Three Tax Breaks

Two Were in Play – One (temporarily) Back from the Dead

How They Measure Up as Tax Breaks vs Tax Policy

Tax cuts are tricky under the best of circumstances and the 2023 Legislative Session is a long way from the best of circumstances, at least when addressing tax cuts.  Three proposals have been in the mix, seeking support and attention among special interest groups, lobbyists, legislators and any number of actual citizens who have dared to look behind the curtain.

In a dramatic move two weeks ago, a House committee killed the Governor’s bill to remove groceries from the sales tax.  At that point, the tax break race looked to have been narrowed down to bills that reduced the overall sales tax rate on EVERYTHING from 4.5% to 4.2%; with a difference that one had a sunset provision and the other made the reduction permanent.

Capitol-ism offers an analysis of the tax breaks still being considered by the Legislature, with three days left in the 2023 session.

First Jolt.  A bill was amended to put the idea of a tax break or credit related to property taxes back in play.  The original of this ideal drowned in the same bucket of water that snuffed out the Governor’s grocery tax bill.  It was revived by the Senate to provide a $425 “credit” to each property tax paying homeowner household.

Second Jolt.  Another bill was amended to revive the Governor’s grocery tax bill and it was sent to the House of Representatives on a vote of 18-Yeas to 17-Nays – the fewest votes necessary to pass the Senate!

What happened?!?!  The best explanation is that the makers of legal sausage started throwing their “beefs” at each other.  Thus, during this the last week of the session, there are three major proposals for tax cuts:

• Governor Noem’s proposal to remove groceries from the state sales tax (now SB 1094)
• Rep. Karr’s proposal to reduce the state’s tax rate from 4.5% to 4.2% as it is applied to all goods and services – which may or may not have a sunset clause as part of it. (HB 1137)
• Property tax proposal that would send people who pay property taxes on “owner-occupied” property (aka – their homes) a check for $425.  This isn’t exactly a tax cut but would be an offset to taxes paid and would cost the same as the other two proposals. (HB 1141)

Which one is best?  All of them could have reduced tax revenues or obligate spending by approximately $100 million dollars.  Does that fact render them all equivalent?  Are there criteria that can guide legislators and policy wonks like the South Dakota Chamber of Commerce and Industry to advocating one of these tax cuts over the others as a “best choice”? 

This issue of Capitol-ism will evaluate the tax reduction ideas along two lines of thought; which idea is the best tax break and which idea is the best tax policy, or could one idea fit both criteria?  Anyone familiar with Schrodinger’s cat will understand how convoluted this question could get.

To begin this evaluation, there should be an explanation of what makes for a good tax break and how that may differ from the criteria for good tax policy.

Here is a list of the principles for a good tax break:

§  Addresses a tax that is too high

§  Addresses a tax that is unfair

§  Is a tax break offered to the broadest possible number of taxpayers

§  Answers the question “Will taxpayers know they have received the tax break?”

§  Addresses whether or not the tax break can be sustained over time or will it need to be rescinded? 

And here are the principles that constitute a good tax policy:

§  Provides for equitable distribution of tax burden

§  Answers the question “Will taxpayers know they have received the tax break?”

§  Provides a stable revenue source for government functions

§  Provides sufficient funding for government operations

§  Is perceived to be fair

§  Is simple, easily administered and efficient 

Tax Break: The evaluation shared with the South Dakota Chamber of Commerce and Industry’s Board of Directors concludes that the Governor’s proposal to remove groceries from the sales tax represents the best tax break under consideration.

Addresses a tax that is too high – South Dakota’s sales tax rate is relatively low because the state has kept the tax base wide, including groceries, and the rate is lower than many states.  But when it comes to taxing groceries at all, this state is one of three that tax groceries.  The Governor’s proposal eliminates this tax which is higher that the vast majority of states.

Addresses a tax that is unfair - There is no real argument that taxing food is regressive and that low-income households pay a higher percent of their income in this tax.  The people in true poverty receive EBT cards that allow tax free purchases of food but the working poor get no relief.  Removing groceries from the sales tax addresses this problem

A tax break that is offered to the broadest possible number of taxpayers – This point is a little murky.  Removing groceries gives the tax break to all citizens who buy groceries, even kids that buy hot dogs for a scout cook out, and it is just horrid that anyone would pay a tax on a hot dog that just fell into the fire. 

Will taxpayers know they have received the tax break? – Removing taxes on groceries is the most visible tax cut of the three proposals.  It eliminates the entire 4.5% tax which makes it the deepest cut of the three proposed.  There will be people who are irked because they thought the tax was taken away and they will still have to pay the local sales tax which has a maximum rate of 2%.  There will be plenty of talk about this tax break.  The reduction of the overall tax rate in the other proposal will likely not be noticed, even though it would reach more people.

