Committee rejects Noem-backed grocery tax cut bill, moves forward with general tax cut

Gov. Kristi Noem’s re-election campaign promise to eliminate the state sales tax on groceries died Tuesday morning in the House Committee on Appropriations, but the committee approved a bill to reduce state sales taxes across the board.

The projected $102 million grocery tax repeal was rejected by an 8-1 vote. The committee also rejected a $73 million tax cut on property taxes for South Dakota homeowners. 

Senate rejects Noem’s bill to vet ag-land purchases by foreigners

The only tax cut bill to make it through the committee was HB 1137, introduced by Rep. Chris Karr, R-Sioux Falls, which was amended to cut the overall state sales and use tax rate from 4.5% to 4.2%, resulting in a projected $104 million tax reduction. In its original form, the bill would have cut the state tax rate to 4%.

The appropriators’ move to support HB 1137 and abandon the other two tax cut bills is in line with the House Republican Caucus’ decision.

Rep. Mary Fitzgerald, R-Spearfish and prime sponsor of Noem’s bill, failed to gather enough support to revive the bill on the House floor Tuesday afternoon.

Noem herself attended the committee hearing at the Capitol in Pierre to speak in support of her bill and urge legislators to defy the caucus vote. 

“I understand you may have taken a caucus position. I’d tell you it’s wrong,” Noem said.

Noem presented a poll to legislators saying that 75% of South Dakotans support the grocery tax cut, and a majority support the grocery tax cut over the other two major tax cut bills when informed of the pros and cons of each.

The governor emphasized that her bill would primarily help South Dakota residents who buy groceries in the state year-round rather than tourists, who would share more of the benefit from an across-the board sales tax reduction. She added that her tax cut would do more to help all residents – including senior citizens, renters and the people “who make this state run” – than the other two tax cuts would do.

She also committed to “hold harmless” South Dakota’s tribal nations that have sales tax agreements with the state by renegotiating their contracts. The Bureau of Finance and Management told legislators earlier in the session that the tribal nations would lose $2 million if the state eliminated the state sales tax on food.

Noem cautioned legislators that a proposed ballot question for the 2024 general election that would eliminate the food sales tax will likely pass based on her polling, which could leave lawmakers scrambling for revenue if it comes on the heels of an across-the-board sales tax cut. A similar initiative failed at the ballot box in 2004, when over two-thirds of South Dakota voters opposed cutting the sales tax on food.

“If you pick a different tax cut to do this year, you’ll be back here in two years to figure out how to do another $102 million tax cut,” Noem said.

Rep. Karr’s bill, HB 1137, would cut a portion of 2016’s half-percent tax rate hike, which was implemented to support raising teacher salaries in the state. Despite that legislation, South Dakota currently ranks 50th in average teacher pay. Karr told legislators the tax cut would not negatively affect education.

“We are not going to take these dollars from anyone besides the taxpayers,” Karr said.

Karr said there was a plan in place when the half-percent tax was implemented to reduce the sales tax incrementally as the state saw more remote, online sales. But that has not happened since the increase was implemented.

Karr told legislators that he believes the general sales and use tax cut is the “most appropriate tax cut to implement.” He also provided legislators with a “sanity check” about whether the state could afford the tax cut, pointing to an average 4.3% growth in sales tax when outlier years, such as the COVID pandemic years, were removed from the equation.

“This growth and expected growth is not all due to the federal stimulus dollars,” Karr said. “There is anticipated, foreseeable growth going forward so we can take care of our obligations.”

Some state legislators are hesitant to make tax cuts, expecting consumer spending to drop eventually. Senate Majority Whip Helene Duhamel, R-Rapid City, told reporters during last week’s Republican leadership press conference 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.

Jim Terwilliger with the governor’s Bureau of Finance and Management told legislators that Karr’s tax cut is less transparent and “less measurable to the taxpayer” than Noem’s. Terwilliger said that on a $100 grocery bill, a consumer would only see a 30-cent savings from Karr’s bill.

“It doesn’t seem like it’s really moving the needle to help those that need it the most,” Terwilliger said.

Karr said he does not know how much money each South Dakota resident would save based on the bill.

The House is scheduled to debate the general sales and use tax cut bill on the floor Wednesday afternoon.