Lawmakers go big on spending increases, tax cuts in final sprint of session

PIERRE, S.D. — It may have been the accumulating snow threatening a lengthy stay in Pierre should lawmakers belabor a tax cut deal and final budget. Or the growing pressure of delivering on the promise that has dominated session.

But no matter the reason, Republican leadership in the South Dakota Legislature finally broke through on tax cut negotiations on Thursday, March 9, with the compromise cut passing both chambers in overwhelming margins that afternoon.

A 70-0 vote in the House garnered an extended cheer. In the Senate, the tax reduction moved forward 31-2.

“This has been a special situation where the House and Senate have worked together, maybe like never before,” Senate Majority Leader Casey Crabtree, of Madison, said. “That remained true even during the most difficult negotiations at the last hour.”

Thursday morning, the committee of six tasked with hammering out details on the overall sales tax reduction voted 5-1 in favor of lowering the sales tax to 4.2%.

In the spirit of compromise, lawmakers attached a sunset clause scheduled four years down the road, meaning the sales tax rate would increase back to the current rate of 4.5% in July 2027 without future action.

“In the house, it's no secret we prefer a permanent tax cut,” House Majority Leader Will Mortenson, of Pierre, said during the committee hearing. “But it takes two to tango. It takes two to cut taxes. So I'm proud of the process we've been through.”

Rep. Chris Karr, a major backer of an overall sales tax cut for years, said he would continue working to prove that the state could afford a permanent version, though he understood that at times the legislative process requires compromise.

Later that day, the final domino fell on the 98th legislative session.

With the revenue side cleared, Republican leadership announced their targets for inflationary increases to core government priorities: 5% increases to Medicaid providers and 7% increases to state employees and education.

Diana Miller, a public education lobbyist in the state, said she was "thrilled" with the result.

“We've been talking about this for a long time; we wouldn't be cutting taxes if it weren't prudent,” Mortenson said. “We came in and delivered a big tax cut, but that doesn't mean we're going to cut off our nose to spite our face.”

In addition to that baseline, those general increases will be buttressed in a few areas, including increasing state reimbursement rates to 100% for some Medicaid providers and further raising salaries in about 8,000 hard-to-fill and longer-tenured roles.

“I think it’s safe to say this is the best budget for Medicaid providers in the history of the state,” said Rep. Tony Venhuizen, the vice chair of the budget committee in the House.

Other bits and pieces in the proposed budget include another year of tuition freezes at state universities and technical colleges as well as increased funding in behavioral health and adult day services.

Taken together, the state is set to spend just under $200 million in state funds on these overall and targeted increases to the "Big Three," a budget term for education, state employees and health care providers.

The budget also sets aside about $12 million in state funds to begin saving for the increased costs related to Medicaid expansion as heightened federal contributions subside over the next few years.

These spending changes take effect in July.

Outside of going a bit higher on the inflationary increases and targeted provider raises, the budget largely mirrors the December budget proposal from Gov. Kristi Noem.

While the overview of the South Dakota Legislature's taxing and spending priorities appeared to enjoy broad support in each chamber, not everyone shares the view of the spending increases as responsible.

"I don't doubt we can afford 7% in the coming year, but that becomes our baseline going forward," said Sen. John Wiik, of Big Stone City, a member of the budget committee who said he would rather 6% increases. "That's the only danger of pushing everything right to the edge of what we can afford."

Assuming little difficulty getting the leadership-endorsed set of budget decisions through each chamber Thursday evening, the final step for the overall budget is Noem’s signature.

That often perfunctory task is potentially complicated by a statement from the governor last week expressing her disdain for the idea of a temporary tax cut.

“The more the sales tax rate is flexible and mobile, the easier it will be to raise your taxes in the future,” Noem said. “I will not allow it.”

But Mortenson and Crabtree during a news conference Thursday appeared confident that their caucuses would stand firm on these priorities, as they have for much of session.

Overriding a nearly unprecedented gubernatorial veto on the general budget would require a two-thirds majority in each chamber.

With the tax cuts passing the Senate 31-2 and the House 70-0 and the vote on the overall budget likely to pass Thursday evening in wide margins as well, overriding a veto could well sit within reach.

“We've been thinking and working on these tax cuts for a long time,” Mortenson said. “And one thing that you realize with a big broad tax cut like this is that you either want to make it a priority to cut taxes, or you want to make it a priority to cut taxes in exactly the way that you want to.”

Jason Harward is a Report for America corps reporter who writes about state politics in South Dakota. Contact him at 605-301-0496 or jharward@forumcomm.com.