PIERRE, S.D. — As the minutes tick away on the 98th legislative session in South Dakota, two major, intertwined decisions remain: how much to increase spending on core government obligations, and how much in extra revenue to return to taxpayers.
In two spurts throughout the morning and afternoon of March 8, six lawmakers — three representatives and three senators — spent all of ten minutes speaking in a conference committee meant to resolve differences between the different versions of the overall sales tax favored by each chamber.
Although a resolution did not materialize at the Wednesday meetings, the discussions did better set up the disagreements and where compromise might be found on House Bill 1137 as the day marches on, with another committee set for the evening.
The House-approved version of the sales tax cut permanently lowers the rate to 4.2%, returning about $104 million next year if enacted.
The Senate-approved version of the bill lowers the rate to 4.3%, returning $70 million next year, and has a two-year “sunset,” meaning that without future lawmakers approving an extension it would go away in July 2025, two years after implementation.
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While the central disagreement over a sunset clause may seem minor, the key difference relates to how flexible the state’s taxation system could be as it bears down on economic uncertainty.
Should the coming years be good, extending the sunset clause would require a simple majority; in the case of a tax cut without a sunset, raising rates in the event of a downturn would require a two-thirds majority.
“When we talk about the sunset, it's just an opportunity to visit this down the road,” Senate Majority Leader Casey Crabtree, of Madison, said during the meeting. “And if all goes well, we'll have a chance to vote on another tax cut.”
Several House lawmakers have criticized that plan as a half-measure. For her part, Gov. Kristi Noem has threatened a nearly unprecedented veto on the overall budget should lawmakers decide on a temporary tax cut.
During the morning committee, Rep. Chris Karr, of Sioux Falls, the main backer of the permanent, three-tenths sales tax cut bringing the rate down to 4.2%, appeared to be speaking for the vast majority of House lawmakers in supporting a “meaningful, long-lasting cut,” signifying one without a deadline.
On the Senate side, Sen. Ryan Maher, of Isabel, etched out one option for a compromise, introducing an amendment that keeps the two-year sunset clause but increases the size of the tax cut to four-tenths, a move from 4.5% to 4.1% that would return around $140 million to taxpayers next year.
"We're focused on getting something done in a big way for folks in South Dakota," Crabtree said. "We continue to work on those discussions. Just had a great meeting a couple of minutes ago, we've got a lot of work left to do."
That potential release valve for the pressure-cooker tax decisions was first floated yesterday by House Majority Leader Will Mortenson, of Pierre, is to increase the size of the tax cut in exchange for a sunset clause, though at the moment his chamber appears firm on wanting a permanent cut.
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The Senate also offered a few other proposals, including tax cuts of 0.2% or 0.3% attached to sunset clauses of three and four years, respectively.
Concurrent to these discussions of how much revenue to return to taxpayers, the joint budget committee is waiting to make a decision on how much to increase spending on the state’s core obligations to match inflation: namely raising salaries for teachers and state employees and increasing rate payments to nursing homes and disability services.
In the governor’s proposed budget, inflation increases to the “Big Three” of state employees, education and health care providers were set at 5%, with some targeted increases to certain employees and an increase to covering 90% of Medicaid costs for community providers like nursing homes.
But leadership in both chambers have indicated throughout session that they might be willing to leverage higher revenues and improve on this baseline proposal.
However, in the more fiscally cautious Senate, the ability to increase funding for core obligations this year — and continue that funding level in perpetuity — may hinge on how taxes shake out.
“The sunset really matters to the Senate,” Sen. Helene Duhamel, of Rapid City, said. “If we get that, we can go bigger on increases to educators and providers. If it’s not in there, we may have to pull back on that and go with the governor’s proposal.”
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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