SIOUX FALLS, S.D. (KELO) – People and businesses who purchase goods and services in South Dakota will be getting a tax break. But how long it lasts might not be known until after the 2024 legislative session.
Gov. Kristi Noem announced Tuesday she signed House Bill 1137, which cuts the state sales tax rate from 4.5% to 4.2% for the next four years. Last week, the Republican governor said anyone who called the bill a tax cut was “lying.” In a news release Tuesday, Noem described it as a “tax holiday.”
House Republican leader Will Mortenson issued a statement afterward and thanked the governor for signing it.
“The bill wasn’t exactly what we wanted, it wasn’t exactly what she wanted, and it wasn’t exactly what the Senate wanted, but legislating is a team game,” Mortenson said, calling the tax cut “prudent and sustainable.”
Noem’s office has summarized the tax cut as saving 30 cents on every $100 spent, while House Republicans describe it as keeping South Dakota a broad sales-tax state with low rates.
“The people of South Dakota deserve relief from burdensome regulations and inflation inflicted by the federal government,” Noem wrote in a letter to the South Dakota Legislature that she released with her announcement. “While our state enjoys the strongest economy in the nation, the lowest unemployment, and unprecedented economic growth, we also recognize that these blessings are a result of embracing liberty and personal responsibility.”
Noem, who has been mentioned as a possible candidate in 2024 for the White House, again called in the letter for “permanent tax relief” and said the bill is “not ideal or the best way to help the people of South Dakota.” You can view Noem’s letter attached below.
Noem’s letter said lawmakers made it clear “they wish to raise taxes again in the near future, and the method through which they have written this legislation allows them to do so without ever having to take another vote.”
But Mortenson suggested the opposite might prove to be the case. “House Republicans fought for a permanent tax cut since day one. With continued strong revenue, I have no doubt we’ll continue pushing hard to remove the sunset when we reconvene next January,” he said.
HB-1137 passed the House 70-0, prompting the representatives to stand and applaud, and the Senate 31-2. Three lawmakers told KELOLAND News last week there’s been no second-guessing the changes to the sales tax rate and four-year expiration date. Noem instead wanted to eliminate the state 4.5% sales tax on groceries, but the House twice set her proposal aside.
HB-1137 calls for shaving the sales-tax rate to 4.2% through June 30, 2027. That would save taxpayers approximately $104 million in the next year, roughly the same amount as Noem’s proposal.
Republican Rep. Chris Karr had pushed for a tax cut for several years. He was prime sponsor of this year’s successful legislation. He originally wanted to slice the rate to 4% but compromised at 4.2%. His bill also permanently repeals a 2016 clause that called for the 4.5% rate to gradually go down as more tax revenue came in from remote sellers but was never used.
The bill’s lead Senate sponsor, Republican Ryan Maher, attached the four-year sunset, because of hesitancy in the Senate about state government’s longer-range revenues and spending needs.
The Republican-dominated House didn’t favor the Republican governor’s approach of repealing the sales tax on groceries, which she had announced during her re-election campaign last fall. Noem nonetheless rolled past her two challengers, then-House Democrat leader Jamie Smith and Libertarian Tracey Quint, taking 62% of the vote.
Her argument in favor of her proposal was that South Dakota voters would back a repeal of the grocery tax that Democrat Rick Weiland is circulating for signatures as a possible 2024 ballot measure and South Dakota couldn’t afford the cumulative effect of both.
South Dakota Municipal League lobbyists however said Noem’s attempt to repeal the state tax on groceries would have raised questions about why communities could still charge a local sales tax on groceries. Many smaller municipalities rely heavily on those revenues to pay for local services. The Senate approved the grocery-tax repeal but the House refused it a second time.
Republican Rep. Tony Venhuizen, one of the governor’s past chiefs of staff, said Tuesday on Twitter about Karr’s proposal, “Glad to see this tax relief become law. Let’s make it permanent next year!” His father-in-law, then-Gov. Dennis Daugaard, led the charge to raise the state sales tax to 4.5% in 2016 to provide more money for K-12 teachers and technical-college instructors and to provide property-tax relief.
University of South Dakota professor Ed Gerrish told KELOLAND News most economic data shows cutting the sales tax overall benefits taxpayers and businesses at a 50-50 split.
“Businesses in South Dakota, many of them are small businesses, so that’s also South Dakotans who are benefiting from the taxes,” Gerrish said. “I’m sure corporations will collect some of that money. But the question is: What do they do with that extra savings? Does it go back? Does it go to employee compensation? Does it go to investors or go to CEOs? We just don’t really know where that money will end up going.”
Gerrish said the benefits of a broad tax base with low rates is compliance with paying taxes.
“By making it a broad base, low-rate tax, it reduces any incentive to actually evade taxes,” Gerrish said. “People pay their taxes and then we end up getting high levels of collections.” In Fiscal Year 2022, South Dakota saw 12.2% growth in sales and use tax collection and in FY2023, sales and use tax was up 11.7% through February.
Noem has signed 171 bills and issued four vetoes in this legislative session.
Veto Day is set for Monday, March 27.
Reporter Bob Mercer contributed to this story.