PIERRE, S.D. — For weeks, legislative leadership has preached a message of budgetary caution: moving slowly; avoiding concrete promises of taxing or spending; and waiting until the full revenue picture is painted.
The day to begin that discussion has come.
In a morning meeting on Feb. 14 carrying serious weight for the dialogue over the final weeks of the legislative session, the Joint Appropriations Committee heard two versions of South Dakota’s economic story, first from the administration’s Bureau of Finance and Management and, second, from the Legislative Research Council.
The job of the committee in subsequent meetings will be to parse the particulars of the two revenue outlooks, laying the groundwork for how much money the state can either put toward its obligations or return to residents.
Dominating the conversation was an attempt to see how much of the state's economic growth is permanent, and how much might be washed away as inflation and pandemic stimulus starts to wash away over the next few years.
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“We have a pretty good track record in South Dakota of being accurate and being conservative,” said Rep. Tony Venhuizen, of Sioux Falls, the second-ranking appropriator in the House. “And that’s my priority. I want to get it right but I also want to be conservative. I’d much rather come back next year and have shot low and have more money to spend than shoot high and have to cut.”
The revenue projections, as they’re known, deal with the state’s 2024 fiscal year, which stretches from July 1, 2023, until June 30, 2024.
The general fund pays for things like state employee salaries, health care providers and the state share of public schools. Anything left over is where considerations like tax cuts and new programs begin, with Senate and House Republicans continually narrowing down their priorities over the session’s final weeks.
“It’s a jigsaw puzzle,” Venhuizen said of the process.
Revenue projections, in the analogy, could be considered the puzzle’s borders.
The major driver of revenue in South Dakota — and, by extension, the major driver of how much appropriators can afford to cut taxes or increase spending — is sales and use tax, which makes up over 60% of ongoing general fund revenues
Despite a slightly souring national economy and a return back to Earth from double-digit sales tax growth, both the BFM and LRC projections included a steady growth in sales tax collections, though big-ticket tax cuts could change that.
Without any change to the items eligible for sales tax collections, BFM is estimating around a 3% growth in sales and use tax, while LRC is estimating a 7% jump.
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As they have throughout the legislative session, BFM included in their forecasts the full cut to the sales tax on food favored by the governor; in that case, the sales tax pool would instead fall by 4% compared to the previous year.
But Venhuizen said he is considering BFM’s numbers without that $100 million food tax cut as a woven-in, foregone conclusion.
“As a Legislature, we’re looking at three different major tax proposals,” Venhuizen said. “I think the right way to do that is to make an estimate based on no tax cut first and then make a decision about what tax cut we want to do and what amount.”
Part of the explanation from LRC for their more “glass half-full” outlook is a large amount of unspent federal dollars from the pandemic: some $3 billion of it that will float around the state economy over the next five years.
“With inflationary growth and increases in wages, you will see increases in state sales tax revenue even if consumers spend less,” Jeff Mehlhaff, the LRC”s chief fiscal analyst, told appropriators.
But the main driver is the joint condition of wage increases and inflation growth — out of the 7% top-line sales tax growth for the 2024 fiscal year, LRC estimates about 4.2% of it coming from price and wage increases, along with 2% from federal stimulus and 0.7% from organic growth germane to the state.
BFM did not offer a competing explanation of the effect of inflation on tax collections nor the breakdown of their estimated growth.
The rest of the revenue picture includes smaller sources such as the lottery tax, contractor’s excise tax and insurance tax. The LRC estimated continued growth in the contractor’s tax due to a continued state of strong demand for construction services, buttressed by federal infrastructure dollars.
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“You have inflation increasing the cost of these materials, while at the same time, you've got the stimulus dollars generating more activity, and that's where you get this multiplier effect in tax revenues,” Mehlhaff said.
In both sets of projections, with tax cuts excluded, the overall growth in general fund revenues — including sales tax as well as these smaller sources — is expected to remain positive but grow at a slower rate than sales tax alone, reflecting a leveling-off of some of these non-sales tax revenue pools.
However, both BFM and LRC explained that these more minor sources of revenue experience higher volatility and are usually estimated in a conservative manner.
Appropriators will reconvene later in the afternoon of Tuesday, Feb. 14, to further discuss revenue projections. The final revenue projections adopted by the South Dakota Legislature will emerge Wednesday morning, beginning a sprint of around three weeks to pass the constitutionally mandated balanced budget.
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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