PIERRE, S.D. — It’s the end of the line for a repeal of the state sales tax on grocery items, a core re-election promise of Gov. Kristi Noem.
Instead, the budget committee advanced a cut to the overall sales tax rate by an 8-1 vote on Tuesday, Feb. 21.
A property tax rebate returning $300 to each homeowner in the state also failed.
“These are the biggest votes that I've ever taken in my nine years in the legislature. And we don't take it light-hearted,” said Rep. Mike Derby, of Rapid City, the chair of the appropriations committee. “My position is to be a leader and take the caucus position and move that down the road.”
The morning meeting in the House Appropriations Committee on Feb. 21 was a climax of sorts for the 98th legislative session: for weeks, three competing tax cuts have circled each other, biding their time, waiting for revenue estimates and ultimately finding their way into a stuffy room on the third floor of the South Dakota State Capitol.
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And suddenly, with Noem looking on, the committee made their choice — banishing the grocery tax cut
“I can understand that you’re talking to your caucus,” Noem told the budget committee members. “But it’s the wrong decision.”
Despite holding separate, back-to-back hearings, it became clear early on in the meeting that the two sales tax cuts — one overall and one specifically on food — were competing for the opportunity to exit the committee.
For example, an amendment to House Bill 1137 , the overall sales tax cut, replaced the original proposal — a half-cent cut from 4.5% down to 4% — with a three-tenths cut down to 4.2%
The reduction to 4.2% was a strategic move. It brought the price tag attached to the reduction down from about $170 million to around $105 million, in line with the $102 million in estimated revenue loss from the sales tax cut on groceries.
“I think it's interesting that they adjusted their bill down to fit the exact same commitment in mine,” Noem told reporters in a press conference following the hearing. “That shows that we're making an argument that they can’t win.”
Further underscoring the competition between the overall cut advanced by Rep. Chris Karr, of Sioux Falls, and the grocery cut advanced by Noem, the governor’s office formed the major opposition during the hearing on the overall cut, which went first on the committee docket.
“I don't necessarily agree that this is the right tax cut proposal at this time. It’s less transparent and less measurable to the taxpayer,” Jim Terwilliger, the director of the Bureau of Finance and Management, said in opposition. “Will they even know or realize the savings?”
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In her testimony in favor of House Bill 1075, the full repeal of the sales tax on food items, Noem further criticized the overall sales tax cut as tilted in favor of out-of-state businesses and visitors.
She was one of several speakers to reference recent polling that showed the grocery tax as far and away the most popular option of the three among South Dakotans, apparently garnering 58% of support compared to 3% for the overall sales tax reduction.
However, details offered to the committee by the governor and others in her office indicated that the poll did not necessarily follow polling standards such as normal sampling and a neutral presentation of questions without any prompting.
Noem added that a potential 2024 ballot measure to repeal the grocery tax was still full steam ahead and, in her mind, would likely pass.
However, House Majority Leader Will Mortenson, of Pierre, was not entirely sure about that claim, pointing out that past attempts at repealing the grocery tax via ballot measure had failed convincingly.
Still, he credited the leadership of the governor for engaging lawmakers in these discussions.
“If the governor would have spent every last cent in her proposed budget, we wouldn't be talking about [tax cuts] because we'd have to cut education to do it,” Mortenson said. “But we're not going to do that. We're still going to be able to fund our core priorities and afford this tax cut. It's sustainable.”
If there was one point of agreement between those in favor of the two interchangeable sales tax cuts, it was that the growth of the South Dakota economy could sustain either one.
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“This growth, and this expected growth, is not all due to the federal dollars,” Karr said in favor of his tax cut. “There is anticipated, foreseeable growth going forward.”
But proponents of the overall sales tax cut noted that part of South Dakota’s strong and stable economy is the “broad-based” nature of the sales tax, a quality that carve-outs, especially on a necessity like food, would harm.
“One priority for the caucus overall was to have a broad tax base and low tax rates,” Mortenson told reporters after the hearing.
Backers of the change also noted that the cut to the sales tax would not have an outsized effect on education, which was the main benefactor of the 2016 increase from 4% to 4.5%.
Ultimately, all eight Republicans on the committee voted in favor of the overall sales tax cut. Rep. Ernie Otten, of Tea, in favor of the bill, explained his reasoning for supporting it as completing a “promise to the caucus.”
Rep. Linda Duba, a Democrat from Sioux Falls, was the lone vote against the sales tax, saying the state had more work to do in addressing its budget priorities.
Moving forward, the real challenge for the overall sales tax reduction lies in the Senate, which Mortenson said has been more “tepid” on charging ahead with a tax reduction.
Were the cut to move over that hurdle and onto the governor’s desk, Noem indicated support for the policy.
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“[Lawmakers] realize that I'm not leaving this session without cutting taxes,” Noem said. “And it's going to be significant.”
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.
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