Lawmakers heap competing tax cut bills on Appropriations Committee

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The House Taxation Committee wasn’t willing to kill two tax cut bills during its Thursday morning meeting. Instead, the committee was forced to send the two bills to House Appropriations.

The House Appropriations Committee will wrestle with at least six bills proposing various tax cuts for South Dakotans in the coming weeks.

“I’m sure House Appropriations appreciates your work,” House Taxation Chairman Kirk Chaffee, R-Whitewood, sarcastically told legislators.

The 2023 legislative session has been flooded with tax cut bills — with over a dozen introduced, three of which are major tax cuts worth a combined $360 million. And while legislators expressed a thirst for such cuts earlier this session, some are starting to feel like they’re drowning.

Rep. Oren Lesmeister, D-Parade, requested the committee table his second tax cut bill shortly after his first was passed Thursday, because of the “pain and agony” the committee was in.

While there’s a buffet of tax cuts to pick from, House Majority Leader Will Mortenson, R-Pierre, said the Legislature will be “planful and deliberate” on which cut South Dakotans will see affect their bank accounts this year.

“They are for tens or hundreds of millions of dollars, and we have an obligation to make sure they’re sustainable for decades into the future,” Mortenson said. “We don’t want to end up in a situation where we cut taxes only to raise them down the road.”

The rush to cut taxes stems from Gov. Kristi Noem’s reelection campaign promise to eliminate the food sales tax in South Dakota.

Noem proposed what she called the “largest tax cut in South Dakota history” in her December budget address , justified by a booming economy, large reserves, surging tax revenue and millions in available one-time funds.

The state has had “extraordinary revenue growth” over the last three years, Mortenson said.

“Two years ago, we thought it was a federal-government-induced blip. Last year, we thought it was just a one-time thing, so we didn’t cut taxes last year either,” Mortenson said. “This year, there’s more of a sense that this is ongoing revenue growth and sustainable in the future.”

The food sales tax repeal bill, HB 1075 , cleared its first legislative hurdle in the Taxation Committee after lengthy debate last week.

State Finance Commissioner Jim Terwilliger told the committee that even with the $102 million tax cut there is another $280 million in revenue to spend. Revenue is $145 million higher than projected — or 13% higher — for the first six months of the fiscal year.

The Legislative Research Council has since changed the estimated tax savings to be $120 million from the elimination of the food sales tax.

With that anticipated revenue, “everyone wants to take a stab at cutting something, since the opportunity is finally here,” Lesmeister said.

The reason there are so many bills introduced this year is because there are “a lot of ideas” on how to cut taxes, Mortenson said.

“Our job in the Legislature is to vet them on their policy merits and how they work mechanically. That’s done in the House Taxation Committee — they look at the policy, if it’s a workable tax cut. Then it’s sent to the Appropriations Committee, where they look at whether tax cuts are sustainable years into the future,” Mortenson said.

Lesmeister introduced two bills, HB 1095 and HB 1096 , that would only cut the food sales tax to 2.5% and 3.5%, respectively. Food is currently taxed at the standard state rate of 4.5%, plus any applicable local taxes.

While the Democratic Party hopes to eliminate the state food sales tax, Lesmeister said he wanted to provide bills that would offer a compromise. Only HB 1095 is headed to Appropriations.

Another proposal would exempt the first $100,000 of valuation on owner-occupied dwellings. The proposal would save the average homeowner an estimated $350 a year on property taxes.

Senate Majority Leader Casey Crabtree, R-Madison, said his constituents overwhelmingly support property tax relief. In the Republican legislative press conference last week, Crabtree told reporters he favors that bill, in part because out-of-staters passing through South Dakota would share the benefits of a sales tax reduction.

“When you look at the owner-occupied property tax reduction, the only people who get the tax reduction are South Dakotans,” Crabtree told South Dakota Searchlight. “With the grocery tax and sales tax, that’s not true.”

But Noem told South Dakota Public Broadcasting she’d rather see a tax cut broadly applied to consumers.

“I just don’t understand why they only want to help certain people and not the rest of the families in the state,” Noem told SDPB . “That only helps the wealthier individuals that own property in the state.”

The biggest tax cut proposed this season, though, was introduced by Rep. Chris Karr, R-Sioux Falls.

His proposal would reduce the state sales and use tax by half a percentage point – on everything, not just food – and cut $168 million in taxes. The state tax rate would return to what it was before 2016 when a half-percentage tax was implemented to support raising teacher salaries in the state (despite that legislation, South Dakota currently ranks 50th in average teacher pay).

Karr told the Taxation Committee last week there was a plan in place to reduce the sales tax incrementally as the state saw more remote, online sales. But that has not happened since the increase was implemented.

Other tax cut bills introduced this year include one that would exempt feminine hygiene products from sales taxes and one that would exempt funeral and burial services from the state gross receipts tax. Two empty bills, commonly known as “vehicle bills” that could be filled later with tax cut language, have been introduced in the Senate and House.

Mortenson, who introduced the vehicle bill in the House, said the House majority hasn’t decided which tax cut proposal to support yet, and there’s a chance more than one could pass.

HB 1011, which cuts unemployment insurance employer contributions by 0.5%, was one of the first bills to be signed into law by the governor. The bill delivers an $18 million tax cut for South Dakota businesses.

The tax cut bills referred by the House Taxation Committee will be considered in the House Appropriations Committee in the coming weeks.

Appropriations will set revenue estimates for the state on Feb. 14 and 15, which will be the basis for budget bills, said Rep. Tony Venhuizen, R-Sioux Falls and vice chairman of the House Appropriations Committee.

“That’s what everyone is holding their breath for before they latch onto any one thing,” Lesmeister said.

But not everyone supports tax cuts.

The South Dakota Retailers Association is adamant that any sales tax cuts could lead to efforts to replace the lost revenue with income taxes. And lobbyists for school organizations believe tax cuts that don’t ensure replacement funds for education would spell trouble for public schools, which are already battling inflation and teacher shortages.

The House will have until Feb. 22, or crossover day, to pass any of the tax cut bills.

This is the first time in recent memory that the Legislature has competing bills with tax cuts in the hundreds of millions of dollars, Venhuizen said. As House Appropriations begins discussion on the bills, he said the Republican caucus will decide what the overall approach will be.

“We need to move in a direction that is going to have the support of the whole House. Our committee is doing its work and the caucus is doing its work as well so we’re all headed in the right direction,” Venhuizen said. “We’re going to pick the path with the best policy and the most support and move forward. We know where the governor stands. Our goal is to get everybody on the same page by the end of session.”

After the bill, or bills, pass onto the Senate, that chamber will have the rest of session to deal with the tax cut issue. Crabtree said the discussion between the House and Senate will continue through the rest of session.

“If there can be a tax cut, what are the priorities we need to invest in?” Crabtree said. “Most of those appropriators have been looking at where we’ve been underinvesting.”

If nothing gets passed this session, a constitutional amendment and an initiated measure eliminating the food sales tax could appear on the ballot in 2024.