PIERRE, S.D. (KELO) – The economic outlook for consumer spending in South Dakota will slow down but remain positive, the state’s Bureau of Finance and Management told state lawmakers during the first public meeting of the Joint Committee on Appropriations on Tuesday. 

Lawmakers on the 18-member committee received a broad overview of the state budget from BFM Commissioner Jim Terwilliger and the BFM staff. BFM is mandated by state law to recommend a balanced state budget to the governor. 

Among the economic assumptions Terwilliger and State Economist Derek Johnson discussed with lawmakers were national forecasts for a “mild recession through mid-2023.” Both Terwilliger and Johnson said South Dakota typically is less impacted by recessions and bounces back quicker from recessions than the national economy. 

Also part of the forecast, officials noted COVID-19 pandemic relief payments will shrink to near zero in 2023. Since the CARES Act in March 2020, South Dakota has been flooded with more than $2 billion in federal aid since the pandemic started. 

BFM economic assumptions slide.

BFM estimates food sales tax cut would cost state $102 million

The BFM has revised its ongoing revenue for Fiscal Year 2023, estimating more than $200 million in additional revenue for the state. BFM estimates $216 million in one-time revenue for FY2023 with $202.8 million from revised revenue growth, $8.4 million in one-time revenue growth and $4.8 million money left from last year’s budget. 

BFM is recommending a budget that would have $33 million more in ongoing revenue for Fiscal Year 2024. Adding the ongoing revenue from FY2023 and FY2024 along with reducing BFM’s $102.4 million estimate for the cost of cutting sales tax on groceries would still leave the state with $208.2 million in ongoing revenue.

You can see a breakdown of the BFM projects in the graph below. 

The BFM’s $102.4 million for the grocery tax cut is different from what the South Dakota Legislative Research Council estimates on a possible ballot question measure regarding the grocery sales tax. The LRC estimated a reduction in state sales tax of $119.1 million for Fiscal Year 2025, starting July 1, 2025. 

If the Legislature were to pass a grocery sales tax cut and Gov. Noem signed it into law, it would start July 1, 2023, which is part of BFM’s estimate. 

Terwilliger said the grocery sales tax cut would not impact municipal grocery sales tax revenue. He pointed out that South Dakota is one of three states that has a full sales tax on food. 

Rep. Mike Derby (R-Rapid City) asked for a definition of food. 

“It doesn’t contemplate candy or soda pop,” Terwilliger said and asked Derby to view future legislation on the topic for legal definitions. 

Terwilliger added the state’s tax would be removed on anything that could be consumed with any nutritional value. It would not include alcoholic beverages and prepared food.

Terwilliger said the South Dakota Department of Revenue had a lot of the data on how cutting the sales tax on groceries would play out. 

The BFM said its estimate is based on tax data on food for FY 2022 and the inflated cost of food for FY2024 based on projected Consumer Price Index prices. 

Medicaid expansion cost estimations

Sen. John Wiik (R-Big Stone City) called Medicaid expansion a nightmare and asked how the state will fund the program in years 2026, 2027 and 2028.

BFM estimated Medicaid expansion will impact 52,000 people, at least three state agencies and cost $66.4 million in FY24.  You can view BFM’s cost estimates in the slide below.

Slide from the BFM on Medicaid expansion.

BFM’s estimations differ from the LRC estimate for Medicaid expansion. The fiscal note from LRC for Constitutional Amendment D estimated 42,000 people would be impacted at a state-share cost of $32.5 million in the first year of implementation.  

Sen. Jean Hunhoff (R-Yankton), co-chair of the committee, said the Department of Social Services will provide more information on how Medicaid expansion will work in the state. 

Terwilliger said there are a lot of unanswered questions with how the program will work when it goes into effect July 1. He suggested a subcommittee to study and follow the costs as Medicaid expansion is implemented in South Dakota. 

COVID-19 stimulus update

Lawmakers heard a breakdown of all the COVID-19 stimulus funds that have come into the state.

Federal stimulus overview slide from the BFM.

Jeff Melhaff, chief fiscal analyst with LRC, told lawmakers $13.6 billion came into South Dakota during the COVID-19 pandemic through PPP, direct payments, CARES Act and other legislation.

He told lawmakers the LRC has a lengthy report detailing all the funds that have entered the state since the pandemic for lawmakers to review.

Lawmakers on the appropriations committee are planning to meet 9 a.m. to noon and return at 3 p.m. on Wednesday and discuss school and public lands, Public Utilities Commission, State Treasurer, BFM and Governor’s Office budget requests.