Noem-backed food tax cut clears first committee hearing

PIERRE – A tax cut touted by Gov. Kristi Noem as the largest in state history cleared its first legislative hurdle Thursday.

House Bill 1075 would eliminate the state’s 4.5% tax on food sales. South Dakota is one of just three states with such a tax. The others are Alabama and Mississippi.

The tax cut was a centerpiece of Gov. Kristi Noem’s reelection campaign, and Noem identified it as one of her top legislative priorities at the start of the 2023 legislative session.

The House Taxation Committee meeting was standing room only as proponents and opponents testified Thursday morning at the Capitol.

Opponents argued that eliminating the tax would remove a stable revenue source, that the money could fund other important projects in the state and that the tax cut would take millions in funding from tribal governments.

Proponents such as State Finance Commissioner Jim Terwilliger told the committee that the state’s growing population and economy are able to withstand the tax cut, and that it would bring “fair and transparent relief” to South Dakotans.

Rep. Mary Fitzgerald, R-Spearfish, is the bill’s prime sponsor in the House of Representatives.

“We have an opportunity to help the people of South Dakota,” Fitzgerald said. “We don’t have to pick and choose who we’re going to help. We can help everyone, and that’s pretty special.”

The tax brings in an estimated $102 million to the state. But even with the tax cut, there is another $280 million in revenue to spend, Terwilliger said. Revenue is $146 million higher than projected — or 13% higher — for the first six months of the fiscal year.

Opponents like Nathan Sanderson of the South Dakota Retailers Association said that the increased revenue is driven by inflation and federal funding.

“This is poor tax policy,” Sanderson said. “Two years of unexpectedly high economic revenue doesn’t make it sustainable in the long term.”

Other opponents spoke of how the windfall in funding could be used to help deal with other issues across the state. Lobbyist Dianna Miller with the Large Schools Group recalled budget reductions of 2011, when government agencies, Medicaid and education received cuts. South Dakota K-12 schools took an 8% cut, she said.

“The bottom could fall out and we’d be back to making cuts,” Miller said. “It’s not easy to get up here and be opposed to this. But I think we can look at other options.”

Still others pointed to the revenue hit the tax cut would cause for South Dakota’s Native American tribes, who rely on taxes for government operations.

Despite the opposition, Sanderson and others encouraged legislators to pass the bill onto House Appropriations for further discussion and to “look at other options.”

Two other bills, HB 1095 and HB 1096, would lower the state food sales tax rate and use tax rate to 2.5% and 3.5%, respectively. A lobbyist with the South Dakota Dental Association also suggested an amendment that would retain a tax on candy and soft drinks while eliminating it for fresh produce and other food sales.

The taxation committee voted 12-1 to send the bill to the House Appropriations Committee.