State revenue ‘overflowing’ this year, but some lawmakers are cautious about the future

PIERRE – South Dakota’s 2024 revenue is expected to increase by millions of dollars, but experts say that increase won’t last forever, and some legislators are growing cautious about how to spend the state’s excess money in the coming year.

At the Joint Committee on Appropriations meeting Tuesday morning at the Capitol, the Legislative Research Council projected $2.4 billion in ongoing revenue for fiscal year 2024 – an increase of $122.35 million from the current year’s anticipated revenue.

The Bureau of Finance and Management projected a slightly lower revenue estimate of $2.2 billion for ongoing revenue, which factors in Gov. Kristi Noem’s proposed elimination of the sales tax on food. Revenue would increase to $2.3 billion without the tax cut.

The legislators on the committee use the revenue projections to set the fiscal year 2024 budget. The fate of several tax cut bills is dependent on the numbers in that budget, including three major tax cut proposals: a food sales tax repeal, a property tax reduction, and an overall sales and use tax reduction.

Later in the evening, the Revenue Projection Subcommittee accepted an ongoing revenue estimate of $2.3 billion for the remainder of the current fiscal year and a revenue projection of $2.39 billion for fiscal year 2024, which are combinations of the revenue estimates the two state offices presented to legislators earlier in the day.

The revised fiscal year 2023 revenue and the fiscal year 2024 revenue will be presented and officially adopted at Wednesday’s Joint Committee on Appropriations meeting.

The revenue estimates factor in federal stimulus dollars entering the state’s economy, increased wages due to a tight labor market, and inflation.

Over the last three years, the Legislature’s adopted budget underestimated revenues by an average of about $245.5 million each year compared to the actual revenue collected. LRC Chief Fiscal Analyst Jeff Mehlhaff said that was because legislators didn’t factor in federal stimulus money, inflation or wage increases in the state during that time.

Now, the financial experts are “more aggressive” in their projections than in years past, said Derek Johnson, state economist with the governor’s Bureau of Finance and Management.

Much of the over $1 billion in federal American Rescue Plan funds the state received during the pandemic will start circulating in the economy over the next few months, Mehlhaff projects. That will lead to an increase in sales and use tax and contractor’s excise tax due to the increase in development across the state. And Mehlhaff doesn’t expect a potentially mild national recession predicted by some economists to impact the state’s revenue.

“Even if consumers spend less, inflationary increase will come in,” Mehlhaff said. “We will see increased revenues even if consumers pull back on spending.”

Inflation is expected to average 4% during the current 2023 fiscal year, but decline to 2.3% in fiscal year 2024. While sales tax collections are still higher than typical, personal income has begun to dip. Johnson expects sales tax collections to drop soon after.

“This can’t continue. The sales tax collections can’t continue to be above personal income,” Johnson said. “Regardless of where inflation is, people can only spend the money that they have.”

In his revenue projection last year, Mehlhaff said he was concerned about sales and use tax receipts in 2024 and 2025.

That means that while the “glass is overflowing” this year, as Mehlhaff put it, some legislators are calling for caution in case inflation lowers and federal stimulus money runs out in the next few years.

“At some point, we’ll get back to normal,” said Rep. Lance Koth, R-Mitchell. “I would rather have us end the year with a couple hundred million because we underestimated rather than try to get that to zero, be short and have to do some serious cutting.”

Sen. Jean Hunhoff, R-Yankton, chair of Joint Appropriations and a member of the Revenue Projection Subcommittee, fought for a more conservative revenue projection. In part, she said she’s cautious about the money that will be available after the federal stimulus runs out.

She referenced the budget cuts of the late 2000s as an example.

“I lived through a 10% budget cut and I don’t want anybody to have to do that again, because that was not an experience you want to have,” Hunhoff said.