January 22, 2015

The 2015 Legislative Session has been underway for two weeks and, so far, there have been no declarations of war, petitions to secede the union or state sponsored slant drilling to get oil out from under the other Dakota.

What is happening is 105 citizen legislators starting to review bills, writing changes in law, working with dedicated professionals that run the state’s various departments and listening to the needs and desires of special interest groups including the South Dakota Chamber of Commerce and Industry.

There are fewer first time legislators than usual with 19 so these first two weeks have had a steady focus.  Capitol-ism salutes the legislators and appreciates the time that they take to make many difficult decisions.  If you should see one of these legislators around your home town, ask them if they have been on vacation. When they are done glaring at you, be sure to thank them for their service.

While there are a number of topics that have been discussed to this point, this first issue will focus on the proposals to increase highway funding.

Special Report – Funding for Highways/Bridges and Roads

Are proposals for increased funding on the right path?

If you find yourself thinking about the road you are driving on, it’s a good bet that something is wrong with it.  Seldom do drivers cruise along on smooth, pothole free pavement, focused with admiration in their minds for the high quality of the road. Actually, it’s worse than that – most drivers go so far as to get crabby at the crews that are working to make the roads smooth and pothole free. 

The legislature has been studying the conditions of the state, county and township roads all summer (truth be told, they have been studying them for the past four or five years) and have issued a bill that calls for a number of tax and fee increases that will increase the funding that can be used to keep those roads from becoming undriveable. 

During his budget address in December, Governor Daugaard endorsed the fact that it was time to discuss specifics of road/bridge funding and that he believed this was the year to have that discussion.  During his State-of-the-State address last week he went even further.  The Governor went into specifics for his own proposal to be submitted to legislators soon.  In a powerful comparison, he suggested that current funding levels constituted a “structural deficit” for responsible road maintenance. 

Here is a brief outline of the condition of the highways and roads in South Dakota.  These are just a few of the facts that establish a strong case for increased transportation funding. 

South Dakota Roads

·       - South Dakota has approximately 83,650 miles of roads.  Interstate highways are 20% of the total, state highways are 10%, leaving 70% as local roads.

·       - There are 9.1 billion vehicle miles traveled (VMT) in South Dakota each year (mostly by hockey/soccer parents).

·       - Today, 2% of these roads are listed as being in “poor” condition (meaning they should be dug up); at current funding levels, the level of roads that will have a “poor” rating will be 24%.

·       - There are a total of 4,436 bridges in the state.  The state owns 1,263 of them, leaving 3,173 as local bridges.

·       - The last increase in the gas tax was in 1999.  South Dakota collects 22-cents of gas tax, 2-cents in a tank fee = 24-cents total for state gas taxes.  The federal government charges 18.4-cents in gas tax (and 24.4 per gallon diesel).  Total per gallon gas tax = 42.4 cents.

·       - Fifty seven counties reported that 39% of their paved roads were rated as poor or failing and 26% of gravel roads were rated poor or failing.  Townships report that 28% of their roads are listed as poor/closed.

·       - There are 1,045 county bridges that are listed to be replaced at an average cost of $230,000 each, for a total that exceeds $240 million.

Capitol-ism figures that for Governor Daugaard to ask for a tax increase is about like eating a sponge, you have to chew on it until your entire face hurts and even then it’s hard to swallow.  While being a strict adherent to tight budgeting, he is also showing he understands the need for investments and fulfilling his long-held promise not to spend more revenue than is available.

The Governor has said the key to a productive discussion about highway/road/bridge funding is specifics.  He has provided a very specific plan and here are the major points regarding the revenue producing parts of that plan.

·       - Gas Tax Increase – Add 2-cents/year, every year 'til someone cries uncle.  South Dakota has a 22-cent gas tax that has not been increased since 1999.  There is also 2-cents that is an “underground tank” fee, so one could argue that the gas tax is really 24-cents and they would be correct.  However, that approach makes it difficult to compare the level of gas tax to surrounding states because we don’t have a good grasp on how those states use fuel to collect various fees and, therefore, don’t know their total tax burden.  (Minnesota just has to use at least 2-cents to fund a study about the psychological impact that living next to freeways has on squirrels that must cross them to ask the chickens if they are going to as well).

