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Sales Tax Changes: How They Affect Your Pocketbook

The Legislature is considering numerous bills on our state sales tax. The House Taxation Committee has already killed HB 1131, which would have repealed the tax on food and replaced that revenue by tacking another 0.35% tax on everything else. Senate Bill 191 from the Governor's office would grinchily repeal the food tax refund program for low-income folks, a program that opponents of food-tax repeal regularly cite as a reason not to pass bills like HB 1131. (Remember, the Governor's office will tell you we can't afford to give poor people maybe a few hundred dollars as refunds on their grocery bills, but we can give million-dollar corporations million-dollar handouts that don't produce that good of a return on investment.)

HB 1222 would add a penny per dollar to the sales tax. SB 174 would add a penny to the sales tax, but only during the summer (that's good Rapid City tourist-season thinking!) and only through 2014.

How would these changes affect South Dakotans? The South Dakota Budget and Policy Project breaks down the numbers:

  1. Based on FY2010 data, boosting sales tax one penny (HB 1222) would put $161 million more in the state coffers. Structural deficit of $127 million solved, and teachers get raises.
  2. Exempt groceries but not pop and candy from that extra penny, and the state gets $147 million.
  3. Repeal the food tax, and the state loses $57 million, which is just a little more than the 0.35% uptick on other goods proposed by HB 1131 would have replaced.
  4. Combine food tax repeal with one-penny increase on everything else (merge HB 1131 and HB 1222), and the state comes out ahead $90 million. We cut 3% instead of Daugaard's 10%.

The Budget and Policy Project also works through numbers from the Institute on Taxation and Economic Policy to show the unequal impact of the sales tax and changes thereto on different income groups. Raise the sales tax a penny (HB 1222), and folks in the lowest 20% of South Dakota wage earners pay an average of $113 more, about 1% of their income. The richest 1% of South Dakotans would pay almost $1600 more, but that's just 0.1% more of their income, an amount they can find in the cushions of their leather couches. Amend HB 1222 to exclude groceries from the increase, and the bite is a little less for low-income folks, just $100, or 0.9% of their income.

Go the other direction and bring back HB 1131, and poor folks enjoy more relative benefits. Taking that 4% tax off food puts maybe $60 back in the average low-income pocket, a boost of 0.5% in their income. The richest 1% get $341, a percentage they hardly notice.

None of the proposed tax increases seem likely to pass, given the Governor's veto promise. The governor's food-tax refund repeal seems also unlikely to pass, given legislators' use of that program to justify not repealing the food tax. But as these bills progress (or don't) through committees, the South Dakota Budget and Policy Project does a great public service by providing analysis like this to help the general public understand what's at stake.

Bonus Regressivity! In its September 2010 "Credit Where Credit Is (Over) Due" report, ITEP calculated that the lowest 20% of South Dakotans pay 11.0% of their income in state and local taxes. The middle 20% (that might be me!) pay 7.8% of their income in state and local taxes. South Dakota's richest 1% pay 1.9% of their income to support the state and local services that make their wealth possible.


  1. Stan Gibilisco 2011.02.08

    On NPR's "Dakota Midday" show Monday (Feb. 7), they were making quite a point of Gov. Daugaard's antipathy toward the idea of any temporary tax increase, citing his apparent desire to have us "take all the pain right now."

    I think I can understand him because much of what he has said about the budget (and the way he has said it) resonates with my own mind.

    A temporary tax increase would be like giving an alcoholic booze in detox.

    A permanent tax increase would be like putting the alcoholic on the street with an unlimited gift certificate to the liquor store.

    I beg to differ with your statement in Option 1, Cory, where you claim that a penny increase in the sales tax would solve the budget problem. That's like assuming that the alcoholic, once set on the street with the free pass, would never use that pass, and would remain temperate forever after.

    Now that I've said all this hard-core conservative stuff, I'll state my "official position": I would favor your Option 2 above, as Ronald Reagan might have (whether we put him on Mt. Rushmore or not -- Aaaargh!). However, we would need some sort of guarantee that the extra revenue would be used to rectify the structural deficit before any new spending took place, now or ever.

  2. caheidelberger Post author | 2011.02.08

    Stan, Option 1 would be as much of a "guarantee" of solving the structural deficit as Governor Daugaard's 10% cut. Even if they adopt the 10% cuts, lawmakers could still fail to raise enough revenue on car registration fees, gas tax, etc., or enact further tax cuts as business incentives, or set spending levels too high, as they have for much of the past decade. Schools last year thought the law "guaranteed" them a certain increases in per-student state aid; legislators simply changed that law. Do we ever get a "guarantee" from the Legislature?

    I understand the addiction analogy. But let's think morphine or codeine after an operation. Sometimes isn't the pain so bad for the patient the doctor does better keeping the patient on the dope so the patient can heal?

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