Democrats are taking another swing at repealing South Dakota’s food tax. District 15’s dynamic House Dems Erik Muckey and Kadyn Wittman offer House Bill 1281, which would set the sales tax on food and food ingredients to 0% while raising sales and use tax on everything else currently taxable to 5%.
Hmm… how much will cutting the food tax from 4.2% to 0% cost, and how much will the state gain by raising sales tax on everything else from 4.2% to 5.0%?
Three years ago, the Legislative Research Council issued fiscal notes estimating the cost of cutting the food tax from 4.5% to 0% and the cost of cutting sales tax on all goods from 4.5% to 4.2% and to 4.0%. I put those numbers in a spreadsheet, ignore inflation, and figure that the state can offset the revenue it would lose from not taxing food simply by raising the sales tax on everything else to 4.54%. Raising the sales tax on non-edibles to 5.0% would produce revenue 2.38 times greater than the lost food tax revenue. In 2023 dollars, I figure the net gain in revenue would be around $150 million. Extrapolating to the Bureau of Finance and Management’s projection that our 4.2% sales tax rate on everything will raise $1.56 billion in Fiscal Year 2027, I figure HB 1281 would generate $159 million more than unchanged sales and use tax.
HB 1281 would raise significantly more money than it would return to taxpayers. You’d pay less tax at Hy-Vee but more tax at Scheels.
Reps. Muckey and Wittman already have designs on that extra money. After 23 sections of amending tax code, HB 1281 directs the state treasurer to put 2% of all state sales and use tax revenues into a new “school building construction fund” from which the Department of School and Public Lands will make zero-interest loans to school districts to cover up to 40% of the cost of building or expanding school buildings.
2% of 5% is 0.1%. HB 1281 is raising sales by 0.8 percentage points. Zeroing food tax eats up 0.34 percentage points. The school construction fund eats up another 0.1 percentage point. If I’m reading it right, HB 1281 leaves 0.36 percentage points of the sales tax increase as mad money for the Legislature.
Of course, good Republicans will have to kill House Bill 1281 immediately, not because Democrats thought it up, not because it raises taxes, but because it encompasses multiple subjects. Changing sales tax rates, creating a new state fund, making loans to school districts—those are multiple subjects. Republicans, in their unwavering fealty to the single-subject rule, cannot in good conscience support HB 1281… at least not until Reps. Muckey and Wittman pare it down to just the sales tax changes and stuff the school construction fund into one of the carcass bills filed by the slower thinkers in Pierre.