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State sales tax goes up to help teachers, property owners

PIERRE -- Two major events converge in the coming week in South Dakota. The statewide sales tax increases on June 1 to 4.5 percent from 4 percent, after a knockdown fight within the Legislature last winter over Gov. Dennis Daugaard's plan to impr...

PIERRE - Two major events converge in the coming week in South Dakota.

The statewide sales tax increases on June 1 to 4.5 percent from 4 percent, after a knockdown fight within the Legislature last winter over Gov. Dennis Daugaard's plan to improve pay for last-place schoolteachers, and provide property-tax relief to business owners for the first time, after homeowners and agriculture producers received reductions 20 years ago.

And South Dakota voters cast their ballots in party primary elections on June 7 that will greatly determine the direction of the Republican Party, whose members rule the Legislature as super-majorities, in what many candidates are casting as a referendum on the Republican governor's approach the past two years and his final two years remaining.

What wasn't debated among lawmakers during the sales-tax fight, and still isn't being discussed to any great extent in the primary campaigns, is the tax itself. There are two important sets of facts to know.

The 4 percent rate wasn't sufficient to pay for any significant amount of increased state aid to public schools, without making changes in spending elsewhere in state government's budget.

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Daugaard began as governor in 2011 by asking the Legislature for 10 percent cuts throughout most of the budget and slightly smaller cuts in school aid and funding for Medicaid providers. Lawmakers agreed the austerity was needed. But four years later, the Legislature still hadn't restored the money taken from schools in 2011.

The second important set of facts is the volatility that developed in sales tax revenue. The tax changed from a reliable, steadily rising source of funding. It turned wildly erratic.

Consider these two sets of numbers.

From 1999 through 2008, the tax generated increased revenues by annual percentages of 4.70, 5.22, 5.51, 1.30, 3.91, 6.63, 6.63, 7.92, 4.70 and 6.92.

When the nation's great recession gripped South Dakota, the tax revenues went into a haywire period. The growth slumped to 2.18 percent in 2009. Then sales tax revenue actually decreased in 2010, falling by 2.45 percent. That prompted the budget cuts. In 2011, the revenue spiked 10.4 percent. That partially made up for the slump in the two prior years. But the state's economy, as measured in sales tax activity, didn't return to its pre-recession level. The tax revenue increased 4.81 percent during 2012, then 4.30 and 5.82 the next two years.

The 5.82 percent looked encouraging, until another deep slump. The growth during 2015 was 0.87 percent.

The real-life numbers, as expressed in millions of dollars, were staggering. The actual amount in 2015 came in $17 million below the amount that legislators had budgeted. Hope of somehow restoring the state aid to schools became more remote as each year passed.

The before-and-after came through in two sets of statistics from the state Bureau of Finance and Management.

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In a pre-recession analysis, the bureau reported the average annual net increase in sales tax collections from 2001 to 2008 was 5.13 percent. That included the 2001-era downturn in the economy.

In a current analysis, looking at the period immediately before the 2009 recession and continuing after it, the bureau calculated the average annual net increase in sales tax collections for 2007 through 2015 was 4.17 percent.

A difference of 1 percent doesn't seem like much for one year. Compounded over seven or eight years, the difference becomes more significant.

Exactly what has changed in South Dakota's economic activity to cause the changes in spending - because that's what a sales tax does, it reflects spending - isn't clear.

The tax increase to 4.5 percent also produces a slight shift in tax burden. Consumers will pay an estimated $107 million more in state sales tax during fiscal 2017 that starts July 1, 2016. Property owners will receive $37 million of that revenue through lower school-tax levies on their land and buildings.

Public schools will get $67 million of additional state aid and will be required to use nearly all of it to pay teachers more. Another $3 million is earmarked for instructors at the four technical institutes run by public school districts in Watertown, Mitchell, Rapid City and Sioux Falls.

The key in the tax shift is an entire class of property now becomes eligible for tax relief. In the original 1995 package, only owner-occupied homes and agricultural property were covered. Now all other property will be covered, including businesses, rental housing and second homes.

With the increase to 4.5 percent, annual state sales tax collections are forecast to pass the $1 billion threshold for the first time by June 30, 2017. The expected sales tax revenue for fiscal 2017 that starts July 1, 2016, is $1,006,724,206.

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Basically the tax increase will allow state government to make public schools whole again on their state funding. None of the opponents in the Legislature to the tax increase brought a formal list of budget cuts that could have made the tax increase avoidable.

The tax increase does include a rollback provision in an amendment that came from Rep. Jeff Partridge, R-Rapid City. As state government collects more sales-tax revenue from remote sellers located outside South Dakota, the tax increase would be gradually reduced.

At the same time, the Legislature and the governor adopted a plan to aggressively pursue sales-tax collections from remote sellers. The legislation is intended to convince remote sellers they need to charge state sales taxes and remit the money to South Dakota - or provoke a lawsuit that could resolve the national issue of whether states can collect sales tax on remote sales.

None of the people in the Capitol last winter argued that enough tax revenue could come from remote sellers to offset the $107 million that is expected from the tax increase, however.

How much money might be produced from remote sales is a mystery cloaked in estimates that run in the tens of millions rather than hundreds of millions.

The bottom line is that the governor and two-thirds of the 105 legislators decided the 4 percent sales tax couldn't keep up with the established needs in the changing economy.

The 4 percent rate had been in place since 1969. The sales tax began in 1935, amid the great depression, at 2 percent. The Legislature raised the rate to 3 percent in 1965, then four years later to 4 percent in 1969.

Twice the Legislature increased the rate to 5 percent temporarily for special purposes.

It was 5 percent from May 1980 to June 1981 to pay for South Dakota's purchase of bankrupt railroad lines throughout South Dakota during the first term of Gov. Bill Janklow.

It was 5 percent again from May 1987 to February 1988 to raise $80 million for the state business-loan program known as the REDI fund during the first term of Gov. George S. Mickelson.

In key ways the new increase to 4.5 percent is tied to the property-tax revolt of 1994. Voters nearly approved a limit on property taxes that would have cut collections for schools and local governments by approximately two-thirds. There wasn't a replacement source of funding.

The Democratic candidate for governor, Jim Beddow, promised to reduce property taxes by 30 percent if elected that year. Janklow, making his comeback for a third term as the Republican nominee, matched Beddow's promise. The tax limit failed on the ballot by less than 1 percent of the votes cast.

That led to the 1995 tax-relief package and the caps on property-tax increases passed by the Legislature and the governor. A variety of maneuvers generated the first $80 million of relief. Janklow and the Legislature gradually found the remaining $40 million in the subsequent years by limiting the growth of state government.

Local governments and school boards were given the ability to opt out of the property-tax limits, subject to local votes. Many opt-outs have passed and many have failed since then, but they generally were to preserve services or keep a school open. The bigger argument on schools always called for more state aid.

Meanwhile schoolteachers were mired in their status as the lowest-paid in the nation. A push by school administrators in the past few years to show their difficulties in recruiting teachers to lower-paying rural districts gradually convinced Daugaard and many legislators to take the bold step of a sales tax increase.

On June 1, people making purchases in South Dakota will pay an additional one-half of one percent of state sales tax. On June 7, voters in South Dakota will mark their ballots in legislative primary elections in many of the 35 legislative districts where the fights have been, at least in part, over the tax increase.

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