Enough of that, South Dakota has a 22-cent gas tax which will be 24-cents next year; 26-cents the year after that; and 28-cents the next year and continues on into perpetuity.  Each penny raises $6.6 million dollars so this proposal raises about $13 million a year.  By 2018, these increases will be collecting nearly $40 million a year in additional revenue from today’s base.

The Federal government has their own gas tax and it is 18.4-cents per gallon.  Add it all up and gas is getting taxed 42.4-cents per gallon.

Estimated Revenue = $13 million additional revenue per year compounding

·       - Ethanol Tax – The Governor’s proposal would also add 2-cents a year to taxes on ethanol based fuel.  The big difference here is the current rate, which is 8-cents rather than 22-cents.  The Governor’s bill does not attempt to close the gap between ethanol and regular gasoline as both would increase at the same rate.  The tax on ethanol would be ongoing as well.

·       Estimated Revenue = $750,000 additional revenue per year compounding

 ·       - Property Tax – The Governor’s bill gives counties easier access to a property tax mil levy of $1.20/$1,000 (1.2 mils) and creates a half mil levy for townships.  Revenue from both of these levies will be reserved for roads and highways. 

The county levy is already allowed but is reserved for matching federal highway projects, which have a pile of conditions and requirements that increase the costs for projects by more than 30%, rendering the levy unworkable for most counties.  The Governor proposes to allow counties to use the funds on local projects.  This levy would increase taxes on a $300,000 home by $360/yr.  The half of a mil for townships would increase taxes on the same house by $150. 

·       - Increase License Plate Fee – South Dakota has rather low fees to license automobiles so the Governor’s proposal would seek a 10% increase in those fees.  The legislature increased car license fees several years ago and since voters returned most of the legislators who voted for the increase, (and none were found tied to any trees by mobs with lit torches) it seems safe to attempt it again. 

Estimated Revenue = $8.7 million per year

 ·       - Non-commercial agricultural truck licensing – There are many 18 wheelers that are owned by farms. These trucks are not licensed at the same rate as commercial trucks, they pay a fee of 60% of the commercial rate.  The Governor’s proposal would raise the non-commercial registration fee to be 70% of the commercial rate next year and move it to 80% the next year.  That rate would be applied to trucks that exceed 20,000 pounds.  The move to 70% is estimated to produce $2 million a year.

Estimated Revenue = $2 million per year

Gas Tax Increase – While the Governor increases the gas tax by 2-cents every year, the Summer Study Committee’s bill will increase the state’s gas tax by 2.5% a year starting in FY 2017 and increasing for nine years (til 2025), making the total gas tax 28-cents (30-cents tank fee). 

How does this compare?  The highest gas/other fuel related per gallon taxes would be in places like California at 48-cents and New York at 50-cents (it must be noted that less than half of these fees are actual gas taxes).  The cheapest are New Jersey and Wyoming at 14-cents each unless you are counting Alaska which has a gas tax of just 8-cents (but they have 22 hours of dark this time of the year as well).

New Proposal – Wholesale Tax on Gas - Based on Price.  While not found in the Governor’s proposal at all, the Interim Committee is advancing the idea of a price based wholesale tax.  The most significant sources of revenue for roads and highways are the gas tax and vehicle excise tax, both of which are dependent on the number of cars or gallons that are sold.  In the case of the gas tax, those units don’t grow as fast and can even decrease from time to time.  Growth in revenue stalls because some categories such as cars/trucks get better gas mileage.  There’s the perfect storm - cars and trucks going further on a tank of gas, doing more damage to the roads and paying less as they go; it’s like feeding a teenager. 

The Interim Committee is proposing the creation of wholesale tax on gasoline that would be based on the price and a unit price on a “per gallon” basis.  The Chamber isn’t about to claim to understand exactly how this tax will be structured other than the fact that the bill proposes a rate of 3%, which would collect nearly $50 million a year.  Several states in the union collect this form of tax and the rate is about the same as the other states. 

