South Dakota’s ‘tax holiday’ may be shorter than expected

Recently a news release from Gov. Kristi Noem heralded a “tax holiday” that started on July 1. On that date, the state sales tax dipped from 4.5% to 4.2%. If that doesn’t sound like a big savings, that’s because it’s not. At the new rate, spend $100 and you’ll save 30 cents on your sales tax bill.

That’s not a “holiday.” At best it’s the equivalent of a long lunch or that time you got to leave work an hour early on a Friday.

While she dubbed it a “tax holiday,” it’s apparent from her news release that Noem was not in a holiday mood. Cutting the state sales tax by three-tenths of a percentage point was not at all what the governor wanted. During her reelection campaign, Noem declared her support for eliminating the state’s 4.5% state sales tax on groceries. She was accused in some quarters of a political ploy by usurping an issue traditionally supported by the Democratic Party. However, during the legislative session she stuck to her belief that eliminating the sales tax on groceries was best for South Dakotans.

Republican majorities in the House and Senate didn’t see it that way. They defied the leader of their party by defeating the plan Noem supported and opted to drop the overall state sales tax to 4.2%. According to that legislation, the tax holiday that started on July 1 will sunset on June 30, 2027. The sunset clause was included because lawmakers knew about an effort to cut the state sales tax on groceries via an initiative that could be on the ballot in 2024.

The 2024 ballot could have two measures on it designed to eliminate the state sales tax on groceries. Those who favor cutting the tax are covering all their bases by offering both an initiated measure and a constitutional amendment to voters. Anyone who followed the last legislative session may expect Noem to be helping with the ballot efforts to eliminate the state sales tax on groceries. However, according to a South Dakota News Watch story, instead of cheering for their passage, Noem will most likely be working for their defeat.

Because of the way the ballot measures are written, about $20 million that the state gets annually from a settlement with major cigarette manufacturers would be jeopardized, according to an attorney general’s opinion. The AG also says that the way the measures are worded, it could jeopardize the revenue the state receives from the streamlined sales tax agreement that allows South Dakota to collect sales taxes on internet purchases.

The “tax holiday” amounts to about $104 million annually in relief for taxpayers. Consequently, it’s $104 million in revenue that the state won’t have. Cutting the state sales tax on groceries would save consumers an estimated $124 million. That’s another large chunk of change that the state won’t have. While the state has been flush with cash lately, largely due to an influx of federal pandemic funds, there’s no way the state budget can sustain both tax cuts at the same time.

During her attempt to get the sales tax on groceries eliminated during the legislative session, Noem was quick to point out that polls showed the tax cut was popular with voters across demographic groups and with members of both political parties. That popularity with voters could bring some embarrassing moments for the governor and legislators.

With the state sales tax cut on the ballot — threatening the cigarette settlement funds and internet tax revenue — Noem may find herself in the awkward position of trying to explain to voters why the tax cut she promised them in her reelection campaign and fought for in the Legislature is no longer a good idea.

Should the state sales tax cut find favor with voters, lawmakers will be faced with the chore of moving up the sunset on the tax cut they recently approved and finding the money to replace the tobacco settlement funds. They’ll also have to ask themselves what, if anything, they gained by so publicly and resoundingly defying the governor’s wishes on tax reform.