis Daugaard
The Honorable Chris Nelson