The simple solution for South Dakota’s budget woes: Restore the sales tax rate

South Dakota legislators are suffering from all sorts of angst this winter over a seemingly complicated budget situation that many believe can only be solved by cuts.

In reality, the solution isn’t complicated at all. It’s incredibly simple: Just move the state sales tax rate back to 4.5%. That would wipe out all of the budget problems with money left to spare.

Confused? Don’t be. There’s an easy explanation for how we got here.

In the fall of 2022, then-Gov. Kristi Noem, a Republican, sensed the slight chance that her Democratic opponent, Jamie Smith, might pose a challenge to her reelection. She overreacted and abruptly hijacked a long-held Democratic position in favor of eliminating state sales taxes on groceries.

As it turned out, she was in no danger of losing to a Democrat in Republican-dominated South Dakota. But she relentlessly pushed her sales tax plan anyway, to the point that Republican lawmakers felt politically compelled to do something about it when they convened for their annual lawmaking session two months after her reelection.

Many Republicans did not want to eliminate sales taxes on groceries. Without a state income tax and with property tax revenue dedicated to counties, schools and cities, South Dakota depends on a broad application of sales taxes to fund state government.

So lawmakers argued through the early months of 2023 and settled on an alternative plan: They’d offer South Dakotans sales tax relief, but not by eliminating the tax on groceries. Instead, they decided to reduce the overall state sales tax rate from 4.5% to 4.2%, but only temporarily, until June 30, 2027.

That was a bad decision for many reasons. First of all, Noem didn’t care about South Dakota taxpayers and only wanted a political win for herself. Legislators should’ve ignored her.

Furthermore, there was no great clamor among South Dakotans to save a few pennies on their purchases (they didn’t want a grocery tax repeal, either, as they proved by rejecting the idea when it was petitioned to the ballot last year).

There was, meanwhile, a great clamor for something else: property tax relief. Noem and legislators inexplicably did nothing about that, leaving the situation to fester to the point that action seems politically unavoidable this year, when lawmakers have little money to work with — except for an attractive pile of $182 million that Noem proposed using to top off the construction fund for an $825 million men’s prison near Sioux Falls, which lawmakers are currently fighting over.

The reason there’s no other extra money is because of the reduction in the sales tax rate (although some lawmakers have amnesia about that, and are blaming the tight budget solely on rising Medicaid costs). The sales tax cut cost the state an estimated $104 million in annual revenue at the time of its enactment.

Lawmakers and Noem felt comfortable surrendering that revenue two years ago, because the state was riding a tidal wave of pandemic-era federal stimulus funding.

Now Noem is gone, having capitalized on her ceaseless political posturing by getting a job as secretary of the Department of Homeland Security in the new Trump administration. She left behind a sinking state budget, doomed by the depletion of federal pandemic stimulus funding and by the Legislature’s decision — at Noem’s prodding — to willingly flush more than $100 million of annual revenue down the toilet. That’s more than the state needs to cover the hole in its next budget.

Lawmakers approve temporary sales tax cut worth an estimated $104 million in first year

In December, before Noem left for D.C., she proposed drastic cuts to many state departments and programs to deal with a roughly $50 million shortfall in ongoing revenue compared to ongoing expenses in the budget she was preparing for 2026. (“Ongoing” revenue comes mostly from the sales tax and is what state government uses to fund its daily operations, as opposed to “one-time” revenue — from sources like federal stimulus funds and unclaimed property — that legislators typically use for expenses like new buildings or paying off bonds.)

Updated revenue estimates have not changed the budget situation much, leaving Noem’s successor, Gov. Larry Rhoden, and many lawmakers to glumly conclude that some of the proposed cuts are unavoidable. Some of the worst pain could fall on the State Library, South Dakota Public Broadcasting, tobacco-use prevention efforts, repair and maintenance of state buildings, dual-credit college courses for high school students, and a host of other departments and programs.

So here we are, all caught up on the backstory. And now you can see how simple it could be to close the budget gap: Just raise the state sales tax rate from 4.2% back up to 4.5%.

Politically impossible, you say? Hardly. The rate was 4% nine years ago, when a Republican-controlled Legislature and a Republican governor, Dennis Daugaard, increased it to 4.5% (to help fund an increase in teacher pay, although South Dakota now ranks 49th in average teacher salaries, which is another diatribe for another day).

With the sales tax reduction already set to expire in 2027, the only action required is moving that date up to this year.

Or, legislators could continue compounding the politically misguided policy blunders of the past few years by refusing to take the obvious and available course of action.

It’s their choice, and it should be an easy one.