Correction: Legislature Strikes Dedication of Half-Cent Sales Tax to Education and Property Tax Relief

Well, I screwed that story up. Yesterday I reported, based on a hasty reading of Senate Bill 35 that the conference committee had stripped the language the House inserted that removed the 2016 Schoenbeck Amendment, which dedicates 63% of the half-penny sales tax implemented last June 1 to K-12 teacher pay, 3% to vo-tech instructor pay, and 34% to property tax relief.

I was mistaken. SB 35 Section 3 strikes the Schoenbeck Amendment:

Section 3. That § 13-1-65 be repealed.
13-1-65. From the proceeds of SL 2016, ch 65, each year sixty-three percent shall be dedicated to increasing teacher salaries by school districts, thirty-four percent shall be dedicated to reducing the property tax levies for general education for all classes of property, and three percent shall be dedicated to increasing instructor salaries to competitive levels at postsecondary technical institutes.

I did read SB 35 correctly on the restoration of the 0.3% inflationary increase approved for state aid to general K-12 education, as confirmed by SDPB and Bob Mercer. SDEA says the 0.3% increase will raise the target teacher salary, which is the basis of state aid calculations, from $48,500 to $48,645. However, looking strictly at the budget lines, the final budget bill appropriates $449,193,174 for state aid to general education, a 0.18% increase from last year’s $448,405,255 appropriation.

But the removal of the statutory dedication of the half-penny sales tax to education and property tax relief still strikes me as problematic. Senator Billie Sutton (D-21/Burke) insists I shouldn’t:

“If we don’t strike Section 3, then we have a real problem. We would have to cut education by $5 million for FY17 and FY18,” Sutton says. “So it’s very important that the public knows and understands that this isn’t an attempt to take money away from education. This is actually an attempt to make sure that education does not have a cut” [Kealey Bultena, “Education Receives 0.3 Percent Increase,” SDPB Radio, 2017.03.10].

SDEA President Mary McCorkle concurs with Senator Sutton:

Lawmakers also had to deal with some conflicting statutes with regard to the half penny sales tax and the state formula. Last year’s legislation which allocated the half cent sales tax also contained language to ‘earmark’ 63 percent of the new revenue for the formula. However, with sales tax revenues coming in lower than expected, lawmakers may have had to cut K-12 funding by about $5 million. The funding formula, on the other hand, requires that schools receive an inflationary increase of .30 percent.  In order to reconcile the differences, lawmakers opted to remove the earmark legislation from the statute giving public schools a better deal.

“There is some confusion about why lawmakers removed the percentage increase in SB 35; many were concerned that teachers would lose what they received last year.  SDEA assures you that the money you received last year is still there with a little more to work with,” said McCorkle.  “We have to keep the focus on the formula. It’s the target salary and the annual inflation factor that will drive education funding in the future. Despite the revenue challenges, lawmakers were able to keep their commitment to schools by giving schools the inflationary increase and therefore increased the target for the state’s average teacher salary.  This is good news for our schools, teachers, and, certainly good for South Dakota’s students.”

[South Dakota Education Association, “Schools to Receive Modest Funding Increase,” Lobby Line, 2017.03.10].

What matters most here is that the Legislature upheld its commitment to raise K-12 funding by the index factor instead of balancing the budget by zeroing out the promised K-12 funding increase.

But at peril of screwing up again, I contend that Senator Sutton, McCorkle, and others defending Section 3 of SB 35 are misreading the law. Read the text they are striking again:

From the proceeds of SL 2016, ch 65, each year sixty-three percent shall be dedicated to increasing teacher salaries by school districts, thirty-four percent shall be dedicated to reducing the property tax levies for general education for all classes of property, and three percent shall be dedicated to increasing instructor salaries to competitive levels at postsecondary technical institutes [SDCL 13-1-65, enacted 2016.06.01; to be repealed by SB 35 2017.07.01].

That law earmarks the ninth half-penny of our sales tax (the 0.5 in the 4.5) to K-12 teacher pay, vo-tech teacher pay, and property tax relief. But it does not say that if sales tax falls short, that’s all the money that those three budget lines get. If 63% of the half-penny sales tax is, as Sutton says, $5 million short of what the formula dictates, SDCL 13-1-65 does not restrict the Legislature from filling the gap with other funds, and the funding formula in SDCL 13-13-10.1 requires them to fill that gap.

The Schoenbeck Amendment didn’t put teacher pay at risk; it only wrote in law on dedicated funding source for teacher pay.

The Schoenbeck Amendment did guarantee that little 3% slice of the sales tax pie for vo-tech instructor pay. Even as they agreed to get rid of the statute with Section 3, the conference committee felt the need to add Section 6 to protect the vo-tech money:

Section 6. That § 13-39-75 be amended to read:
13-39-75. The presidents of the postsecondary technical institutes, acting pursuant to rules established by the State Board of Education, shall use the money provided pursuant to § 13-1-65 SL 2016, chapter 65 to increase instructor salaries to competitive levels at each postsecondary technical institute. The amount of money provided each year shall be increased by the index factor as defined in § 13-13-10.1. [SB 35, Section 6, as added by conference committee, 2017.03.10]

So if the funding formula (target teacher salary plus index factor) protect K-12 funding, and if SB 35 Section 6 protects the vo-tech salary boost, what does SB 35 Section 3 really change?