Car Excise Tax (sales tax on cars) – Willy Horton robbed banks because “that was where the money was.”  For the exact same reason, the state has been taxing the sales of vehicles since shortly after they were invented.  It’s called the Motor Vehicle Excise Tax and it has been collected since before 1939 when the legislature placed an amendment on the ballot saying revenue from those two tax sources was required to be spent on roads and highways.  It passed.

The tax was increased to 3-cents in 1986, and the plan to take it to 4-cents is in both proposals.  Mr. Horton’s logic has proven to be irrefutable and long standing.

Dyed Diesel – Diesel used for vehicles that are operated strictly off road is not subject to tax by the gallon.  Tractors, combines and other contraptions used in the fields along with construction bulldozers, excavators and those amazing paving machines that take a mound of concrete in the front and . . . um . . . “drop off” a finished road from the other end do not pay “gas/diesel taxes”, so they use a special diesel that literally has red dye in it.  The reasoning is that they don’t travel down the road so it isn’t fair to tax them for damaging the road.  It should be noted that construction companies pay sale tax on the diesel used by those machines.

The Interim Committee has proposed a 7-cent per gallon tax for dyed fuel.  The Governor does not have a dyed diesel tax.

Ethanol – The committee’s bill increases the tax rate on ethanol (currently 8-cents) by 2-cents/year until it reaches 22-cents.  It stops at 22-cents while the tax on regular gasoline will be at 28-cents.

Estimated Revenue = $750,000/first year; $1.5 million second year; $5.2 million fully implemented.

Car License Fees – Both proposals increase car registration fees 10%.  Estimated Revenue $8.2 million

Non-commercial Ag Vehicles – The committee’s bill would raise the license fee for non-commercial agricultural vehicles that exceed 54,000 pounds to the full commercial rate.  Current law charges them at 60% commercial rate.

Estimated Revenue = $7 million

Chamber’s Position

Conclusion.  The Chamber’s Board of Directors has been following the evaluations of the state’s highways/roads and has been convinced that there is a need to increase funding for the maintenance of this valuable infrastructure, particularly at the local level.  The Board has not taken a specific stance on any of the specific tax changes. 

The Board would like to hear from members on the specific tax increases.  You will receive a follow up email Friday linking you to a survey of your opinions on the proposed tax increases.

The Chamber board has issued a statement of general conditions for an acceptable tax/fee increase to enhance funding for infrastructure.

The South Dakota Chamber of Commerce and Industry believes that the tax structure of the state has been well balanced.  A very broad based sales tax that has a moderate rate combined with specialty taxes that includes a bank franchise tax (essentially an income tax on banks); even the basic application of the contractors’ tax will represent a tax system that includes most citizens and businesses. 

·       - Additional revenue should be derived from taxes that have a strong “user fee” concept.  Pursuing this philosophy, fees from gas tax, excise tax on vehicles and wheel taxes would be preferable to an increase in property taxes or the general sales tax.

·       - The increase must be moderate. While there are many needs to be addressed with highways and roads, the guiding thought for any tax/fee increase is that it should be moderate which could be viewed as slightly higher than an inflationary rate for multiple taxes/fees.  This should allow for the collection of sufficient funds to increase the investment in infrastructure, understanding that it will not be sufficient to meet all needs.

·       -The total fee after the increase must not be excessive.  With a tax system that uses moderate tax rates broadly distributed among citizens and businesses, whatever taxes/fees are increased to allow more investment in highways/roads should not allow any of the taxes/fees to become comparatively high.

·       - Increases must be balanced among industry sectors and between citizens and the business community.  Part of South Dakota’s favorable business climate is the balance maintained between various groups paying the taxes and soundness of the principles used to apply taxes.  There are examples of taxes being paid exclusively by the business community such as bank franchise, but these are found in most other states and South Dakota’s rates remain reasonable.

Thank you for your support of the South Dakota Chamber of Commerce and Industry!

Click here to check out the schedule for this year's Business Day at the Legislature.