The FY2017 budget proposed yesterday by Governor Dennis Daugaard includes $989,613,013 (you could round that to one billion) in “tax expenditures,” also known as tax breaks. Tax expenditures are taxes on various goods and services which South Dakota could collect but which we (in many cases with the helpful advice of various lobbyists and other special interests) have decided we are better off leaving in the buyers’ or providers’ pockets.
$166 million of those tax breaks go to public sector buyers—federal, state, local, and tribal governments—not having to pay sales or use tax. That $166 million includes savings for schools; SDCL 10-45-14 extends that tax break to religious and private educational institutions.
But five sixths of those tax expenditures go to the private sector. Following is a list of the biggest cashers-in, those getting at least an eight-figure slice of the tax-expenditure pie, along with the statute authorizing each tax break:
|Statute: Recipient||Amount FY2017|
|10‐45‐18, 10‐45‐18.2, 10‐46‐16, 10‐46‐16.2: Livestock, live poultry, ostriches, emus, or rheas, if such sales are part of a series of transactions incident to producing a finished product intended to be offered for an ultimate retail sale. Also includes live cattle, buffalo, sheep, goats, swine, poultry, and horses.||$160,075,000|
|10‐45‐12.1: Health Services; 10‐45‐14, 10‐45‐15: Purchases by nonprofit hospitals; 10‐45‐14.10: Drugs to the extent used by humans that are prescribed, dispensed, or administered by a physician, chiropractor, optometrist, dentist, podiatrist, or audiologist; 10‐45‐14.9: Insulin that is not sold by prescription; 10‐45‐14.11: Durable medical equipment, mobility enhancing equipment, and prosthetic devices used by humans when prescribed by prescription, dispensed, or administered for a specific patient by a physician, chiropractor, optometrist, dentist or podiatrist; 10‐45‐14.12: Medical devices used by humans when prescribed by prescription, dispensed, or administered for a specific patient by a physician, chiropractor, optometrist, dentist or podiatrist; 10‐45‐14.6: Hospital meals paid for by a public entity.||$124,034,960|
|10‐44‐8: Insurance companies are exempt from all other taxes, except sales or use tax on tangible personal property and taxes on real property. Insurance companies do not owe use tax on the purchase of services, if the service provider does not collect the applicable sales tax.||$104,144,001|
|10‐45‐12.1: Financial services of institutions subject to the tax under Chapter 10‐43 (Bank Franchise) including loan origination fees, late payment charges, nonsufficient fund check charges, stop payment charges, safe deposit box rent, exchange charges, commission on travelers checks, charges for administration of trusts, interest charges, and “points” charged on loans.||$68,867,497|
|10‐45‐18.3: Feed for cattle, buffalo, sheep, goats, swine, poultry, ostriches, emus, rheas, and domesticated fur‐bearing animals defined in chapter 40‐35, if such feed is used by farmers or ranchers who are regularly engaged in the business of raising and feeding such animals, or producing milk for sale for human consumption, and horses and other animals with the family equidae. Poultry does not include any fowl other than domestic fowl kept and raised for the market or the production of eggs for human consumption.||$51,285,320|
|10‐45‐16: Commercial fertilizer, either liquid or solid, when sold in quantities of five hundred pounds or more in a single sale to be used exclusively for agricultural purposes.||$39,566,160|
|10‐45‐15: Seed legumes, seed grasses, and seed grains sold in quantities of 25 pounds or more in a single sale to be used exclusively for agricultural purposes.||$31,602,520|
|10‐45‐7: Lodging or campsites provided to any person for 28 or more consecutive days. Occasional rental of sleeping accommodations or camp sites, which is 10 or less days/year.||$31,326,167|
|10‐45‐9.1: Personal Property sold for lease.||$20,956,160|
|10‐45‐3.4: (1)Parts or repairs on machinery or equipment which are clearly identifiable as used primarily for agricultural purposes, including irrigation equipment, if the part replaces a farm machinery or irrigation equipment part assigned a specific or generic part number by the manufacturer of the farm machinery or irrigation equipment; and (2) Maintenance items and maintenance services used on machinery or equipment which are clearly identifiable as used primarily for agricultural purposes, including irrigation equipment.||$19,877,440|
|10‐45‐16.1, 10‐46‐17.5: Pesticides (including insecticides, herbicides, pesticides, rodenticides, and fumigants) and products or substances used in conjunction with application of the pesticides used exclusively for agricultural purposes. (Sales tax applies to endoparasiticides and ectoparasiticides)||$19,405,800|
|10‐45‐12.1: Exempts advertising services, which is the preparing and placement of ads. Exempts charges by media for placement of an ad in that media.||$19,236,816|
|10‐45‐19, 10‐46‐17: Motor fuel, including kerosene, tractor fuel, liquefied petroleum gas, natural and artificial gas, diesel fuels, and distillate, when used for agricultural purposes. Agricultural purposes includes hay grinding but does not include the lighting or heating of any farm residence.||$17,918,240|
|10‐44‐4: Tax credit for principal office or regional home office for insurance companies.||$13,556,094|
|10‐45‐12.1: Arrangement of Passenger Transportation; Arrangement of Transportation of Freight & Cargo; Local and Suburban Passenger Transportation, except Limousine Services; Trucking and Courier services, except air, except collection and disposal of solid waste; Pipelines, except Natural Gas; Transportation on rivers and canals; and school buses. 10‐45‐67, 10‐46‐55: Natural gas transportation by pipeline.||$12,609,440|
We can make sensible arguments for and against any of these exemptions. Consider the $68.9 million we forgo in taxes on financial services: that seems a fair trade for imposing on financial institutions the bank franchise tax, a state income tax that the banks seem perfectly happy to bear. An expert friend suggests that most businesses prefer a well-designed income tax to sales tax.
But notice that in exchange for exemption from $68.9 million in sales and use tax, banks are paying just $5.4 million in bank franchise tax this fiscal year and are projected to pay $11.4 million in bank franchise tax in FY2017. If I were a banker, I’d take that deal, too!
The $57.5-million gap between bank franchise tax receipts and bank tax breaks would cover the full $57 million Governor Daugaard says it will cost us by FY2021 to cover the state’s expected 10% of expanding Medicaid. Alternatively, claw back that portion of the bank exemption, then take out the tax break for either pesticides or advertising, and we have the funds for the Blue Ribbon plan while leaving over $910 million in tax breaks on the table.
13% of our state tax breaks could fully fund the two biggest funding priorities that Governor Daugaard says he wants the state to tackle in FY2017. South Dakota has the money; does the Legislature have the will to collect it?