The short-sighted nature of South Dakotas Legislature is coming back around to bite them right in the wallet. In the 2023 legislative session, lawmakers chose to temporarily cut the state sales tax from 4.5% to 4.2% until 2027, betting that the state budget could handle the estimated $100 million annual loss in revenue.
They did this while rejecting Gov. Kristi Noems bill to eliminate the state sales tax on groceries, a move that polls show is popular with the states consumers.
At issue now is Initiated Measure 28, which voters will consider in November. It would prohibit the state from collecting sales taxes on anything sold for human consumption. As its backers drew up the measure, its designed to eliminate the state sales tax on groceries.
Members of the state House of Representatives stand and applaud after a $104 million tax cut bill passed with unanimous support on March 9, 2023, at the Capitol in Pierre. (Makenzie Huber/South Dakota Searchlight)
Members of the state House of Representatives stand and applaud after a $104 million tax cut bill passed with unanimous support on March 9, 2023, at the Capitol in Pierre. (Makenzie Huber/South Dakota Searchlight)
Opponents of IM 28 are coming at it from many angles. One of the first criticisms was that cutting the state sales tax on groceries would lead to a state income tax. As scare tactics go, this one is laughable. Theres no way South Dakotas ultra-conservative Legislature backs an income tax. If they did, it would certainly lead to a veto from South Dakotas uber-conservative governor.
The phrase in IM 28 for human consumption is causing some heartburn for the measures opponents. Narrowly applied, as the measures backers intended, that means eliminating the state sales tax on groceries. That cut could cost the state an estimated $134 million in revenue.
A presentation from the Legislative Research Council, recounted in a South Dakota Searchlight story, applied the term more broadly to items like utilities, toiletries and car repairs goods and services consumed by humans. That estimated revenue loss was $646.2 million. Imagine the resulting cuts in state services if that much revenue were to disappear from the states $7 billion budget. Now theres a scare tactic with some teeth. Another South Dakota Searchlight story noted that IM 28 opponents are concerned about the effect of the sales tax cut on the states AAA bond rating. Governments finance projects by selling bonds to investors. With its highest AAA rating, South Dakota is able to get lower interest rates on its bonds, saving taxpayers money.
Cutting out one of our most reliable sources of revenue in a public vote, with no plan to pay for the loss in revenue, does not look great to these credit agencies, said Rep. Tony Venhuizen, a Sioux Falls Republican and IM 28 opponent.
If the specter of cutting the tax on groceries is such a bad look for South Dakota, perhaps Venhuizen and his colleagues in the Legislature can change that look. If the prospect of facing a $134 million shortfall in revenue is going to upset the states bond market, lawmakers could make a plan now rather than wait until they gather again in January.
A special legislative session could offer fixes to IM 28 in the event it is endorsed by voters. Legislators used a similar tactic when they OKd a trigger law outlawing abortion that was designed to go into effect if Roe v. Wade was overturned.
Two actions by the Legislature would be all thats needed to allay the supposed fears of the bond market:
- Fix the language in IM 28 so that it is crystal clear that the measure is limited to a state sales tax cut on groceries.
- Reinstate the 4.5% sales tax. This would leave the budget with an estimated $34 million shortfall in revenue, an amount more easily handled by a state government known for its conservative approach to fiscal responsibility. It should be noted that the state maintained its AAA rating with the cut to a 4.2% sales tax and an estimated $100 million revenue shortfall.
In truth, these actions could just as easily be taken when lawmakers return to Pierre in January with no harm at all to the states bond rating. Its just that squawking about income taxes, threatening massive cuts in revenue and blowing smoke about a lower bond rating are political tactics. Those tactics are used with the hope that they will convince voters that, despite all their grousing at the cash register, they really dont want to cut their grocery bills.
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