January 25, 2023

Done

SB 41 – Workforce Housing Infrastructure Bill Passes House

Awaits Governor’s Signature to Become Law

SB 41 has been developed and perfected over a year and half, starting with a legislative summer study in 2021.  After delays and debates about how the money was to be administered, rehashing alternative solutions and enduring the resistance of a small number of legislators who don’t believe in the use of any government involvement, SB 41 passed the House of Representatives on a vote 54-Yea to 16-Nay.  Because this bill was a special appropriation and had an emergency clause, which means it becomes law immediately when it is signed, it needed 47 votes (2/3rds) and surpassed that threshold.

When the Governor signs the bill, it will allow housing projects across South Dakota to apply for $100 million in grants and another $100 million in loans to underwrite the costs of water, sewer, and gas, plus roads and sidewalks.  These programs will be administered by the South Dakota Housing Development Authority.

Here is the vote on final passage of SB 41:

The question being "Shall SB 41 pass?"

And the roll being called: Yeas 54, Nays 16, Excused 0, Absent 0

Yeas: Arlint, Bahmuller, Blare, Callies, Cammack, Chaffee, Chase, DeGroot, Derby, Deutsch,  Donnell, Drury, Duba, Duffy, Emery, Fitzgerald, Healy, Heermann, Jamison, Kevin Jensen, Kassin,  Koth, Krull, Kull, Ladner, Lesmeister, Massie, Moore, Mortenson, Mulder, Nelson, Olson, Ernie Otten, Perry, Drew Peterson, Sue Peterson, Pinnow, Pourier, Rehfeldt, Reimer, Reisch, Sauder, Schaefbauer, Schneider, Shorma, St. John, Stevens, Teunissen, Tordsen, Venhuizen, Wangsness, Weisgram, Wittman, and Speaker Bartels

Nays: Auch, Aylward, Gross, Hansen, Phil Jensen, Karr, Krohmer, Lems, May, Mills, Mulally, Odenbach, Overweg, Randolph, Sjaarda, and Soye

The South Dakota Chamber of Commerce wishes to acknowledge and express appreciation to the lead sponsors of SB 41 Senator Crabtree (R-Madison) and Representative Chase (Huron) and the lobbyists who played a key role, including Yvonne Taylor of the South Dakota Municipal League, Sam Nelson, Eric Erickson and Tim Dougherty.  Major accomplishments don’t happen without endless attention to details and adjustments, the diligence of these leaders is how this approach to workforce housing is finally becoming a reality. 

Hey Brother, Can You Spare a Dime . . . or $100 Million Dollars?

Should South Dakota stop collecting the state portion of sales tax on the sales of groceries?  Governor Noem startled public policy wonks (and even some voters) when she proposed doing away with sales tax on groceries during her campaign for reelection and even more when she made it clear in subsequent speeches that she was serious and is dedicated to that goal.

The result of removing the 4.5% sales tax imposed by the state, but leaving the local sales tax of up to 2% alone, would be to permanently decrease sales tax revenue by some $104 million dollars per year.  The amount of lost revenue would increase each year with growth in economic activity and inflation.  The first draft of this concept is HB 1075 sponsored by Representative Fitzgerald (R-St Onge) and Senator Wiik (R-Big Stone City).

What is NOT being debated.  South Dakota has debated about taxing groceries for decades but that debate has focused mainly on the regressive nature of the tax and the fact that groceries are a larger percent of lower income household’s spending than it is for middle and higher income households.  Today’s debate is not centered on the regressive nature of taxing groceries.  Today’s debate is centered on the amount of extra tax money that has been collected and is sitting in reserves.

What will be debated.  By suggesting that the state can reduce revenue, the Governor has opened a debate about what should be done with approximately $100 million dollars.  There are advocates who agree there is too much money laying around and it should be reduced; not by removing groceries from the sales tax but by some other method.  There are advocates who say if there is extra money lying around, it would be better used for “one time” projects that might have long lasting benefits to South Dakota’s citizens.

Here is a look at several of the ideas on what to do with an odd $100 million.

Governor Noem: Remove groceries from the sales tax

Advantages – This will give a tax break to every household in South Dakota and it also addresses the former arguments about regressivity.  It can take effect soon and will be noticeable by taxpayers.  The state can indeed afford to reduce sales tax revenues by $100+ million because of growth in other revenues and controlled spending over the past several years.  Future budgets are being based on average sales tax growth of 5% or less and are still balanced.  Future years have smaller excess revenues. 

