SIOUX FALLS, S.D. (KELO) — South Dakota lawmakers have agreed to the largest tax cut in state history if House Bill 1137 is signed into law by Gov. Kristi Noem.
The bill would cut South Dakota’s state 4.5% sales-tax rate to 4.2% until June 30, 2027. Noem’s office has summarized the tax cut as saving 30 cents on every $100 spent and House Republicans describe it as keeping South Dakota a broad sales tax state with low rates.
How much will the average South Dakotan notice this tax cut?
“At the end of the day, I think we just won’t really notice it. Every day, we’ll have a little bit more, a little bit more,” University of South Dakota professor Ed Gerrish told KELOLAND News. “Where the actual (tax) relief goes is a really good question.”
Gerrish, who grew up in South Dakota and earned a doctorate degree in Public Affairs at Indiana University, teaches public budgeting and finance at USD. He was speaking in his personal capacity and not representing views of the university.
Gerrish said 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 nobody totals up at the end of the year what their individual sales tax spending was. He also noted local governments, counties, cities and municipalities add sales tax rates on top of the state rate.
“We know how much we’re paying income tax, we report that to the government every year,” Gerrish said. “I doubt anybody’s ever actually gone back and added up a (sales) tax bill. I had a friend who did it once and it was a miserable experience that he had.”
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%. The tax cut would give back more than $100 million in tax revenue.
Republican Rep. Will Mortenson said the tax cut discussion was a long process that included plenty of public input. He added lawmakers set revenue projections for FY2024 with growth of 3.8%.
“I’m proud that we remembered the taxpayer in addition to taking care of other priorities,” Mortenson said in a news conference Thursday. “I don’t think the Senate would tell you they’re cutting taxes exactly how they want to. I don’t think the House is cutting taxes exactly how we want to but that’s the process.”
South Dakota is already a low-tax state and remains one of eight states without a state income tax. Gerrish said the state has a competitive and transparent tax code.
“Our sales tax is so broad, so equally applied, transparent and easy to collect and to remit,” Gerrish said. “We tax a lot of things in South Dakota that a lot of states don’t, including something like haircuts, which is unusual for our state. Everyone is paying the same tax, everything you buy is that amount of money.”
When asked what lawmakers would do if Noem vetoed the tax cut bill or the proposed budget with the overall sales tax cut in place, Mortenson said there’s plenty of appetite to cut taxes in the House.
Predicting impact, economic volatility
Republican Sen. Casey Crabtree said lawmakers worked together throughout the session to provide tax relief. Crabtree called the “sunset clause” an insurance plan.
“If things don’t go as we hope, we can revisit this at that time,” Crabtree said.
Gerrish said it’s hard to know if the revenue surpluses have been structural changes that will happen every year or if the high revenues are temporary.
Republican Sen. Michael Diedrich called the four-year expiration date on the tax cut “fiscal responsibility.”
“Having that sunset (clause) on there allows us to get through this current bubble of federal funds that are an abbreviation for all states, not just South Dakota,” Diedrich said. “That gives us adequate time to understand that.”
Gerrish said there will be some sort of increase in economic activity because of a tax cut.
“But again, because the tax rate was already so low, people aren’t really making a lot of decisions because of those tax rates,” Gerrish said. “The rate cut from 4.5% to 4.2% I think is far easier to predict than what the actual effect would have been on the grocery taxes. The sales tax is very transparent. You know exactly how much you’re spending on your sales tax every time you get your receipt.”
Gerrish noted people dislike income taxes and property taxes more because they are more visible taxes.
“It would be really curious to know if people actually knew how much they had spent on sales tax in the year whether they would change whether they liked or disliked the sales tax,” Gerrish said. “Sales tax is transparent, but it’s not salient. There’s something very different about how that tax operates because people don’t see the end of the year bill on the sales tax.”