Sales Tax Rates

Standard

South Dakota first implemented a sales tax in 1935, at two percent. Four years later, the state instituted a two percent use tax. The sales and use tax increased to three percent in 1965, and to four percent in 1969.  The sales tax rate remained at four percent until 2016, except for two temporary increases to five percent – one in 1980 to buy railroad property, and one in 1987 to establish the REDI fund.  As one of eight states without an income tax, we rely on sales and use taxes as the primary source of revenue for ongoing state government expenses.

In 2016, legislators voted to raise the sales and use tax by half a penny to help improve teacher salaries and provide property tax relief. Part of that law included a provision that would trigger a lower tax rate if the additional tax collected from remote sellers (internet sales from out-of-state companies) reached $20 million more than the previous year.

That $20 million trigger has never been reached.  However, HB 1327 was introduced this year to reduce the general sales tax rate from 4.5 percent to 4.25 percent starting July 1, and then 4 percent next July.  The bill passed the House on a 39-31 vote but was subsequently deferred to the 41st Legislative Day by the Senate State Affairs committee.  All three District 24 legislators voted against the bill.

We all agree that the State has unanticipated revenues this year, thanks in part to the infusion of one-time federal dollars.  While general fund revenues are strong this year, there are storm clouds gathering on the proverbial horizon.  Looking ahead to FY2023, anticipated revenues for the State are up three-tenths of one percent.  Lowering the sales tax rate by half a percent would equate to an estimated $150 million ongoing cut to the general fund. The proponents of HB 1327 explained how we could afford the $75M ongoing this year but had no plan for the $75M next year.

I believe it is imprudent to equate our current sales tax growth – spurred by one-time federal money – as an ongoing certainty.  We are working this year to increase salaries for state employees, teachers, and community support providers.  I believe we need to take a fiscally conservative approach to making sure we can meet that goal and not have to come back in a year or two and cut those salaries.  Rather, when we have one-time money available, we need to make sure that it is used for one-time purposes.  Over the final two weeks of Session, we will discuss ways to develop a fiscally responsible budget.  Among suggestions for one-time uses are a one-year property tax break, putting additional money into other favored projects, or saving up for anticipated expenses relating to our prison system.

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