PIERRE — With just hours left in the last regular day of business in the 2023 legislative session, lawmakers compromised to approve what some described as the largest tax cut in South Dakota history.

The plan would reduce the state sales tax from 4.5% to 4.2% for four years, saving taxpayers and costing the state budget an estimated $104 million in the first year of implementation. The impact to consumers works out to a savings of 30 cents for every $100 of taxable purchases.

Legislators also adopted increased funding for the “Big Three” – education, state employees and community service providers, such as nursing homes – in the state budget. The adopted budget for the 2024 fiscal year includes $7.4 billion in total spending, up 8.8% from last session’s fiscal year 2023 budget.

The House voted unanimously to approve the sales tax cut, and the Senate approved it 31-2. The lone “no” votes were from Sens. Reynold Nesiba, D-Sioux Falls, and Shawn Bordeaux, D-Mission.

The House voted 66-3 to approve the budget, which included the tax cut, and the Senate voted 29-3.

House Majority Leader Will Mortenson, R-Pierre, said the Legislature is taking care of the “Big Four” this year, with taxpayers as the fourth obligation.

“We are prepared for the notion that we need to take care of our obligations when we can, which is what we’re doing, and be prepared for rougher seas if they come our way,” Mortenson said during the Republican leadership press conference Thursday morning.

Legislators won’t return to Pierre until Veto Day on March 27. Gov. Kristi Noem previously threatened – without using the word “veto” – to withhold her support for the budget if lawmakers didn’t pass her proposal to eliminate the state sales tax on groceries. But she said nothing publicly for the past several days as legislators worked out a deal on tax relief, and her office said she had no immediate comment to offer Thursday.

‘Largest tax cut in state history’

It was Noem’s reelection campaign promise to repeal the state sales tax on groceries that kick-started tax cut debates in September. That announcement by Noem, a Republican, surprised many politicians in both major parties. Democrats had been advocating a grocery tax repeal for years, while many Republicans opposed it.

Since convening in January, the Legislature has whittled down several tax relief proposals, including the rejections of Noem’s proposal and a property tax rebate program.

The two chambers clashed over their expectations for the state’s fiscal future and whether to enact a sunset clause or a permanent state sales tax reduction. While Senate leaders pushed for a two-year sunset – about the same time the country will enter into a mild recession, some financial experts predict – House leaders were adamant the tax cut needed to be permanent.

But the two chambers agreed to a $104 million cut with a four-year sunset clause on Thursday. Although it would apparently be the largest single tax cut in state history in terms of raw dollars, other historical tax cuts – including a 1978 repeal of personal property taxes, and a mid-1990s push to reduce real-estate property taxes – are larger if adjusted for inflation or considered over multiple years of implementation.

Senate Majority Leader Casey Crabtree, R-Madison, was a member of the conference committee that struck the tax-cut deal. He said both the House and Senate had to compromise to achieve a tax cut – and now Noem faces a similar situation as she decides whether to veto the bill.

“We are very satisfied with where we’re at,” Crabtree said. “And it’s certainly within the governor’s right to do that. But as you know, the process also allows for the Legislature to override that veto with a two-thirds vote. So we’ll have a chance to play in that should we end up in that direction.”

Rep. Chris Karr, R-Sioux Falls, was also a member of the conference committee and the original architect of the $104 million tax cut bill.

He’d previously said implementing a sunset clause wasn’t “good policy.” But a sunset clause was necessary to get the Senate on board.

“I thought it creates way too much market disruption out there, especially in our business climates to have a two-year sunset. But a four-year sunset, I think we can work with that,” Karr said.

He added that he hopes to continue looking at the tax cut and revisiting the sunset clause in future sessions. He said cautiously conservative lawmakers might come to agree with him that South Dakota’s economy can handle a $104 million tax cut and fulfill its state obligations.

Meanwhile, petitions are circulating to put a food-tax repeal on the ballot in 2024. Sen. Nesiba, another member of the conference committee on the tax bill, referenced the petition drive in a floor speech against the bill. He said there are only two other states – Mississippi and Alabama – with a full sales tax on food.

“It’s wrong for us to be taxing formula out of baby bottles, and baby food off high chairs, and bread and beef off people’s tables,” Nesiba said. “If we pass this, I think it makes it really hard for us to repeal the sales tax on food.”

Substantial increases for Big Three

Karr also proposed bills to increase spending in the state, especially in regards to the Big Three.

In its budget decision on Thursday, the Legislature approved increases of 7% for education and state employees, and an increase to a 100% cost reimbursement rate for community support providers that rely on government funding, such as nursing homes. Other Medicaid providers, such as hospitals, are set to receive a 5% increase.

Those increases are higher than the 5% increase for the Big Three and the increase for community service providers to 90% reimbursement that Noem proposed in her December budget address.

Such an increase would be the highest for education funding since the half-percentage-point increase in the state sales tax rate in 2016, Mortenson said, which was meant to support better teacher pay in the state. South Dakota remains 50th in the nation for average teacher pay.

“Education is our strongest tool for upward mobility of citizens or kids,” Mortenson said. “We think it’s important that we continue to make funding our teachers and schools a priority.”

An increase in funding for state employees will ensure higher wages to stay competitive with other states and the private sector in attracting and retaining employees, said Senate Assistant Majority Leader Michael Diedrich, R-Rapid City.

Help for health care providers

The increased Medicaid provider funding would be a welcome relief for community service providers across the state.

Mark Deak, executive director of the South Dakota Health Care Association, told legislators in the House Committee on Appropriations earlier in the session that 15 South Dakota nursing homes closed in the last five years, with seven closures in the past 12 months.

Deak explained to South Dakota Searchlight earlier this year that a reimbursement rate of 100% still wouldn’t fully cover the costs of providers, because service costs aren’t updated frequently enough to address inflation and other factors. 

“I think the situation merits getting closer to 100% of methodology, because then you get closer to 92% or 93% of coverage,” Deak said at the time. “Then I think folks would have a better shot of making a go of it.”

Karr introduced a bill this session that would have required a yearly updated cost report for community service providers, and a bill that would have required lawmakers to reimburse community service providers at 100% every year.

Both were rejected by the Senate, but lawmakers have agreed to sign a letter of intent with the state Department of Social Services and the Governor’s Bureau of Finance and Management to annually update information to determine reimbursement rates for providers.

Karr said he’ll work to prevent future legislators from reducing reimbursement rates below 100%

“I’ll be here every year, saying that is not an option,” Karr said. “That is a service somebody provided on the state’s behalf. They did that service, they gave us a bill, we need to pay that bill in full. That’s going to be my stand going forward, and I hope other legislators remember that it’s an obligation.”

Mortenson emphasized that the Legislature used “conservative budgeting” during its decision-making process.

“Do we want tax cuts? Yes,” Mortenson said. “It also means that if there’re hard times coming, we need to be prepared for those, and I think this budget strikes that balance.”