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Sales tax breaks: Consumers pay, big businesses get exemptions

You pay it when you buy a pair of jeans, a couch or a loaf of bread. Many shoppers don't even notice the small tax assessed at the bottom of the sales receipt.

Money

You pay it when you buy a pair of jeans, a couch or a loaf of bread. Many shoppers don't even notice the small tax assessed at the bottom of the sales receipt.

But Margaret Straley does. And last month, the Sioux Falls woman's explanation to lawmakers how the state sales tax affects her budget helped launch them into a heated multi-billion-dollar debate over how South Dakota collects taxes and about who pays and who does not.

The debate brought to light how more than $1 billion in annual sales tax breaks, or exemptions, overwhelmingly benefit the state's largest industries such as agriculture, medical care, insurance and advertising. Lawmakers held a robust debate over those exemptions as they examined new options for state revenue.

Changing shopping habits and other factors have caused sales tax collections to stagnate in recent years and that trend could be costly for a state that in comparison to others has an outsized reliance on sales taxes to fund government.

Under the current system, for every dollar that South Dakota residents and visitors pay in sales taxes on groceries, household goods, home heating oil, hardware supplies, restaurant meals and consumer services, roughly a dollar of potential sales tax revenue goes unpaid by businesses big and small.

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Straley, a 63-year-old office assistant, used a jar of peanut butter in a real-world example to illustrate the penalizing nature of the state and municipal sales taxes collected on food purchases, a highly regressive form of taxation implemented by South Dakota and only two other states.

Straley testified to a Senate committee that eliminating the 6.5 percent sales tax on a $25 food purchase would save her enough to buy another jar of generic peanut butter, "which is a meal for me with a piece of bread," Straley said, her voice breaking.

The tax discussion unfolded against the backdrop of a U.S. Supreme Court case to be argued in April. South Dakota's attempt to collect sales tax on online purchases is being challenged. If the justices uphold the state's law, as much as $50 million could be added to sales tax collections annually.

Democrats who pushed the food tax exemption hoped to offset the resulting revenue loss with the money from new taxes on internet sales if the state wins the case.

In two committees, lawmakers shot down the attempts to end the food tax or phase it out as new internet revenues arrive. But the bills revived a long-standing debate over the reliance of South Dakota on the sales and excise taxes, which generate $1.4 billion a year and form nearly three-quarters of the state's annual general fund revenues.

A regressive tax

Sales taxes are considered "regressive" because all consumers - rich or poor - pay the same tax rate on purchases. For example, the sales taxes in Sioux Falls or Rapid City would add $6.50 to a $100 purchase of groceries or other goods, creating an unfair burden on someone who makes $20,000 a year compared with someone who makes $100,000 a year. In that system of taxation, the poorest 20 percent of Americans pay almost 11 percent of their income in taxes, compared with the wealthiest one percent of taxpayers who pay only 5.4 percent of their income in taxes, according to the non-partisan Institute of Tax and Economic Policy.

South Dakota is the fourth most-regressive tax state in the nation, according to ITEP. In a recent study, the group reported that the poorest 20 percent of South Dakotans pay 11.3 percent of their income in taxes each year, while the wealthiest one percent of South Dakotans pay only 1.8 percent of their income in taxes.

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Straley told the Senate Taxation Committee that she would directly benefit from a bill to exempt food from the 4.5 percent state sales tax and 2 percent sales tax collected by the city of Sioux Falls. An unexpected furnace repair this winter cut into her budget for food and forced her to limit what she ate and to eat dinners at The Banquet in Sioux Falls twice a week. She said the sales tax is a noticeable burden on her ability to buy necessities.

Supporters of the food tax say it is among the most stable of revenue sources because people will always need to eat. The food sales tax is also viewed as a way to broaden the state tax base and insulate South Dakota from larger economic forces such as the Great Recession of 2008.

The regressive nature of the state taxation system led to an impassioned plea for reform by state Rep. Elizabeth May, R-Kyle, who represents the Pine Ridge Indian Reservation and Oglala Lakota County, one of the poorest counties in the nation. May proposed a bill to close some major exemptions, which she called "carve-outs," in order to replace revenues lost by exempting food sales.

"If we are not even responsible enough to look at the people that are receiving the sales tax exemptions, before we consider raising the taxes on the citizens of South Dakota, we have to ask ourselves, 'Are we doing our jobs?' " May said.

That conversation highlighted the many exemptions that left more than $1.1 billion of potential sales taxes uncollected in fiscal 2015.

Sales tax rates for area states

Montana, no state sales tax

Wyoming, 4 percent

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South Dakota, 4.5 percent (cities can add up to 2 percent more)

North Dakota, 5 percent

Nebraska, 5.5 percent

Iowa, 6 percent

Minnesota, 6.88 percent

Notes: In this group, only South Dakota fully taxes food; South Dakota and Wyoming do not impose an income tax.

Source: State of South Dakota

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