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In advancing grocery tax proposal, SD Gov. Noem skirts other tax relief options favored by some lawmakers

Most lawmakers agree with Gov. Kristi Noem on her contention that record — and growing — surpluses allow the state to give dollars back to taxpayers. Exactly how to do that is up for debate.

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The state capitol building in Pierre.
Jason Harward / Forum News Service
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PIERRE, S.D. — As she promised on the campaign trail, Gov. Kristi Noem put into writing her promise to repeal the state’s grocery tax, a $102.4 million reduction in revenue for the 2024 fiscal year that would bring South Dakota in line with most other states that don’t tax groceries at the full sales tax rate.

Rather than directly replacing that revenue, Noem and her team of economists say the continued growth of the economy — to the tune of some $300 million in projected revenue growth in 2024 compared to the baseline of 2023 expectations — will more than make up for the ongoing revenue hit.

“My team and I are fully confident that this is the right tax cut at the right time,” Noem said during her address.

And, although many lawmakers are in agreement with giving some of the state’s ballooning revenues back to their constituents, how exactly that should be done remains up for debate.

“I certainly think that it's time that we all sit down and look at how we're going to deal with these surpluses,” said Rep. Chris Karr, who will sit on the House Appropriations Committee this session. “Hopefully, we're in agreement to do that.”

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However, others aren’t so sure. The central question that will be asked by legislators in the coming session is how much of the revenue growth over the past two years has been powered by true growth of the state economy and how much has been artificially boosted by federal funds and inflation juicing sales tax receipts.

“Once a tax is eliminated, it's very hard to bring back,” Sen. Helene Duhamel said. “I just don’t know that that's the wisest thing right now. You almost feel like let's just hold off a little bit and watch a year or two and see if this holds up, or when they stop printing money at the federal level, maybe that growth stops.”

In a slide deck accompanying Noem’s address, the Bureau of Finance and Management lists “economic assumptions” including falling inflation, flatlined gross domestic product, slowing but still positive consumer spending growth and “near zero” pandemic relief payments by next year.

That’s one reason why, despite the over $300 million topline growth number presented in the budget address, Noem’s economists predict that sales tax receipts would grow by about 3% in 2024 compared to revised 2023 estimates if the grocery tax cut was not realized, and would shrink slightly if it were.

While still growing, that number would be considerably slower than the breakneck, double-digit rate that sales tax receipts have grown over the pandemic.

Still, for legislators keen on returning record revenues and reserves to their constituents, the debate in Pierre will likely center on three potential options: Noem’s grocery tax cut, a property tax cut or an overall sales tax cut.

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Gov. Kristi Noem delivers her budget address to a joint session of the legislature on Dec. 6, 2022.
Jason Harward / Forum News Service

Some lawmakers favor responding to rising home values, property taxes

One topic Noem did not hit on in her speech was a proposal that emerged from a summer study looking at how to relieve homeowners struggling to keep up with property taxes, especially elderly South Dakotans who own their homes but have found rising property taxes eating away at fixed incomes.

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“That’s been a prime issue that I continue to hear about from people, and so I’d like to know if people want the food tax or property tax relief,” Rep. Jess Olson, who will serve as vice chair on the House Taxation Committee, told Forum News Service after the governor finished speaking.

Several other legislators echoed Olson’s experience, saying constituents — especially those in the rapidly climbing housing market of the Black Hills — on the campaign trail were keener on seeing a property tax cut than Noem’s grocery slash.

The major proposal coming from the property tax summer study would forgive the school portion of the first $100,000 in property taxes for owner-occupied, single-family homes in the state. Rather than leaving local schools on the hook, the state’s general fund would fill in the gap left by those dollars.

Sen. Brent Hoffman, who will serve as vice chair on the Senate Taxation Committee, said one issue he has with this proposal is its complexity.

“It’s taking a complicated process and making it even more complicated,” Hoffman said. “That’s violating one of the first principles of taxation as a simplistic process that's transparent and understandable to voters.”

