Gov. Noem wants permanent sales tax cut as revenues down for first time in a decade

Governor Kristi Noem wants to make a temporary overall sales tax cut permanent.

Lawmakers passed the cut to fight inflation at the time. Backers said organic growth would cover the cost of the cut.

But there are competing ideas to reduce the tax burden in the state.

Last Tuesday, Gov. Noem proposed a lean budget for the first time in several years.

Recent budgets have been buoyed by billions in federal pandemic aid that have worked through the state economy.

Austin Goss

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South Dakota Broadcasters Association

That rosy financial picture led then-candidate Noem to propose removing the state sales tax on food. That ultimately led the Republican-controlled legislature to reduce the overall sales tax by .3 percent, or $105 million. But it’s only temporary and set to expire in 2027.

Speaking to the state legislature, Noem reiterated she wants it to stay.

“Last year during this speech, I asked you to make a permanent tax cut for the people of South Dakota – and I am reiterating that request today," Noem said. "Our people deserve better than a temporary sales tax holiday.”

Noem is paring that permanent cut with $72 million in reductions in government spending.

That includes nearly $17 millions in reductions to maintenance and repair of state facilities, repealing the collection allowance—a credit paid to businesses who remit taxes to the state online, which is estimated to save the state $7 million.

She also wants to cut the state portion of SDPB’s budget by $3.6 million, the Board of Regents budget by $2 million and $1 million from the state library budget.

Noem, who is President-elect Donald Trump’s pick to run the Department of Homeland Security, said low taxes will keep South Dakota the strongest economy in the nation.

At the time the cut was passed, backers said organic growth would be enough to show the state no longer needed the .3 percentage.

But already, less than a year and a half after the tax cut was passed, the state’s organic growth is down by 5.1 percent.

That’s according to the legislature’s own fiscal analyst Jeff Mehlhaff, who in November said core inflation is up by three percent.

“Consumers are really pulling back on spending. They’re still spending dollars because of inflation, but they’re really pulling back," Mehlhaff said. "They’re spending less.

That’s leading to an overall decline of percent in overall sales tax collections by 2 percent—which tallies out to about $29.1 million.

Chris Karr is the incoming leader of the state Senate. He’s spent years on the state’s budget setting committee and brought the sales tax cut. The Sioux Falls Republican says two factors have put pressure on the economy—which affect consumer spending and confidence.

“We just got to get through this period that, I hope, we’re on the tail end of with the higher interest rates and prolonged inflation," Karr said.

Sales tax collections are the primary revenue generator for state government. While online sales are strong, farm equipment sales are down.

“Sales taxes are one measure of how an economy is doing, but that’s just the consumer portion and that’s really related to retail sales," said Ernie Goss, an economist at Creighton University.

“When the global economy is slowing down and many of our trading partners are not doing economically well, then that comes back to this part of the country,” Goss said. “That’s what we’re seeing right now.”

Meanwhile, some state lawmakers are proposing increasing the state’s overall sales tax rate to five percent.

The Republican proposal would represent a .8 percent increase to the sales tax rate, which would get put toward property tax relief. Representative Tony Venhuizen announced the proposal on Thursday. He said the state has seen property taxes go up quickly in the last few years.

“Here in Sioux Falls, where I live, there’s people whose valuations have gone up by 20 or 25 percent just in the last year. This is a tax that people are very conscious of and very concerned about how quickly it’s going up," Venhuizen said. It’s not a problem you can fix with a million dollars or 10 million dollars. It takes hundreds of millions of dollars to have an impact.”

Venhuizen, who is one of Gov. Noem's former chiefs-of-staff, estimates his idea would generate $280 million to go toward property tax relief.

Some legislative leaders say they want to establish a legislative working group to weigh potential competed property tax proposals set to come in during the coming legislative session.

That session starts on January 14.