Can the tax break be sustained over time or will it need to be rescinded?  The state of South Dakota has received a number of cash infusions from the federal government that are best described as tsunamis.  These funds total more than $13 billion dollars over two years and clearly those funds have helped drive up the sales tax numbers for the past several years and will not be continued.  Can this be sustained if you throw a significant part of the tax base out the window?  The Chamber has evaluated the calculations offered by the Bureau of Finance and Management and there seems to be a way for South Dakota to grow out of this reduction.  If it takes a few years longer than expected, there will be enough cash lying around to fill in until natural growth replaces the loss of groceries.

Tax Policy: The evaluation shared with the South Dakota Chamber of Commerce and Industry’s Board of Directors concludes that the proposal by Representative Karr to reduce the tax rate on all purchases from 4.5% to 4.2% represents the best tax policy under consideration.

A tax policy that provides for equitable distribution of tax burden – South Dakota has followed the tax philosophy of having a broad tax base and keeping the rate as low as possible since the first ox died, stranding the state’s first citizens here for good.  Groceries provide a key to the stability of the taxes during good economic times, and the occasional recession.  Narrowing this tax base is simply bad tax policy.  The state had a rebate program for people who were low income and didn’t get EBT cards.  The program ended after eight years because there were only 200 or so households applying for relief.

A tax policy that provides a stable revenue source for government functions – Groceries are key to the stability of South Dakota’s revenue system.  Removing groceries not only reduces revenue starting immediately, but reduces the ability of the state to fund education and health programs during economic lulls. 

A tax policy that provides sufficient funding for government operation – Reducing the overall tax rate from 4.5% to 4.2% while revenue is running ahead of historic trends is a better policy than removing groceries because it can more easily be increased again which will take a two-thirds vote.  Raising the rate will be easier in the future than taxing groceries again.

A tax policy that is perceived to be a fair – All South Dakota citizens share the cost of public services.  People with lower incomes have expressed a sense of pride at still being able to say they are still taxpaying citizens.  The South Dakota Chamber of Commerce and Industry believes the state should address the regressive nature of the sales tax on groceries.  The idea of removing groceries from the tax base fails as a tax policy because it gives a tax break to 90% of the citizens that don’t need a tax break.

Will taxpayers know they have received the tax break? – This question is one that shows the weakness of lowering the rate from 4.5% to 4.2% on everything that is taxed.  It is a very small reduction that taxpayers may not know they received.  To its credit, this tax break will impact more people than removing groceries from the sales tax and it even allows businesses to get the tax break.  Every business purchases items that are taxed and the lower rate will benefit Chamber members.

A tax policy that is simple, easily administered, and efficient? – This criterion is about equal for both proposals.  South Dakota has a long history of administering the sales tax and will be able to deal with reduced rates or taking groceries out of the tax.

Door Number Three: Property Tax Credit – The debate over tax cuts has seemed a little like the TV game show “Let’s Make a Deal” hosted by South Dakota’s own Bob Barker and behind door number three is a property tax credit that would be given to households that pay taxes in the “owner-occupied” category.  The tax credit would be based on taxes assessed this year (2023) which are payable in 2024.  The Chamber has never been enthusiastic about using property taxes to accomplish the goals of this tax cut.

This option gives a break to the smallest number of people – owners of homes – and excludes people that rent homes or live in apartments.  It won’t be in effect until May of next year, and while being delayed, has an advantage of being given out during an election year.  It would be the easiest of the tax breaks to rescind if future budgets needed a revenue boost but that doesn’t mean the taxpayers won’t get steamed when their “credit” stops.

Conclusion: The Board of Directors for the South Dakota Chamber of Commerce has not decided which of the two leading tax breaks is the better policy overall.  The property tax credit is not considered a policy that should be adopted over the proposals to reduce the overall tax rate or to remove groceries from the sales tax.

This may seem sheepish.  But this conclusion recognizes several realities that can best be determined by the legislators.  Both proposals will reduce revenue by $100 million dollars or so.  Without a doubt, removing groceries will make that lost revenue more permanent but anyone  who thinks that ending a payment to property tax payers or increasing the overall tax rate is going to be easy, perhaps will benefit from having a medical marijuana card.

In the end, those legislators wishing to vote for the deeper tax cut will most likely vote for the Governor’s proposal . . . and . . . those legislators wishing to maintain the stronger tax policy will vote to reduce the overall tax rate. 

Whichever prevails in the next day or two, the South Dakota Chamber of Commerce and Industry will have a front row seat.

Just before this report was sent, the House of Representatives voted to defeat the Governor’s grocery tax version once again.