According to a presentation by the Department of Revenue to the property tax study, South Dakota’s property tax rate outpaces several other states in the region; only 14 states in the nation pay a higher property tax rate.

However, the DOR did point out that rising housing costs do not automatically mean higher property taxes, as the effective tax rate could go down if county, city and education costs stay flat or increase at a slower clip than property values.

Outgoing Rep. Mary Duval, who served as the vice chair of the summer study, estimated savings per household from this relief at around $315.

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“If that were to happen [as written], we're talking probably around $100 million,” Rep. Lance Koth, who sat on the property tax summer study and will serve on the House Appropriations Committee this coming session, said. So clearly, we probably can't do both food tax relief and real estate property tax relief. So that could surface as an issue as we work through that and also honor and look at the governor's proposal.”

While Noem did not directly mention the property tax proposal, both her line on the grocery tax being the “right tax at the right time” and her point that “every South Dakotan is paying more for food” appear to make an argument against property tax relief; after all, the South Dakotans who rent would be left out.

“She drove that home really well yesterday, I think,” said Sen. Jon Wiik, who made clear he was keeping an “open mind” on the two tax proposals.

Will the Partridge Amendment debate resurface?

Another way to return tax dollars to South Dakotans would come in the form of rolling back the overall state sales tax rate, which in 2016 increased from 4% to 4.5% mainly to fund an increase in education spending.

Needing a few more votes to pass the increase, lawmakers added an amendment to the hike known as the “Partridge Amendment” after Jeff Partridge, a former appropriator who now serves on the Board of Regents.

“That helped pass that 0.5% increase,” said Sen. Jack Kolbeck, who was not in the legislature at that time but has revisited the tax several times as a member of the Appropriations Committee. “Because there were legislators that probably moved in favor of it, and probably were opposed to it until that was attached.”

The amendment laid out a mechanism for getting the sales tax back to 4% if the state was able to collect taxes from remote sellers, reading the sales tax rate “shall be reduced by one-tenth percent on July 1 following the calendar year for which each additional twenty million dollar increment of net revenue is collected and remitted by such remote sellers.”

Despite now being able to collect sales taxes from online transactions following a 2018 Supreme Court decision, the rate has not dropped from its 4.5% level. That’s because many of the largest remote sellers in the state are not counted as revenue under the amendment, since they have some form of physical location in the state.

“This is why people hate lawyers and politicians. The bill was written poorly on purpose, and they never wanted to roll back this tax,” said Karr, a House appropriator who has introduced bills in previous sessions to clear up this loophole. “So Walmart, Amazon, all these places sell online, and we're collecting that sales tax, but they have a shipping center or a return center, so all of a sudden they don't count [as remote sellers.] Well, that's ridiculous, because we obviously are collecting more sales tax overall.”

Karr, who also would support repealing the grocery tax, says rolling back the overall rate has the added benefit of lowering the burden on anything South Dakotans buy. Taking the projected 2024 sales and use tax collection of just over $1.4 billion, lowering the tax rate entirely back to its 2016 level would cost the state $160 million in revenue, significantly more than the grocery tax projection.

However, lowering it to 4.2% rather than all the way would carry a price tag nearly equivalent to the grocery tax cut.

For Sen. Jim Stalzer, who will chair the Senate Taxation Committee, an overall sales tax cut in practice would help South Dakota’s poorest citizens more than a grocery tax cut since those using an EBT card to buy groceries are already exempt from state and local taxes on their purchase.

Either way, Stalzer believes the legislative will is there for a return of some tax dollars.

“The only thing I'm sure of is we will do something,” Stalzer said. “And the money is there to cover it up without having to raise some other tax.”

MORE BY JASON HARWARD

Jason Harward is a Report for America corps reporter who writes about state politics in South Dakota. Contact him at 605-301-0496 or jharward@forumcomm.com.

Jason Harward covers South Dakota news for Forum News Service. Email him at jharward@forumcomm.com.
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