Disadvantages – The permanent loss of $100 million is based on artificial increases in sales tax revenue, resulting from $5 billion in federal money that increased tax collections artificially by more than 10%.  A reality which will not continue after the “sugar high” of federal money is gone.  Sales tax collections will again be around an historical average of 3-5% and the loss of grocery revenue will force cuts in funding for schools and medical providers, or a vote to increase the tax rate.  There could even be a proposal for new taxes entirely.  Those opposed to HB 1075 worry that removing groceries from the tax base will destabilize tax collections and make state government income more volatile.

Property Tax Break 

A legislative summer study brought forth a proposal to reduce property taxes by exempting the first $100,000 of taxable value for each owner-occupied home for the school general fund portion of their property taxes, with the state using some or all of $100 million dollars making up the lost revenue to schools.  For example, if you own a home with a taxable value of $350,000, that assessed taxable value would be reduced to $250,000 for the purpose of school general fund taxes.

Advantages – Many people believe property taxes are way too high in South Dakota.  Tax payers who own their homes are more aware of their tax bills than people who rent because they see a tax statement, even if their taxes are actually paid from a bank escrow account.  By having the state pay the amount of lost revenue to the schools, this tax can be adjusted more easily than trying to increase a sales tax rate, should revenues fall short. 

Disadvantages – This is tax break that many citizens will not receive.  People living in apartments or other forms of rental housing will not get this tax break.  Even for those who will get the tax break, it won’t be effective for at least a year because property taxes are paid one year in “arrears” which means people are paying taxes this year for taxes that were really owed in 2022.  For homes with mortgages that escrow the money for taxes, the tax break may not be received for another year after the bank looks at funds paid out of the escrow account for taxes.

Just how the money would flow through to the state-aid formula for schools is a bit uncertain and the funds needed to make up for the lost revenue would need to increase each year as the number of owner-occupied homes increases.  Any adjustment to the discount of $100,000 would most likely constitute a tax increase.

Finally, school general fund levies are the only place where different classes of property are treated differently in South Dakota, with commercial property paying a much higher general fund levy ($6/thousand) than either owner-occupied properties ($3/thousand) or agricultural land ($1.30/thousand).  Reducing the taxable value for owner-occupied homes for school general funds just creates a bigger gap between home owners and businesses.  To be clear this would not be tax shift immediately; but should the money required to fill in the $100,000 taxable value decrease for home owners become unaffordable, it may be easier to find the additional funds from the business levy or business taxable value calculation.   

Reduce Sales Tax Rate

Another method to reduce the amount of money being held and collected by the state government would be to simply reduce the rate of tax collected on all sales of all things large and small.  Assuming total sales/use tax collections will be approximately $1.4 billion (with a “B”), then each one tenth of one percent (0.001) would collect somewhere in the range of $33 million dollars.  Reducing collections by $100 million would require reducing the state portion of the sales tax by 0.03 or 0.3%, leaving the tax rate at 4.2%.

Advantages – This is a tax break for all citizens that can become effective right away, or at least as of July first.  It is a tax break that does not narrow, and perhaps destabilize, the tax base.  It can be easy to administer with systems in place in all businesses that collect and remit the sales tax.

Disadvantages – If sales tax collections decrease during a potential recession, it would difficult to nearly impossible to get the rate increased and may require cuts in budgets to maintain.  It would be such a small reduction in the tax that it would go unnoticed, as opposed to removing food from the sales tax which would be noticeable at the checkout.

Any government has an endless list of needs that require the legislature and governors to allocate limited tax revenue to meet as many of these needs as possible.  If there is an extra $100 million dollars piling up in the corners of the Capitol building, it could be deployed to build jails, or add to highway projects or educational equipment.

Advantages – Continues the practice followed by Governor Noem when spending a tsunami of federal money.  One time projects do not need continued appropriations and do not need to be repeated, yet often have benefits that continue for years.  If revenues fail to grow, it is easy to discontinue authorizing additional projects.

Disadvantages – Getting a common sense of what are worthy “one time” projects can challenge the best career diplomats, let alone the citizen legislators who will have to make those very decisions.  Many “one-time” projects in fact do require ongoing spending and jails are a perfect example of that. 

The South Dakota Chamber of Commerce and Industry has a long history of opposing taking groceries out of the tax base for the very reasons listed above.  To address the regressive nature of the tax on groceries the Chamber has been a longtime advocate of refund programs for lower income households.  That said, the question of excess revenue requires another evaluation than that of the past.

The South Dakota Chamber of Commerce and Industry thinks there is time in the remaining six weeks of the 2023 session to further evaluate the questions above.  The work continues.

Business Day at the Legislature is happening Thursday, February 23^rd at the Ramkota in Pierre. Register at https:/bit.ly/3E00P6F - early registration discount ends February 3^rd.

Thank you for your support of the South Dakota Chamber of Commerce & Industry.