South Dakota Exempts Water from Regressive Sales Tax, But Not Food

With general fund revenues coming in 13.8% higher this year than last, might there be room for us to talk about reducing the sales tax on food?

The Legislature’s Executive Board has before it for today+tomorrow’s meeting an issue memorandum from the Legislative Research Council on sales tax exemptions. The LRC counts 149 sales tax exemptions and places them in ten categories:

1. Required by federal law (5)
2. Reduce government operating expenses (9)
3. Courtesy (2)
4. Goods and services used for production (38)
5. Special tax applies in lieu of sales and use tax (12)
6. Reduce burdens of administering the sales and use tax system (16)
7. Satisfy needs that the government would otherwise be asked to satisfy (12)
8. Make the sales and use tax less regressive (10)
9. Increase taxable sales (9)
10. Prevent businesses from being harmed by the sales and use tax system (36)

The issue memo lists all of the exemptions in each category in a color-coded chart. The ten exemptions given to make our sales tax less regressive are the following:

1. Health services;
2. Social services (includes individual and family social services, job training and vocational rehabilitation, child day care services, residential care);
3. Water supply (except irrigation);
4. Sewerage systems;
5. Local and suburban passenger transportation, except limousine services;
6. Management, billing, bookkeeping, administrative, and related services provided to a rural water system by any cooperative or nonprofit corporation that is wholly owned by the water systems receiving such services;
7. Purchases of non-prescription insulin used by humans;
8. Prescription drugs used by humans;
9. Prescription durable medical equipment, mobility enhancing equipment, and prosthetic devices used by humans;
10. Sales of bulk water delivered for domestic use.

Hmm… we can recognize that taxing water is regressive, but we don’t apply the same logic to taxing food.

The LRC reminds us that we don’t include food among these regressivity exemptions because we want to maintain a broad tax base:

Finally, a broader base is desirable because it is the most responsive to economic growth and raises revenue in a reliable manner. Because sales of food for home consumption do not substantially decrease during an economic recession, the tax collected from these sales have been a steady and reliable source of revenue for this state. All efforts to exempt these sales from the sales and use tax base have been defeated for this reason [LRC, Draft Issue Memorandum: Sales Tax Exemption, November 2020].

Yet the LRC turns around a couple lines later and explains why taxing food, water, and other essentials is regressive and warrants consideration of exemptions:

…sales and use tax is a regressive tax system by placing an inequitable burden on those individuals who spend a larger percentage of their take-home pay, which is usually low-income individuals. For example, in a jurisdiction with a four percent sales and use tax rate without any exemptions in which the monthly pre-tax purchases for two individuals amounts to $2,000, but one of the individual’s monthly tax-home pay is $2,100, while the monthly tax-home pay of the other individual is $6,000, the effective tax rate for the individual with the lower income in relation to take home-pay would be 3.8% ($80 of $2,100 = 3.8%), while the other individual’s effective tax rate in relation to take-home pay would be 1.3% ($80 of $6,000 = 1.3%). To somewhat alleviate this inequality, certain purchases that are considered essential goods and services have been exempt [LRC, Nov 2020].

Taxing food takes a bigger chunk of the poor working man’s paycheck than of the rich trust-lawyer’s hefty haul. South Dakota’s revenues are going up even as the pandemic is putting the squeeze on lower-income workers. Reducing the tax on food would give working South Dakotans a small but useful boost in their purchasing power and help them weather the pandemic recession.