Reps. Mike Derby, R-Rapid City, left, and Chris Karr, R-Sioux Falls, shake hands after a $104 million tax cut passed the House unanimously on March 9, 2023, at the Capitol in Pierre. (Makenzie Huber, South Dakota Searchlight)
The scene was a District 7 legislative cracker barrel in Brookings, circa 2011 or thereabouts. The lawmakers on hand were two Republicans, Sen. Larry Tidemann and Rep. Scott Munsterman, and one Democrat, Rep. Spencer Hawley.
Near the end of the allotted time for the cracker barrel, Tidemann and Munsterman remained seated but they were taking a bit of a victory lap, responding to a question based on a recent news story that touted South Dakota’s low tax burden. Tidemann and Munsterman were happy to take some of the credit, implying that a string of Republican governors and GOP majorities in the state’s House and Senate were working hard to keep South Dakota’s tax burden low.
As his Republican colleagues came to the end of their victory lap, Hawley, the Democrat, turned to them and said, “Well, you get what you pay for.” The implication being that South Dakotans would be better off if they were tapped a little more heavily for tax dollars.
Here’s hoping Hawley left the cracker barrel and bought some lottery tickets, because it seemed that he could look into the future. In a few years, the low tax burden enjoyed by South Dakotans came around to bite them right in the wallet.
In 2015, under the leadership of Gov. Dennis Daugaard, the Republicans in the Legislature put aside their low tax burden inclinations and endorsed a package of gas tax, excise tax and license plate fee increases designed to raise as much as $88 million a year for improvements to public highways and bridges.
In 2016, the Legislature addressed another need that had been exacerbated by the state’s low tax burden — teacher pay. A half-cent increase in the state sales tax was approved, designating 63% of an estimated $107.4 million for teacher pay, 34% for property tax relief and 3% for increasing instructor pay at the state’s four public technical colleges.
Even with those tax increases, South Dakota’s low tax burden was in the news again recently. South Dakota Searchlight reported on a meeting of the Legislature’s Executive Board at which its members heard from the Legislative Research Council that South Dakota has the lowest tax burden when compared with neighboring states. The state’s per capita tax burden of $4,466 was lower than the tax burdens in Iowa, Minnesota, Montana, Nebraska, North Dakota and Wyoming.
Though its tax burden is lowest in the region, South Dakota leads its neighbors in per capita sales tax burden at $1,788. An LRC research analyst noted that 40% of South Dakota’s total tax revenue comes from money generated by the state’s sales tax.
This is troubling given that the governor and legislators want nothing more than to cut the state sales tax. With the state awash in federal pandemic funds and higher than expected tax revenues, the 2023 legislative session could have been dubbed the Battle of the Tax Cuts. Noem, who ran on a platform of protecting South Dakotans from tax increases, even went so far as to use a branding iron to stamp her veto on a bill that would have let communities raise the motel occupancy tax from $2 to $4.
Noem quickly lost the Battle of the Tax Cuts when a legislative committee easily dismissed her plan to cut the state sales tax on groceries. Instead, lawmakers endorsed an overall state sales tax cut, taking the tax rate from 4.5% to 4.2%. While the cut doesn’t make much of a dent in an everyday purchase, it will mean an annual loss to the state budget of $104 million.
Potentially lurking on the 2024 ballot is an initiative designed to follow through on Noem’s failed bill to cut the state sales tax on groceries. If approved by voters, all of whom eat, that would amount to another annual loss to the state budget of $124 million.
At some point, Noem and the Republicans in the Legislature will have to raise a tax or two as they deal with the cut in the state sales tax on food on top of the lowering of the tax rate to 4.2%. Despite their proclivity for tax cuts, it’s never going to get cheaper to fund a state government. Someone has to pay, especially as the state faces challenges in prison building projects, rural health care, long-term care for senior citizens and discovering a path toward affordable child care. South Dakota’s ranking in teacher pay is once again in the cellar, and that will also need to be addressed.
Maybe our leaders can tiptoe through this financial minefield and keep the state’s tax burden the lowest in the region. Or maybe they’ll be haunted by the words of Spencer Hawley: “You get what you pay for.”
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