New revenue forecasts don’t improve grim budget situation for South Dakota lawmakers

South Dakota lawmakers already knew it was a tight budget year. They learned Wednesday it could be worse than they thought. 

State government’s day-to-day operations are funded by “ongoing” revenue, such as sales taxes, while money from federal stimulus programs and other “one-time” sources are typically used for one-time needs such as construction projects. 

Legislative Research Council Fiscal Chief Jeff Mehlhaff spoke to the Legislature’s main budget committee at the Capitol in Pierre and said ongoing revenues, including sales taxes, “will see negative growth” this year.

“The last time this occurred was fiscal year 2010, in the midst of the 2009 recession,” he said.  

Lawmakers will adopt official 2026 revenue estimates Thursday, and those estimates will be used to help build the next annual budget. On Wednesday, Mehlhaff, who works for the Legislature, and State Economist Derek Johnson, who works for the governor, separately presented their revenue estimates to the budget committee.

Before the legislative session began last month, then-Gov. Kristi Noem’s budget proposal estimated $2.46 billion in ongoing revenue for the 2026 budget.

Her budget plan — inherited by new Gov. Larry Rhoden after Noem departed to become U.S. secretary of Homeland Security — includes numerous cuts to close a $51 million gap between ongoing revenue and ongoing expenses.

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Johnson estimated Wednesday that 2026 revenues will be $17.6 million less than Noem’s budget proposal originally estimated.

Johnson also provided updated numbers for the current budget year. The bureau estimates this year’s ongoing revenue to be $2.38 billion – about $9 million less than lawmakers expected when they made this year’s budget last winter.

The picture presented by Mehlhaff was different. The Legislative Research Council’s earlier ongoing revenue estimate for the current budget year was $2.42 billion, and he said the new estimate is $2.39 billion, a nearly $30 million decline.

Mehlhaff’s estimate for the next budget year is $2.46 billion in ongoing revenue, putting the council’s estimate in line with Noem’s initial estimate.

Both state officials outlined economic conditions affecting the state’s revenue, including persistent inflation, lower farm income, and a slowdown of people filling jobs.

“Since about January 2024, we’ve been flat to negative on employees in South Dakota,” Mehlhaff said. “That, to me, is a bit concerning in terms of growing the economy.”

Noem estimated $1.45 billion in sales tax revenue for this year. The council’s revised estimate is $10 million less than that, while the bureau’s is about $14 million less.

Johnson said the outlook is negative.

“The consensus seems to be that interest rates are going to be higher for longer,” Johnson said. “That suppresses economic activity.”

One factor in the budgetary difficulties is the Legislature’s own doing. During the 2023 legislative session, lawmakers reduced the state sales tax rate from 4.5% to 4.2% until 2027, costing an estimated $100 million annually in lost revenue.