SB 99: Mehlhaff Files Plan to Raise State Sales Tax to 6.2% to Replace Most School Property Tax

Senator Jim Mehlhaff (R-24/Pierre) follows through on a proposal he made last fall and files Senate Bill 99, which would replace property taxes levied by K-12 school districts with an additional two percentage points of state sales tax.

Unlike his colleague John Carley (R-29/Piedmont), Senator Mehlhaff is not proposing to eliminate all property taxes. SB 99 zeroes the levy only for school general funds and special education funds. SB 99 does not touch property taxing authority for counties, municipalities, townships, and special districts. SB 99 still allows schools to levy taxes and issue bonds for capital outlay.

Unlike Senator Carley, Senator Mehlhaff cowboys up and pays for this tax break, proposing to raise the state sales tax rate from 4.2% to 6.2%. SB 99 then places 32.3% of the state sales tax received into a new “local effort replacement fund,” via which the state would redistribute that additional sales tax revenue to the schools. Mehlhaff generously rounds up: 32.3% of a 6.2% levy is actually 2.0026%, which based on FY 2025 taxable sales would give schools an extra $879,000 on top of the $676 million that the additional 2% sales tax would generate.

Note that SB 99’s formula does not dedicate the two percentage points of the sales tax. If a future Legislature dropped the sales tax to 4%, SB 99 would not give schools half of the sales tax revenue. SB would send (32.3% x 4% = ) 1.29 percentage points worth of the state sales tax.

In short, SB 99 commits the state to spending just about one-third of its sales tax on K-12 schools in addition to current state funding.

In seeking to shift some tax burden from property owners to shoppers, Senator Mehlhaff goes much farther than Governor Larry Rhoden. The Governor’s SB 96 only provides counties the option to adopt a local sales tax that would replace at most only 25% of homeowners’ property tax bill. Senator Mehlhaff’s SB 99 imposes a statewide tax policy that would cut everyone’s property tax bill, on homes and commercial property—by over 50%.

Recognizing the monumentality of this shift in tax policy, Senator Mehlhaff wants SB 99 to wait a year to take effect. School taxes would go poofski and sales tax would jump on July 1, 2027, when sales tax is already scheduled to rise from 4.2% back to 4.5%.

Replacing local school property tax with state sales tax could have the welcome effect of smoothing out economic inequities. Districts with low property tax bases and low sales tax revenues would get to share the wealth that places like Sturgis and Sioux Falls make with big events and shopping.

But SB 99’s sales tax for schools, like SB 96’s optional sales tax for counties, would deepen our dependence on a regressive tax system that takes a larger portion of lower-income South Dakotans’ income and fails to tap the wealth of trust babies and other rich tax dodgers who exploit a state tax system rigged to protect money rather than people.

SB 99 awaits a hearing date before Senate Taxation.