In a significant setback for Senator John Carley, the South Dakota Senate Taxation Committee has rejected Senate Bill 243, which proposed a retail transaction tax to replace property taxes. The committee deemed the bill regressive and detrimental to rural businesses. This decision comes as Carley sought to alleviate the burden on his supporters, including fellow senators Mike Mueller, Julie Frye-Mueller, and Matt Smith, by facilitating a tax change without the need for a statewide petition.
The rejected bill aimed to implement a tax of $1.50 on retail transactions of $15 or more, and a 10% tax on purchases under that amount. Unlike Mueller’s initiative, which seeks to eliminate property taxes entirely, SB 243 would have allowed counties to continue levying property taxes while providing them funding through the new retail transaction tax. This mechanism intended to offer some tax relief, primarily for owner-occupied homes, farms, ranches, and businesses.
Senator Carley argued that the Legislature has not provided sufficient property tax relief through budget cuts, necessitating his approach to generate replacement revenue. However, his calculations have come under scrutiny. Carley claimed that the additional cost of $1.50 on a $300 purchase at Costco would be less than the proposed county tax under Governor Larry Rhoden’s optional county sales tax, which is capped at 0.5%. Critics pointed out that 0.5% of $300 equals $1.50, which undermines his argument.
The fiscal implications of SB 243 were also questioned. Carley cited an estimate from the Legislative Research Council (LRC) that the tax could generate around $1.5 billion in revenue. However, this figure was inaccurate, as the LRC had revised its estimate to approximately $1.167 billion as of October 29, 2023. Carley also mentioned a further reduction to around $800 million, a claim that has not been substantiated by any official communications from the LRC.
During the committee hearing, Derek Johnson from the Bureau of Finance and Management expressed concerns that the retail transaction tax would likely be a diminishing revenue source as budget and property tax needs grow. He pointed out that the tax would disproportionately affect small businesses and induce changes in consumer behavior.
The opposition to the bill was notably vocal. Angela Ehlers, representing the South Dakota Association of Conservation Districts, shared her concerns regarding the potential negative impact on rural communities. She explained that small towns like hers depend on local businesses, which would suffer as consumers might choose to shop in larger towns to avoid higher taxes. Ehlers highlighted the risk of losing essential local services, such as grocery stores and gas stations, if residents opted to travel to larger cities for purchases.
Senator Amber Hulse supported these criticisms, noting that rural residents often have to shop at multiple smaller stores, resulting in higher cumulative taxes than those incurred by urban residents with access to big-box retailers.
In a vote that reflected deep divisions, the Senate Taxation Committee ultimately voted 4-3 to defeat SB 243. The decision included a decisive vote from committee chair Sue Peterson, who missed the initial vote to defer the bill.
With the committee’s rejection of SB 243, the future of the proposed retail transaction tax remains uncertain. Team Mueller will need to continue gathering signatures for their initiative petition to place the tax on the ballot, with a deadline of May 5, 2024, to collect 35,017 signatures. As it stands, the committee’s decision underscores the challenges of implementing new taxation measures in South Dakota and the complexities involved in balancing rural needs against fiscal policy.
