Salivating over a surplus: Tax cut proposals are enticing, but shortsighted

Most national news about the economy seems to be filled with worries about whether or not the nation is heading for a recession. In South Dakota, we’re worried about what to do with this avalanche of tax revenue.

In this state, tax revenue projections are traditionally conservative. Lately, they have also been wildly inaccurate.

In her budget address to the Legislature, Gov. Kristi Noem said general fund tax collections were $146 million ahead of legislative projections. She said that total was likely to grow to $203 million by the end of the fiscal year 2023. Add that to the federal COVID money that hasn’t been spent yet, and you’re talking about some serious money.

That’s quite a haul in a small state like South Dakota, where a million dollars is still considered big money. This windfall has put the Legislature in an odd position. Usually during a legislative session, lawmakers have a few million dollars to throw around as most of the budget is spoken for by funding education, nursing homes, Medicaid and state employee salaries.

Other South Dakota governors would have loved to have faced the problem of what to do with surplus tax revenue. The first time Gov. Bill Janklow left office, he had to be jealous of the funding cushion enjoyed by Gov. George Mickelson as he raked in cash from the newly instituted video lottery. Gov. Dennis Daugaard, who famously had to cut state funding during tough times, must be wondering, as many other South Dakotans are, about the sustainability of large tax cuts.

For the most part, the state’s budget will be decided by the Republican super majorities in the House and Senate. This surplus of money creates a real problem for Republicans. They’re salivating over the prospect of using the surplus as a reason to cut taxes. They’re also conservative enough to realize that if the tax cuts aren’t sustainable, in the future they could be faced with the ugly prospect of raising taxes. It’s not exactly Sophie’s Choice, but it is a dilemma.

Just as they face a surplus of funding, Republicans have a surplus of tax cut plans from which to choose. The most famous of those may be Noem’s proposal to cut the state sales tax on food. Estimates value this as a $120 million tax cut.

After years of repeating the usual talking points opposing a sales tax cut on food — it will lead to an income tax, revenue increases may not be sustainable — Noem was suddenly, during her re-election campaign, a believer.

Cutting the tax on food isn’t the only sales tax reduction being considered. Rep. Chris Karr, a Republican from Sioux Falls, is the prime sponsor of a bill that would lower the state sales tax from 4.5% to 4%. This is estimated to be a $170 million tax cut.

Also under consideration is a property tax reduction bill sponsored by Rep. Trish Ladner, a Hot Springs Republican. This would exempt the first $100,000 of valuation on owner-occupied dwellings. This clocks in as an estimated $70 million to $80 million tax cut, saving homeowners approximately $350 per year. Since property taxes are largely meant for school funding, the state would supply the money to backfill those budgets so that school districts don’t lose any money.

Of those tax cut plans, the property tax cut seems the diciest as it depends on the state to provide the funding every year. State funding for education is usually a sticking point in the budget, anyway. It’s hard to imagine it would bring much relief to school officials if they needed to rely on the state to provide an extra $80 million every year.

If lawmakers can be convinced that revenues are going to continue to be there to sustain a tax cut, one of the current tax cut plans is likely to be approved at the end of the legislative session. As pleasant as this may be to contemplate, any tax cut is short-sighted.

There is plenty that legislators can do with this windfall — get full funding for nursing homes and Medicaid, give a bigger raise to state employees and give a much needed boost to teacher salaries. Instead of giving in to their first instinct to cut taxes, Republican lawmakers and the governor should allow these surplus tax dollars to fulfill their best destiny by spending them on the needs of South Dakota.