MERCER: Might a tax holiday cure slow economy?

• Bob Mercer

Bob Mercer

Talk about it

PIERRE — As taxpayer relief and job incentives go, the best idea of the 2013 legislative session never stood a chance.

That was the proposal from Sen. Tim Begalka to phase out South Dakota’s 2 percent contractor’s excise tax.

Coming from Begalka, R-Clear Lake, probably was one reason it was sent to the Senate Appropriations Committee and dismissed.

He isn’t one of the powerful and influential at the Capitol.

Or so some people think.

He was powerful enough back home in his legislative district, however, to dispatch a Republican primary challenge last June from the then-speaker of the House, Val Rausch of Big Stone City.

And he was powerful enough to turn aside a second strong challenge in November, defeating one of the Democratic Party’s best legislators in Rep. Steve Street of Revillo.

His district covers the northeast counties of Grant and Deuel and rural parts of Codington and Brookings counties. One of the biggest taxpayers in South Dakota is in his district: The Big Stone power plant.

The Legislature this year is cleaning up a major tax break that was extended to the Big Stone plant so that it doesn’t face property taxes for a long time on the hundreds of millions of dollars of environmental upgrades being required there.

Rep. Jim Peterson, D-Revillo, and Begalka are the main sponsors of that legislation.

Peterson was one of the co-sponsors of Begalka’s attempt to repeal the contractor’s excise tax.

The contractor’s excise tax in reality penalizes three groups of people.

It hits the misfortunate who must make repairs on their home or business or property.

It hits taxpayers in a roundabout way by charging more on government construction projects, whether it’s a local school funded through a long-term bond issue or highway work.

And it hits the innovators and risk-takers who want to open new businesses or expand existing ones.

Those innovators and risk-takers are the same people that state officials are working so hard to encourage in South Dakota.

For the past decade, governors and many legislators have been pre-occupied with tax refunds and tax rebates and grants for big projects.

Public exposure of the recipients of the millions of dollars in construction tax refunds led to the program’s repeal effective Dec. 31, 2012.

The replacement program from Gov. Dennis Daugaard would have allowed the state Board of Economic Development hand out $15 million or more annually to some business projects. South Dakota voters soundly rejected that plan in November.

What the Rounds-era tax refunds and the Daugaard large-project grants had in common was their focus on reducing or eliminating the impact of sales taxes and contractor’s excise taxes on business projects.

Rather than go through those gyrations, why not deal directly with the root?

The Begalka plan is expensive. The contractor’s excise tax brought in about $83 million during state government’s 2012 budget year. It is expected to grow slightly in 2013 and produce more in 2014 as the economy picks up pace.

State government would need to do further restructuring if $80 million-plus was suddenly and permanently eliminated from its revenue stream.

The $127 million of cuts made at the request of Daugaard in his first year as governor showed how difficult — but possible — a 10 percent cut can be.

Giving some business breaks on the contractor’s excise tax, while the average person still pays it, rubs raw. We saw the 57.6 percent rate of rejection by voters of the large-project grants plan.

Of 66 counties, it won in only South Dakota’s poorest, Shannon County.

The contractor’s excise tax resulted from a financial emergency in the late 1970s. The personal-property tax was repealed without a replacement for half of the lost revenue.

The Begalka plan, SB 91, called for eliminating one-half percent of the contractor’s excise tax each year, gradually reducing the tax rate over four years, until it was repealed altogether on July 1, 2016.

Meanwhile, South Dakota’s economy is soft. As of December, the total non-farm jobs still lagged behind the 2008 peak, and sales-tax revenue isn’t growing as fast as pre-recession.

Other states have sometimes declared tax holidays to briefly spur consumer spending. There is ample short-term extra cash in state government right now to declare a holiday on contractor’s excise tax and invite businesses to get in on the sale.

With Daugaard as governor, the right man is in place at the right time to manage the internal budget efficiencies during holiday.

A temporary repeal could be the economic jolt needed right now for new business and government projects, for home improvements, for much-needed new rental housing, for existing business expansion and renovations, for new homes.

There is a week left in the legislative session for a simple, clean plan for all to pass.

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