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HB 1265 Challenges Partridge Backtrack by Mandating Sales Tax Reduction Based on Overall Revenue Growth

Senate Bill 86, Senator Jeff Partridge’s effort to backtrack on his famous 2016 amendment’s promise to give back that year’s half-penny sales tax hike with extra revenue from remote online sales, passed the Senate easily a couple weeks ago and awaits House Taxation’s review.

But the Partridge Backtrack has competition on the House floor this afternoon. House Bill 1265, which started as an effort just to let legislators look at tax returns from specific businesses so they could figure out exactly how much money we’re getting from our new sales tax on out-of-state vendors (and which Governor Noem opposed, transparency my foot!), was hoghoused Wednesday into a modified version of the tax reduction Partridge promised in 2016.

HB 1265 pins the sales and use tax rate at 4.5%. However, each fiscal year, if the amount of sales tax revenue we take in beats the preceding year’s revenue plus inflation, we knock down the next fiscal year’s sales tax rate by a tenth of a percentage point.

Now I think the intent of the HB 1265 hoghouse is to make the original Partridge adjustment: every $20 million in additional revenue triggers another tenth-of-a-point reduction in sales tax rate. HB 1265 says the sales tax rate cannot be cut below 4%. However, its language doesn’t make clear how to remove multiple tenths to get to that maximum half-point cut:

For each fiscal year in which growth in gross sales tax revenue in the state general fund as compared with its immediately preceding fiscal year, exceeds the adjusted cost of living plus twenty million dollars, the rate of tax imposed by this section is reduced by one-tenth percent, effective on the next fiscal year. The rate of tax under this section is not reduced below four percent [HB 1265, as amended 2019.02.22].

As written, HB 1265 appears not to have a way to get to a full half-point rate cut. We check revenue, compare it to last year’s revenue adjusted for inflation, and if we’re more than $20 million ahead, we cut 0.1 point off the sales tax rate for the next fiscal year. The Partridge Amendment said we got 0.1 point off for $20 million in extra revenue, 0.2 million off for $40 million, 0.3 of for $60 million, and so on. HB 1265 fails to provide that stepping mechanism. We can tell what you’re thinking, HB 1265 sponsors, but the law demands that you write it all down.

Arguably, HB 1265 does improve on the Partridge Amendment in not tying the tax cut strictly to remote online sales tax revenue. Apparently it’s a sticking point getting the Department of Revenue to tell us exactly how much each online vendor collets for us; HB 1265 says, fine, we’ll just calculate the cut from overall revenue, and wherever the surge comes from, online or off, if we get a surge, we’ll ease back the rate.

But decoupling from online revenue poses the possibility that increased sales tax could reflect increased sales that reflect increased need for government services. Suppose sales tax rises because we get an influx of farmers and entrepreneurs who want to plant and process hemp. Those hempsters are going to put more kids in our schools, who will require more funding. Cutting tax rates just because revenues are up isn’t necessarily sustainable.

HB 1265 also has an unclear and possibly unworkable timeframe. Enact this bill on July 1, and we need to look at revenues for Fiscal Year 2019, which ends June 30, right away. We need to do an instant calculation and immediately transmit any rate reduction to all vendors in South Dakota and across the country under Wayfair for Fiscal Year 2020. Applying the rate cut HB 1265 appears to envision doesn’t seem doable. Legislators may need to take HB 1265 back to the language of the original hoghouse offered Wednesday, which counted revenue in calendar years, then applied the rate cut to the next fiscal year, giving the Department of Revenue all winter and spring to count the cash, do math, and let everyone know what the sales tax rate will be come July 1.

If rewritten to work as intended, HB 1265 will gauge the House’s willingness to challenge the Partridge Backtrack on one key point: HB 1265 mandates the rate reduction, while SB 86 leaves it at the Legislature’s discretion each year.

House Bill 1265 is near the bottom of the House’s Crossover Day calendar this afternoon.


  1. lrads1 2019-02-26 21:38

    Either the five Appropriations Committee members who signed onto this bill haven’t learned what has been spoon fed to them during their hearings, or they are bargaining for another token in the game of “I’m not a Democrat; I’m not a RINO; I’m not a wacky; I just want to keep you guessing.”

    Every Medicaid dollar spent in SD this year is composed of about 44 cents state money and 56 cents federal money. The maximum state match is 50 cents on the dollar. As our state’s personal income INCREASES, the federal share of Medicaid match DECREASES, to the tune of about $8 million per percentage point. In the good ag years, our federal match dropped close to 50%. As ag fortunes and our state personal incomes have fallen, our state match requirement has decreased again.

    HB 1065 irresponsibly ignores not only the Medicaid factor; it also ignores differences between the consumer price index and the inflation factor unique to the basket of government services (think medical inflation…especially in a state that has refused to accept $5 million a week in federal Medicaid funding since 2012 (what is that?…just a little short of $2 billion invested in our medical delivery systems…I wonder what that might have done for my health insurance premium?).

    HB 1065 also assumes ALL extra tax receipts above inflation are attributable to internet sales tax collections…or at least that they ought to go to tax reductions. But who cares about details…they are such a pain…

    What a dishearteningly simplistic reflection of legislative members responsible for our state budget.

  2. Cory Allen Heidelberger Post author | 2019-02-26 22:55

    $5 million a week?! Boy, that would heal a lot of owies.

    You’re right, lrads1, HB 1265 oversimplifies revenues and assumes any notch up in sales tax must be remote seller revenue. It also quickly discounts that revenue and leaves the tax rate stuck at 4.5%.

    Consider: suppose in the first fiscal year of Wayfair tax we got $50M extra above inflation. HB 1265 would cut the sales tax to 4.3% for the following year. That $50M extra then becomes part of the baseline for the following year. If actual Wayfair tax the next year is $60M, we don’t get a cut to 4.2%. $50M would be part of the baseline, so only $10M would be new revenue, and the sales tax rate would jump back to 4.5%.

    Plus, lowering the sales tax rate will sandbag revenue. Governor Noem figures we’ll see $1.073B in sales tax revenue in FY2020, a $38.4M/3.71% increase over FY 2019 projection. If inflation runs at 2%, we’d need an unexpected $2.5M extra to trigger the first tenth-point HB 1265 cut.

    But suppose we got that cut, thanks to a total $1.075B in sales tax revenue. Next year, we only charge 4.4%. Assuming another year of 2% inflation, that tenth of a point we knock off the rate knocks about $25 million in revenue off the FY 2021 books. The rate cut kills itself.

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