SIOUX FALLS, S.D. (KELO) — South Dakota will continue to make money through sales and use tax in the fiscal year 2024, two analysts told the Legislature’s Joint Committee on Appropriations on Feb. 14.
“This is a big day for us,” committee co-chair Republican Sen. Jean Hunhoff said of hearing about revenue projections.
The committee’s subcommittee is scheduled to meet later today to discuss revenue. The subcommittee will present recommendations at a joint committee on appropriations meeting on Wednesday.
While sales and use tax revenue will still be healthy, the Bureau of Finance Management projects a 4.1% decrease in fiscal year 2024. The 4.1% decrease is based on the removal of the state sales tax on food such as items bought in a grocery store.
The FY24 revenue projection is $1,414,685,166 compared to the estimated FY23 amount of $1,475,195,102. Although FY24 is lower than the prior year, it’s higher than the $1,356,844,793 in FY22.
Derek Johnson of the BFM said FY23 is expected to finish at 8.7% growth
The Legislative Research Council’s (LRC) forecast differs. Jeff Mehlhaff of the LRC said the agency is projecting a 7% increase in sales and use tax revenue for FY24.
The LRC estimates sales and use tax revenue at $1,598,407,725 for FY24.
Mehlhaff said the LRC did not remove the sales tax on food from its estimate. Mehlhaff said the LRC deals with law as it currently exists.
Both Mehlhaff and Johnson said wage increases and inflation are two driving factors behind the sales and use tax revenue.
“Wages and inflation will continue to drive increases in revenue,” Mehlaff said.
Inflation and tight labor market has helped increase wages. Inflation also increases revenue because if people still pay for a similar basket of goods, they will spend more and more tax is applied.
Yet, Johnson said, sales tax collection has hovered above personal income in South Dakota. “Sales tax collection can’t continue to be above personal income,” Johnson said.
Johnson said the BFM expects consumer spending to soften in FY24. Also, many economists predict a mild recession with a short time to recovery, BFM Commissioner Jim Terwilliger said.
Although South Dakota tends to get hit by a recession later than the U.S. and recovers quicker, a mild recession will still likely soften spending, Johnson said.
Both Johnson and Mehlhaff said federal COVID stimulus money positively impacted sales and use tax revenue in the state.
Consumers did spend stimulus money, they said.
Mehlaff said the impact of federal stimulus money will continue as it will fund construction and infrastructure projects over the next several years. The impact will be felt in the contractor’s excise tax.
The contractor’s excise tax is a “2% contractor’s excise tax is imposed on the gross receipts of all prime and subcontractors engaged in construction services or reality improvement projects”, according to the state.
The LRC projected a 7.8% increase in revenue from the contractor’s excise tax for FY24. The amount is $202,864,979.
The BFM projected a reduction of .2% for FY24. The amount would be $187,047,838 compared to an estimated $188,182,608 in FY23. The FY24 number is still about $30 million higher than in FY22 and $40 million higher than in FY2021.
Johnson said the contractor’s excise tax will be lower in part, because housing starts are slowing in the state. Workforce challenges and other factors will also play a role, he said.
Melhaff said the federal stimulus money will be used for projects. There will be an impact on the contractor’s excise tax but also in sales and use tax. Construction workers from outside the state will be working in the state, staying at motels and similar, Melhaff said.
