Sunday, December 7, 2014

South Dakota Takes A Pass On $600 Million A Year In Sales Taxes. A Lot Of These Exemptions Range From Outdated To Outrageous.

South Dakota Poorhouse
     South Dakota really, really needs to look at how much revenue it passes up in the way of sales tax exemptions.  Last year the Department of Revenue totted them up and came up with a total of $582 million in potential tax receipts that are lost to the state from a wide variety of businesses that are exempted from paying the 4% state sales tax. That's a huge amount of money in a state where the total state budget approaches $4 billion, about $2 billion of which comes from state revenues, the rest coming from the Feds. 
     I wonder how many of our elected officials in Pierre have heeded this note in the report I linked?  According to State Revenue Director Andy Gerlach, "Tax exemptions are an important component of South Dakota tax policies. However, exemptions always come with a cost. Exemptions reduce revenues otherwise available for programs, education, and other services for our citizens. Therefore it is critical that policymakers understand both the costs of exemptions and their effectiveness at achieving their intended goal."  Get that, state officials? Exemptions come with a cost.  It really is long past time to take a hard look, line by line, industry by industry, at every one of these exemptions and ask ourselves if the limited amount of money available for state and local programs is a reasonable trade off for giving numerous special-interests in this state a pass on paying sales taxes.
    The eye catcher for me is the "agriculture group," which gets about a $220 million break in sales taxes.  That sounds like a lot, but when you consider that farm income in this state in 2012 was around $10 billion, that number doesn't seem particularly daunting.  It represents about 2% of the ag community's annual take.  This break (I'm surmising, correct me if I'm wrong) probably dates back to the days when farming was a family-by-family affair and those small time, incredibly hard-working folks tilled the soil and kept their livestock without much support from the federal government. They deserved this break during an era when survival was a crop-year to crop-year crapshoot.  Ag economics are altogether different these days, with all sorts of risk amelioration opportunities abounding throughout the industry.  Other businesses that share similar levels of market risk have to pay sales tax on their inputs and maintenance.  Why shouldn't farmers?
     If you go through some of the other exempted groups, you'll get even more frustrated, especially if your business isn't one of them.  Add to the frustration that Governor Daugaard pointedly notes that his budgets can't spend money the state doesn't have, then doesn't lift a finger to see if there might be some untapped potential revenues in this list of exemptions that seem to go on in perpetuity without, as far as I recall, ever being called into question, much less revoked.  So we go on crying poor when it comes to funding education and suddenly find ourselves scrambling to come up with half-a-billion bucks to repair our insufficiently tended roads.
     I challenge the Governor to appoint a committee that's dedicated to doing a line-by-line analysis of the exemptions list and produce some economic justification for each one of those tax breaks.


  1. Yet they refuse to drop the sales tax on food, no trouble figuring out what their priorities are. Just plugging the loopholes you point out here would be enough to make a big dent in our teacher problem.

    1. Yes, it would, Tim--not to mention alleviate the cash crunch created by the sudden discovery that we've got serious roadway repair work obligations coming up.

  2. John,

    I think an examination of tax exemptions (and what / how much we currently tax items today) is a great idea.

    However, I'd encourage you to look not at gross farm income ($10 Billion) and instead at net farm income, as that will be where the bottom line gets impacted. If you refer to pg 47 of the document provided, net farm income was $4.6 Billion, so $220 million represents 5% of net income.

    But if you look at earlier years, like 2007, where net income was $1.8 Billion, suddenly that $220 million eats 12% of the bottom line. Granted maybe some of those tax dollars get reduced in bad years - maybe you forego putting that 3rd application of generic glyphosphate on the field... but many of those costs are sunk fixed costs.

    In good years with $7.50 bushel corn, it's not so bad. But when corn drops below $4.00, and all your inputs remain the same, that extra tax can be a heckuva wallop.

    Still, I think the evaluation is a great idea.

    1. Good points that need to be included in the discussion.

  3. John I'd support the idea of a committee performing a line by line review of the exemptions, but not sure the administration is capable of giving it a impartial review. There are too many backs to scratch and too many elections to be won in order for anyone to bother pulling away a tax exemption no matter how silly the average person might think it is.

    I almost wonder if we dug in here and found a few heavy hitters, is this something that should be brought to the public via a referendum? I've practically given up on expecting our elected leaders to get anything done, and the most significant issues over the past several election cycles seem to have been decided by the public after it was clear our legislature was unable - or unwilling - to act.

    The people rule after all - and their voices need to be heard.

    1. If this can be accomplished via referendum or initiative I'd be a strong supporter. Do you have some experience in that process?