State sales tax is one factor fueling South Dakota's $115.5M budget surplus
Although the surplus partially stemmed from a strengthening of the state's economy, the aftershocks of federal stimulus, sales tax structure and fluctuation in social service spending also played a part.
SIOUX FALLS, S.D. — A dive into South Dakota’s unexpectedly high budget surplus announced by Gov. Kristi Noem on July 18 reveals three factors that drove this outcome: savings on social services, the continued effects of federal stimulus and, somewhat counterintuitively, a decades-high inflation rate.
The state finished the 2022 fiscal year, which stretched from July 2021 until June 2022, with a $115.5 million budget surplus. That number stemmed from $72.3 million more in revenues and $43.2 million less in expenditures than budget forecasts predicted.
The primary source of revenue for the state continues to be the 4.5% sales tax, which in 2021 made up around 60% of the state’s income. Although other sources of revenue contributed to the $72.3 million increase, sales tax made up just over half of that jump, coming in at $36.6 million above projections. Other increases came from the insurance company tax and lottery tax.
Derek Johnson, who serves as the state economist at the Bureau of Finance and Management, said that this rise in sales tax revenue, which represented a 12% increase compared to 2021 inflows, was “largely a result of South Dakota's strong economy, though the federal stimulus that is driving rising inflation also played a part.”
In her news release, Noem made a similar statement, using the budget surplus to continue touting the state’s fiscal responsibility and growing economy while also criticizing President Joe Biden policies for rising prices nationwide, writing that the state “must remain cautious and conservative due to 40-year highs in inflation caused by the Biden administration’s heavy spending and regulation.”
While the most recent Consumer Price Index report measured inflation at 9.1%, the highest in more than 40 years, South Dakota’s use of a sales tax to fund a large portion of the budget is a mechanism that can, in theory, weather inflation better than alternatives such as an income tax. That’s because an increase in prices would lead to an increase in sales tax revenue, although a rollback in consumer spending due to higher costs could dampen that effect.
The $43.2 million in savings on the spending side came mainly from an overestimate of the utilization of social services in the budget predictions last year. The Department of Human Services and Department of Social Services, which together form the state’s safety net for disabled and low-income South Dakotans, spent $23.9 million under projections, representing around 1.5% of the program’s total appropriations.
$15.4 million in unspent dollars came from the Department of Education, a figure that Johnson primarily attributed to “special education expenses coming in below budget.”
The budget surplus from the fiscal year was transferred to the state’s budget reserves. The Bureau of Finance & Management will present a more in-depth review of the budgeted reversions to the Joint Committee on Appropriations at its July 27 meeting.