Noem’s sales tax cut on groceries revived in SD Senate

March 7, 2023

PIERRE – The House and Senate are playing tug-of-war on tax cuts, with three days left before legislators leave the Capitol.

After the House of Representatives whittled numerous tax cut proposals down to just one earlier this session, the Senate has revived two major competing proposals – including the Gov. Kristi Noem-backed elimination of the state sales tax on groceries, which was resurrected Monday, and a property tax relief program that took shape last week.

Makenzie Huber of South Dakota Searchlight ( reports legislators are attempting to work out their differences by Thursday. After that, the only day left in the current legislative session is March 27, when they’ll return to consider any vetoes from Noem.

Whatever they decide, it’ll land on the governor’s desk. And Noem is adamant the state needs a tax cut that will address the needs of all South Dakotans.

“It’s my responsibility to do the right thing for the people of South Dakota, and I take that very seriously,” Noem said in a press conference shortly after her bill was revived.

Noem’s campaign promise to eliminate the sales tax on groceries was revived and inched out of the Senate chamber by one vote Monday afternoon. A number of senators who previously voiced their distaste for eliminating the grocery tax switched their vote, leading to the 18-17 tally.

Sen. Herman Otten, R-Tea, brought the bill back to life with a “hoghouse” amendment on a “vehicle” bill, which involves wholly rewriting an essentially blank-canvas bill with different language.

“This horse hasn’t been allowed to run the race to the end,” Otten said on the Senate floor. “This will allow all the options to be on the table.”

The tax cut would cost the state and save taxpayers about $102 million, according to the Governor’s Office.

The governor emphasized that her bill would primarily help South Dakota residents who buy groceries in the state year-round rather than tourists, who would share more of the benefit from an across-the board sales tax reduction. She added that her tax cut would do more to help all residents – including senior citizens, renters and the people “who make this state run” – than the other two tax cuts still alive.

The grocery tax repeal bill, House Bill 1094, now heads back to the House for consideration.

The House-favored bill is a reduction in the state sales and use tax rate from 4.5% to 4.2%.

However, the Senate amended the bill last week with a sunset clause that would return the tax rate to 4.5% in two years. Additionally, the Senate changed the rate in the bill from 4.2% to 4.3% on Monday, which would reduce the impact by about $35 million a year, dropping the value of the tax cut from $104 million to $69 million.

House Majority Leader Will Mortenson, R-Pierre, called the Senate’s approach “scattershot.”

“The House has never had more consensus or more clarity on a tax cut,” Mortenson said. “We studied the issue for a month. We held numerous committee hearings and decided on a broad-based tax cut that will help every single South Dakotan.”

Mortenson added that the sales and use tax reduction would apply to “food, fireworks and fencing supplies” – and a host of other purchases – instead of just grocery store items.

“We want it to be a significant size and we want it to be a permanent tax cut,” Mortenson said. “We would not have proposed a $104 million tax cut if we couldn’t afford it this year, next year and 10 years from now. We have clarity and consensus on our side and we’re looking forward to working with our friends in the Senate to see if they can gain some clarity on their side.”

In response to the proposed sunset clause, Mortenson introduced a hoghouse amendment to another vehicle bill, Senate Bill 104, on Monday that is identical to the sales tax reduction the House passed earlier in the session – but without the sunset clause added by the Senate.

Noem showed no sign of warming to that bill or the Senate version. She said the broad-based tax cut would be less impactful for taxpayers.

“I don’t think they’ll notice that tax cut very much,” Noem said. “It’ll be minimal compared to repealing the sales tax on groceries.”

She added that changing the state sales and use tax by decimal points makes it “easier for them to raise taxes in the future.”

“If we eliminate the sales tax on grocery store items, it’s gone,” Noem said. “We’re not bringing that tax back. That’s something that’ll be very hard to put back in place and that’s why I want to pursue it, because it doesn’t pick winners and losers.”

The other tax relief proposal is one that would send $425 to South Dakota homeowners each year as a way to relieve their property tax burden. The annual cost to the state’s general fund is estimated at just over $100 million. Since the money would come from the state, property tax revenue to local governments would be unaffected.

Noem called the property tax bill a rebate program.

“It’s not very Republican. South Dakota doesn’t do that and then try to sell it as property tax reform,” Noem said. “And I think a more honest discussion would be on really what the people of South Dakota want: They want fairness, they want to be respected, and they want an opportunity to make sure that we’re really giving them the benefit of a tax cut that they can see every day in their budget for these hardworking families in our state.”

Senate President Pro Tempore Lee Schoenbeck, R-Watertown, voted in favor of the property tax bill. The bill can be revisited each year, he said, which makes it more fiscally responsible than an outright tax cut. But he’d rather not cut taxes at all, he said.

“I’m not in favor of any of these options,” Schoenbeck said. “I think they’re fiscally irresponsible, period. With the sunset clause I could tolerate that one, or the property tax because you can relook at it. But to dig a hole? The nursing homes have got problems. We have Medicaid expansion. It’s going to increase costs. We’ve got our K-12 schools. We’ve got issues out there.”

He’s worried that a tax cut on groceries will lead to a future proposal to implement an income tax to replace the lost revenue. Noem is worried any other tax cut aside from her own would put the state budget at risk because voters could choose to eliminate the state sales tax on food in the 2024 election anyway. An effort to petition the issue to the ballot is underway.

Schoenbeck characterized Noem’s motives as political.

“I get she wants to have a national headline that says she led a tax cut thing,” Schoenbeck said. “Me? I just care about fiscal responsibility. I spent a lot of years trying to help this state just be normal. And it does a lot of damage to us when the governor’s objectives are national and the rest of us are just trying to stay here and fix problems.”

When asked if Noem would sign a budget that includes a property tax credit payment, she said it “seems like a really irresponsible budget.”