Gov. Kristi Noem presents her fiscal year 2024 budget proposal to legislators on Dec. 6, 2022, at the Capitol in Pierre. (Makenzie Huber/South Dakota Searchlight)
PIERRE – Gov. Kristi Noem proposed South Dakota’s largest-ever state budget and biggest-ever tax cut Tuesday in her 2022 budget address, along with improved pay and benefits for state employees, money for new and improved prisons, free college tuition for National Guard soldiers, and numerous other proposals.
Noem said the tax cut – a proposed elimination of the state sales tax on groceries – and the increased spending are justified by a booming economy, large reserves, surging tax revenue and millions in available one-time funds.
“The people of South Dakota deserve safe planning that protects them from future tax increases or drastic cuts to state services,” Noem said in the address, delivered to legislators in the Capitol’s House chamber.
Noem’s proposed fiscal year 2024 budget would be the largest in South Dakota history, at over $7.2 billion. Compared to the adopted 2023 budget, that would be a 25% increase. Lawmakers will consider Noem’s proposals when they convene next month for the annual legislative session in Pierre.
Noem boasted that the state has $423 million in reserves, ending last year with a record-breaking budget surplus of $115.5 million.
This year, the state is on track to beat revenue projections again by $58.8 million, setting the state up with a $135.3 million surplus so far this fiscal year. Sales tax alone is running $81.8 million ahead of the estimate the Legislature adopted, Noem added.
Noem’s office expects $310 million in new ongoing revenue available for fiscal year 2024 with $216 million in one-time revenue as well.
Tony Venhuizen, an incoming Republican state representative from Sioux Falls who will be vice chair of House Appropriations, said the revenue growth is “practically unprecedented.”
“That’s an opportunity but also a challenge,” Venhuizen said. “It’s going to be difficult to judge how long that will continue.”
Eliminating state sales tax on groceries
That revenue growth gives South Dakota the opportunity to cut taxes, Noem said. Eliminating the sales tax on groceries would cut about $100 million in revenue, dropping the anticipated new ongoing revenue from $310 million to $208 million. Noem has called the proposal the biggest tax cut in state history.
“The people of South Dakota overwhelmingly want this tax cut, and they know we can afford it,” Noem said. “… My team and I are fully confident that this is the right tax cut at the right time. Let’s get it done.”
However, some legislators are skeptical that the tax cut is fiscally responsible. Senate President Pro Tempore Lee Schoenbeck, R-Watertown, said the tax cut is “obviously problematic.”
The state received unprecedented levels of federal funding from pandemic stimulus programs in recent years. To cut the sales tax when such federal spending isn’t continuous, Schoenbeck said, would affect the state’s stability and budget going forward.
“You can’t do that unless you think the feds are going to keep spending millions of dollars in our state,” Schoenbeck said. “The extreme increase is caused by federal spending in our state. Fiscal conservatives are saying that we’re not going to go down a path that’ll set us up for an income tax.”
Sen. Reynold Nesiba, D-Sioux Falls and minority leader, applauded Noem’s proposed tax cut, saying Tuesday that Democrats have been working to eliminate the food sales tax for years.
While Nesiba hopes to see legislators eliminate the grocery tax completely, he said he would support a compromise of 2 percentage points cut from the state sales tax on groceries, eliminating about $50 million in revenue by dropping the tax from 4.5 percent to 2.5 percent on groceries.
House Republicans have yet to identify their priorities for the session, Venhuizen said.
“It’s too early to say we’ll support one plan or the other,” Venhuizen said, “but we certainly see the merit in what the governor is proposing and we’ll keep talking.”
Prisons, National Guard tuition & more
Nesiba also said he is supportive of Noem’s recommended 100% tuition coverage for National Guard soldiers at state universities and technical colleges (an increase from the current 50% at state universities and 80% at technical colleges), and her plan for a 5% pay increase for state employees.
However, the pay raise for state employees doesn’t keep pace with the nation’s current 8% inflation, leaving workers with a wage cut, Nesiba added. Failing to keep pace with inflation puts the state at a disadvantage when competing for workers in a tight labor market.
“It didn’t go nearly far enough,” Nesiba said. “Our revenues are robust enough and there is enough in reserves where we can simultaneously cut taxes, increase spending and balance the budget. The big debate will be how much to cut taxes and increase spending to balance the budget.”
Noem said her budget does include $11 million for targeted pay increases for state workers and another $11 million in added benefits. In addition to the 5 percent pay increase for state workers, Noem is also proposing a 5 percent increase in state aid to public schools.
In the realm of public safety, Noem proposed spending about $400 million to renovate and construct new prisons.
$60 million of that money is intended for a proposed 300-bed women’s minimum-security prison in Rapid City. Another $341.6 million would go toward purchasing land, conducting engineering and design, and eventually building a replacement for the state penitentiary in Sioux Falls.
Noem said she wants to use excess reserve funds to help pay for the prison projects.
Schoenbeck said he supports addressing the prison needs.
“Those are unattractive things to deal with and are extremely expensive,” Schoenbeck said. “It takes some gravitas to do that. I’m told that’ll be $800 million by the time we’re done with those two prisons.”
Other spending Noem proposed to the Legislature includes:
- $22 million in targeted increased reimbursement rates for care facilities across the state, including a 21% increase in funding for nursing homes, 17% increase to community support providers for South Dakotans with developmental disabilities, and a 26% increase for psychiatric residential treatment facilities.
- $25.6 million in one-time funding to finish projects in progress, including the State Public Health Lab, Board of Regents projects and the Dakota Events CompleX at the State Fair.
- Covering 100% of state employees’ pay while on family leave, which is currently paid at 60%.
The next step for legislators is to meet beginning in January and discuss each of the topics covered in Noem’s address and how best to move forward.
“We don’t want to be in a position where we find ourselves in a hole in a couple of years,” Venhuizen said. “In the meantime, we have a lot of opportunities.”
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