Makenzie Huber/South Dakota Searchlight – A bill to permanently set South Dakota’s state sales tax rate at a reduced 4.2% sailed through its first committee hearing Thursday at the Capitol in Pierre with an 11-1 vote.
Prime sponsor Rep. Chris Karr, R-Sioux Falls, told House Taxation Committee members the bill “concludes some unfinished business” from last year’s session.
The 2023 legislative session was dominated by tax cut discussions — the Senate originally favored a property tax cut, the governor favored eliminating the state sales tax on groceries, and the House favored an overall cut to the state sales tax.
The general state sales tax cut won out in the end, with the expectation that it’d cost the state about $104 million, but only in a compromise to automatically revert to a 4.5% sales tax in 2027. Senators urged caution at the time with talk of a potential recession, preferring to wait to make any permanent decisions until after federal pandemic aid is fully spent.
Karr pitched the permanent tax cut to the committee Thursday, citing South Dakota’s low unemployment rate, high gross domestic product and personal income growth, as well as significant increases in state revenue in recent years. South Dakota’s sales tax collections historically mirror the state’s personal income growth.
He also pointed out that in the first six months of fiscal-year sales tax collections, South Dakota was only about $16 million behind 2023 collections year-to-date. Concerns about a recession have also receded in recent months.
“This is going to be foreseeable strong economic growth,” Karr told the committee. “We’re going to be able to organically absorb this.”
Opponents say federal funding inflates numbers, worry over food tax ballot measure
But opponents said the federal influx of pandemic cash is still inflating South Dakota’s budget and financial numbers. Executive Director of the South Dakota Retailers Association Nathan Sanderson pointed out that the state budget has doubled in 10 years, primarily due to federal COVID relief funds.
“It’s absolutely true that we’re seeing revenues go up, but these revenues won’t stay up forever, because that federal money will go away. And that’s why we’re opposed to HB 1001,” Sanderson said. “Because we know this federal money is going to go away and we’ll go back to normal at some point.”
Gov. Kristi Noem said in her budget address that the state still has about $131 million from the federal American Rescue Plan Act, which she proposed spending on water projects.
Sanderson added that businesses and retailers across the state aren’t seeing increased profits in recent years or after the tax cut, because their costs are still increasing. Inflation has increased significantly in the past few years, with 2023 ending at 3.5% after 8% inflation in 2022 and 4.7% in 2021.
Opponents representing the South Dakota Farm Bureau and the Greater Sioux Falls Chamber of Commerce also worry that South Dakotans will vote in November to eliminate the state sales tax on anything sold for human consumption, commonly referred to as the grocery tax or food tax. Petitions to place that measure on the ballot are circulating.
Gov. Kristi Noem cautioned legislators last session that a proposed ballot question for the 2024 general election eliminating the food sales tax will likely pass, which could leave lawmakers scrambling for revenue.
A statewide South Dakota News Watch poll released in December showed that 60.6% of registered voters support eliminating the grocery tax.
“Let’s pull back a little bit,” Sanderson said. “Let’s keep the big picture in mind why we’re seeing the record revenues that we’re seeing and what’s going to happen in the next couple of years.”
Noem administration supports tax cut, despite initial opposition last session
The state Bureau of Finance and Management expects the state will have surplus revenue for the next budget year — primarily due to higher than expected contractor’s excise tax revenue and unclaimed property funds.
Overall, the bureau expects $115 million in surplus ongoing revenue, which Noem hopes to put toward a 4% increase in funding for education, health care providers and state employees.
Bureau Commissioner Jim Terwilliger told the Taxation Committee that he supports the effort to make the tax cut permanent, since predictable and permanent tax policy is the goal of the state.
He added that South Dakota’s rising population will drive economic growth and spending, making the cut affordable. A state demographer predicts the state’s population growth will continue over the next decade but at a slower rate than in recent years.
Impact of tax cut explained
The bureau expects South Dakota to receive $23 million less in sales tax revenue this fiscal year than projected by the Legislature last session. That shortfall is due to a slower growth rate in sales tax revenue than years prior and the implementation of the statewide tax cut.
According to the bureau’s presentation to the Joint Appropriations Committee on Tuesday, the tax cut has resulted in a 6.67% net decrease in sales tax revenue for the state so far compared to the same period of the previous year. When accounting for the rate change, sales tax spending has increased by 3.4% in the last six months compared to the same period a year before.
But in order to meet the legislative adopted estimate for sales tax revenue in the current 2024 fiscal year, sales tax receipts would have to grow by 7.4% in the remaining seven months.
That is “more considerable growth than what we’ve seen for the last 10 to 12 months,” State Economist Derek Johnson told lawmakers Tuesday afternoon.
“At this point in time, we don’t think that growth will be quite that strong the remaining seven months,” he added.
Rep. Roger DeGroot, R-Brookings, was the lone vote against the tax cut bill Thursday morning. He told South Dakota Searchlight after the meeting that he thinks it’s best to let the sunset clause run its course, especially given the popularity of the food tax cut initiative so far.
“We have time. It doesn’t sunset for another 2.5 years — we’re only half a year into it,” he said. “If we want to extend that sunset, we can in a couple of years. If the food tax cut doesn’t pass, we can give a more meaningful cut from .3% to a half percent. We have options in the future.”
Other members of the committee, including Rep. Liz May, R-Kyle, said the House originally voted for a permanent tax cut last year and would push for one again this year.
“I do think this is an obligation to the taxpayer that we need,” May said, “so we need to pass this.”
The bill now goes to the full House of Representatives.