What about that property tax relief? That was the part of the 2016 deal that kept the Retailers Association from torpedoing the teacher play plan: basically, for every $63 we aimed at teachers, we handed businesses $34 back on their property taxes. We shifted $40 million from property tax payers to sales tax payers. The only part of the 2016 deal that guaranteed that shift would happen was the Schoenbeck Amendment. SB Section 3’s repeal of the Schoenbeck Amendment means that property tax relief may have been a one-time boon… and it may have allowed the Legislature to pass its budget woes off to the local school districts that will levy their property taxes.

But few if any legislators appear worried about that possibility. The House approved the conference committee report 63–4. The Senate concurred 34-1.


10 Responses to Correction: Legislature Strikes Dedication of Half-Cent Sales Tax to Education and Property Tax Relief

  1. Darin Larson

    Cory, I am in agreement with your reading of the law with regard to the Schoenbeck amendment. Dedicating the revenue stream from the half penny sales tax increase via the Schoenbeck amendment does not limit the amount spent to reach the average teacher salary target of $48,500 (now $48,645 for FY2018). It merely assigns, at a minimum, that revenue stream for the purposes specified in the Schoenbeck amendment.

    I hope there is more to the legal picture that we are not seeing, but I’m afraid this decoupling of revenue from expenditure leaves open the possibility of shenanigans in the future (see video lottery money going into the general fund, for example.)

    I listened to the committee hearing and the state official from BFM did not give me a high degree of comfort that he knew what he was talking about. He talked about a conflict in the law that did not appear evident to me and he did not specifically get into the details of the conflict. Why it was not a conflict last year and now it is a conflict is a mystery to me as well. I wouldn’t trust them any farther than I could throw them.

  2. I am in agreement with Mr. Sutton. He sits on the committee of appropriations, which is headed by Mr. Tidemann, not that pretty young Ms. Peters, and that means Mr. Sutton probably has inside information and also is experienced in the legislatures. He knows what he is doing and does not speak when he knows not of what he speaks. He is not just one of us bloggers making guesses.

  3. Of course, we bloggers aren’t trying to come up with new funding for new projects like the SDSU animal disease lab without admitting that we’re raising taxes. Hmmm….

  4. No, we are not, Mr. H. Did Mr. Sutton vote for the fancy new million dollar animal barn they want to build?

  5. Joshua Walton

    Cory Allen Heidelberger , your article is still misleading about the target salary. In the final bill, it was not raised from $48,500 in 2016. It is still $48,500 for 2017.

  6. Joshua, let’s review the bill text. The House amendment tried to revise the target salary statute to set the target salary at $48,500 for FY2018 and delay the index factor adjustment until FY2019.

    The conference committee/enrolled version of SB 35 erased that amendment, leaving SDCL 13-13-10.1(4) unchanged:

    “Target teacher salary,” for school fiscal year 2017 is $48,500. Each school fiscal year thereafter, the target teacher salary is the previous fiscal year’s target teacher salary increased by the index factor;

    The target salary for the school year we are in right now, FY2017, remains $48,500. The target salary for the coming school year, FY2018, increases by the index factor, as intended by the 2016 legislation.

  7. Kathy Tyler

    I’m agreeing with Cory here. What happens next year or the next when sales tax revenues go up? They will all go into the general fund. Just a bit skeptical…

  8. According to SB 172, $1.615M moves from the half-penny sales tax to the SDSU animal disease lab (bond redemption and operations) in FY 2018, then $3.35M in each subsequent fiscal year.

    As long as the school funding formula remains intact, this diversion won’t affect the amount of money the schools get, just possibly the source. Whether sales tax revenue goes up or down, schools get the same index factor increase. Thanks to the vo-tech amendment in SB 35, the vo-techs will still get the same cut of that half-penny to raise instructor pay. The only thing left to flex is the amount of property-tax relief given by the half-penny sales tax.

  9. Joshua Walton

    Thank you, Cory. Yes, that is what I said. The target salary for… FY2017, remains $48,500. I appreciate your work on this. It appears that many people are confused by Sen. Sutton’s interpretation.
    My concern is that I understood the bill passed by the voters intended the extra tax to be applied in addition to the funding formula, and that certainly won’t happen this year, and perhaps won’t ever again. They can raise the target salary all they want. I see know legislation between the target salary and funding the salaries.
    I do not know if there is a separate bill giving any property tax relief. Of course, I don’t know why the retailers should have been afforded property tax relief, since the sales tax is paid by the customers, not the retailers.

  10. Ah, but there was no bill passed by us voters on this matter. The half-penny sales tax came from 2016 House Bill 1182; the new K-12 funding formula, based on the target teacher salary, came from 2016 Senate Bill 131.

    2016 HB 1182 contained the fund dedication that this year’s Legislature has erased. That dedication was only meant to guarantee that the money from the new half-penny sales tax was used solely to support the new formula, fund a pay boost for vo-tech teachers, and fund property tax relief.

    You’re right, the property tax relief was not necessary to make the new K-12 funding mechanism work. It was necessary, however, to get the SD Retailers to stand down and not oppose the sales tax increase in 2016, as well as to win the votes of certain legislators.