Proposed South Dakota grocery tax repeal passes first procedural hurdle, nursing some concerns
While a tax committee passed the cut to the food tax on the basis of its independent policy merits, the real discussion will come as appropriators consider it in the context of the entire budget.
PIERRE, S.D. — A cut to the state sales tax on food, the central promise of Gov. Kristi Noem’s campaign for a second term as South Dakota’s chief executive, has passed its first hurdle in the legislative process, emerging from the House Taxation committee by a 12-1 vote on Thursday, Jan. 26.
Rather than moving straight to the floor, the proposed cut contained in House Bill 1075 and its projected $102.4 million price tag in year one will head to the House Appropriations committee. It will likely sit and wait until final revenue projections for the coming fiscal year are cemented in the middle of February, when it will be weighed alongside other tax proposals, spending priorities and the general financial health of the state.
Bureau of Finance and Management Director Jim Terwilliger, Noem's top economist, assured legislators the state can afford the cut.
Much of the testimony in favor of the grocery tax cut centered on the policy merit of the cut in a vacuum as well as its potential advantages over two competing tax proposals: a cut to the property tax on owner-occupied, single-family dwellings, and an overall dip in the state sales tax, potentially moving from 4.5% down toward 4%.
One the side of property tax, several proponents pointed to the more even distribution of cutting the sales tax on food as one upside.
“We have an opportunity today to help the people of South Dakota,” said Rep. Mary Fitzgerald, a Republican from Spearfish and prime sponsor of the bill in the House. “We don't have to pick and choose who we're going to help, we can help everyone and that's pretty special.”
Backfilling the school dollars lost to the property tax cut would cost in the realm of $80 million per year, according to prime sponsor Rep. Trish Ladner, a Republican from Hot Springs.
The overall sales tax cut would cost approximately $35 million in ongoing revenue for each percentage-point drop, with a full reduction back to the 2016 level of 4% costing $170 million.
The implicit comparison between the cut to the overall sales tax was not made as often, although Rep. Liz May, a Republican from Kyle who sits on the committee, argued that shoppers at the grocery store would be able to feel the full reduction more than if that reduction was spread out over all goods.
One concern of opponents, which will almost certainly be discussed as appropriators piece together a stable budget for the state, was brought up by Nathan Sanderson, the executive director of the South Dakota Retailers Association. He argued that huge pandemic-era growth in sales tax receipts did not necessarily equate with sustainable growth.
“Proponents have said that other states don't tax food right now, that we have strong revenues, and we've paid for this with economic growth, so we can do this,” Sanderson said. “Our perspective is that two years of unexpectedly high economic revenues doesn't make this proposal sustainable for the long term.”
Another concern, which it appeared the proponents of the bill had not spent significant time thinking about or discussing, was the effect of cutting the sales tax on tribal revenues.
Currently, five tribes have tax collection agreements with the state that “ensure that all retail transactions or construction services on property included in a tax collection agreement are subject to the same taxes, tax rates, and exemptions.”
A cut to the sales tax rate on food would thus require these tribes to lower their own rate.
And though Terwilliger pointed out that this drop would come with a requisite easing of food costs for those on the reservation, tribal representatives indicated that losing this source of revenue would be an overall harm.
“This bill will negatively affect our tribal economy and deeply impact our ability to provide social services to our people,” Alli Moran, the intergovernmental affairs liaison with the Cheyenne River Sioux Tribe, said during testimony.
In making the successful motion to move the governor’s proposal forward, Republican Rep. Tony Randolph, of Rapid City, made a final case for his support of the bill.
“Listening to everything I've heard today, opponent, proponent and questions, I still haven't heard anything that tells me this is a bad idea,” Randolph said. “And as matter of fact, I've been some reiteration as to why this is a good idea to get relief for the citizens of South Dakota across the board.”
Jason Harward is a Report for America corps reporter who writes about state politics in South Dakota. Contact him at 605-301-0496 or firstname.lastname@example.org.