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Lawmakers mull tax cut amid historic revenues

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Joshua Haiar
From Left: Noem, Sly, Nesiba

Some South Dakota legislators want to live up to a promise they made six years ago; to roll back sales taxes if the state could tax online purchases. The state won that legal battle and now brings in tax revenue from online orders. 

But, there are Republican lawmakers who say the state should be cautious about the idea.

State lawmakers estimate South Dakota will collect $92 million more than Gov. Kristi Noem anticipated in December. That number makes some Republicans want to reduce the state sales tax by one-half of a percent.

“Our economy is doing well. We have an unprecedented amount of ongoing dollars that aren’t earmarked. We have some one-time dollars that aren’t earmarked," said Rep. Chris Karr, R- Sioux Falls.

He chairs the state’s appropriations committee which crafts the budget. Reducing sales tax by one-half of a percent would result in $150 million in savings.

“I think it’s a conversation that needs to be had. We’re still going to pursue how we can make good on a promise that was made to the people,” Karr said.

That promise is called the Partridge Amendment. Back in 2016, lawmakers said that if South Dakota won the legal right to tax online purchases, the sales tax rate would stair step its way down. The amendment called for one-tenth of a percentage point drop in the sales tax for every $20 million dollars collected online.

The state won that court case and now collects online sales taxes.

“We have something in statute that says we’re supposed to reduce this when X, Y and Z starts happening. We’ve collected millions and millions of dollars from online sales,” Karr said. “I think we’re fully capturing sales tax.”

However, not everyone agrees that now is the right time to reduce the sales tax, like Republican State Sen. Jean Hunhoff.

“The uncertainty when these dollars are gone in ’24, ’25, ’26 what’s going to happen? If you take a tax away you’re never going to get it back,” Hunhoff said. “I’ve heard some colleagues say these are the good times we can do it, but you’re never going to get the people to put it back on.”

Hunhoff, from Yankton, is co-chair of the appropriations committee. She’s concerned about making permanent budgeting decisions while state coffers are loaded with federal stimulus money from the pandemic.

Hunhoff is not the only state leader concerned about the economy going forward. Gov. Kristi Noem is also cautious about making changes to the sales tax. She worries inflation and increasing energy prices will have negative effects.

“We need to make sure that we understand that will impact revenue coming into the state as families tighten their belts in the coming years," Noem said. "We need to make sure that we’re budgeting appropriately.”

Noem says her office has examined the sales tax issue for months. She says the state has some big budget items ahead.

A recent prison study estimates the state Department of Corrections needs $600 million in new infrastructure. Polling indicates large support for Medicaid expansion in the state. That could cost the state $33 million annually. The federal government will match those dollars 9 to 1.

The governor says she’s not comfortable working from revenue projections. That frustrates one state Senator, who said the governor wants it both ways.

“On one hand she keeps touting how strong the economy is, keeping everything open, what fast growth we have. But when it comes to revenue estimates she suddenly changes the station," said state Sen. Reynold Nesiba, D- Sioux Falls.

Nesiba said the state is already seeing increased revenue from internet sales, and he says revenue will continue to increase because of inflation. He also says infrastructure spending over the next four years will create new jobs and revenue.

Senators rejected a bill from Nesiba to remove the sales tax on food. It’s a tax he’s worked to remove for nearly two decades. He said the food tax affects all South Dakotans

“This is a tax on the formula in baby bottles, right. This is a tax on the baby food in highchairs. Let alone the beef and bread and milk that all of us—that most of us in South Dakota consume,” Nesiba said.

The half-penny sales tax was added in 2016 to pay for increased teacher salaries, as well as property tax relief. The Partridge amendment helped get the 2/3 votes necessary to pass the increase.

The tax bumped up teacher pay which increased it from 50th in the nation for a couple of years. However legislators did not fully fund the dollars to sustain it and South Dakota teacher pay now ranks back at 50th.

Jacqueline Sly is a former Republican representative who chaired the Blue-Ribbon task force. She said lawmakers should be cautious before making a change to the sales tax.

“We don’t know what’s down the road long term,” Sly said. “ I think when we start making major changes like that—when I think of that half-percent sales tax increase, that was major. It had not happened for years and years and years. If we start going back and forth, I think that’s short sighted.”

Corrected: February 22, 2022 at 11:53 AM CST
This story has been updated to reflect a correction. The original story included incorrect information about South Dakota's most recent national ranking in teacher pay.