Some Republicans look to ‘take care of our house’ before cutting taxes

PIERRE — Gov. Kristi Noem announced in her budget address two months ago that 2023 was the “right time” to cut taxes and eliminate the sales tax on food in South Dakota.

Several legislators echoed that sentiment, flooding the agenda shortly after the 2023 legislative session began with more tax cut bills.

But some legislators have grown more cautious about tax cuts since the session began.

Some now believe this is the time to make smart choices with extra revenue and support ongoing programs instead of cutting the state’s largest source of income.

Senate Majority Whip Helene Duhamel, R-Rapid City, said there is “growing sentiment” among the chamber’s Republican caucus in favor of strategic investments before enacting a tax cut.

“There are people in the conservative position saying, ‘Let’s take care of our house, and if we’re still in that position in a few years, then we can take a look at that then,’” Duhamel said in Thursday’s Republican leadership press conference.

High sales tax collections ‘can’t continue’

Earlier this week, the Joint Committee on Appropriations adopted a revenue projection of $2.39 billion for fiscal year 2024. While that’s the highest revenue projection in state history and $189 million more than Noem’s projected fiscal year 2024 general fund revenue, the committee still considered it a conservative projection.

Legislators who pushed for an even more conservative revenue projection were wary of how long that revenue growth would continue. Federal stimulus money will run out eventually and inflation is expected to decline to 2.3% in fiscal year 2024, according to the Bureau of Finance and Management.

While sales tax collections are higher than typical right now, personal income has begun to dip. Derek Johnson, state economist with the governor’s Bureau of Finance and Management, 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 told the Joint Appropriations Committee on Tuesday. “Regardless of where inflation is, people can only spend the money that they have.”

About 60% of South Dakota’s revenue is derived from state sales and use tax receipts. South Dakota is one of nine states without an income tax.

“We’ve got a really low tax burden the way it is,” said Senate Majority Leader Casy Crabtree, R-Madison. “We’ll be very cautious and prudent going forward with this. Just like you would at a business and at home, you look two years, five years, 10 years down the road when budgeting.”

Millions needed in funding for Republican priorities

The growth in state sales tax over the last two years has put the Legislature in a “position to consider” tax cuts, said House Majority Leader Will Mortenson, R-Pierre.

But at the same time, the party has a laundry list of priorities that requires funding from the state, including freezing tuition for the state’s higher education institutions and increasing support for education, Medicaid care providers and state employees.

Duhamel hopes to use $100 million of federal stimulus funds for water projects across the state. Her bill to accomplish that was referred Thursday to the Joint Appropriations Committee.

“We may never have this opportunity again,” Duhamel said in testimony on the bill. “Especially if we remove the grocery tax and lose a hundred million ongoing, my fear is water will be in trouble.” 

Long term finances are a concern for the party as well. Crabtree said counties will require fiscal help to keep local governments from raising taxes themselves. The state will have to budget for potentially up to $73 million over the next three years to support Medicaid expansion passed by South Dakota voters last year.

“I think it’s fiscally prudent to start planning for that,” said Mortenson. “We don’t want to wait and start dealing with that in two years.”

Minority House and Senate leaders Oren Lesmeister, D-Parade, and Reynold Nesiba, D-Sioux Falls, echoed similar ambitions during the Democrat Party leadership press conference on Thursday. But they believe the state has enough funds to both cut taxes and further support its programs.

“Let’s fund the programs we have in place to 100% before we start cutting taxes,” said Lesmeister, D-Parade.

What tax cuts are still on the table?

The largest proposed tax cut on the table is a reduction in the state sales and use tax by half a percentage point – on everything, not just food – that would cut $168 million in taxes.

The bill, introduced by Rep. Chris Karr, R-Sioux Falls, would return the state tax rate to what it was before 2016 when a half-percentage increase was implemented to support raising teacher salaries in the state. Despite that legislation, South Dakota currently ranks 50th in average teacher pay.

Lawmakers heap competing tax cut bills on Appropriations Committee

The second largest tax cut is the Noem-endorsed bill, which would eliminate the state sales tax on food.

The bill’s cost was originally estimated at $102 million by the governor’s Bureau of Finance and Management. The Legislative Research Council has since changed the estimated tax savings to $120 million.

The third major tax cut bill would reduce property taxes for homeowners across the state. The proposal would cut taxes by over $73 million as introduced, by exempting a home’s first $100,000 of value from taxation. But Rep. Tony Venhuizen, R-Sioux Falls, introduced an amendment to the bill on Thursday that would simplify the tax cut formula by setting the tax cut at $300 per household.

“I think the idea was, ‘let’s just kind of cut to the chase,’” Venhuizen said. “And instead of having this complicated mechanism, let’s just say it’s a credit of $300. It’s much simpler.”

Venhuizen said the House Republican Caucus is determining what tax cuts it will support. While the property tax cut would cost less to the state and apply only to South Dakota residents, it would not help renters across the state.

“That’s clearly a disadvantage of that mechanism,” Venhuizen said.

All three tax cut bills will be heard in the House Appropriations Committee on Tuesday.

The day after that is Crossover Day in the Legislature, the deadline by which all bills must pass their house of origin.