“It is regressive,” he said. “There’s no denying that.”
But Mehlhaff said the state’s modest sales tax increase will bring a much-needed reprieve from rising property taxes, under two bills Republican Gov. Larry Rhoden signed into law last week.
South Dakota is among several Republican-led states this year pushing higher sales taxes as a way to pay for other tax cuts. The moves will force lower- and middle-income residents, who spend a larger share of their earnings than the wealthy, to foot more of the bill for state services, advocates say.
“Rich families have the luxury of taking away their incomes into savings, but then low-income people, middle-income people, they spend all their income to make ends meet or to pay for necessities,” said Aidan Davis, state policy director at the left-leaning Institute on Taxation and Economic Policy. “And that’s really the reason why these consumption taxes fall so much harder on everyday people.”
In some states, including Georgia and Missouri, the efforts come as part of a yearslong push to reduce or eliminate state income taxes, which supporters say will make states more competitive for businesses and residents. In other places, including South Dakota, lawmakers see sales taxes as a way to help provide relief for climbing residential property taxes.
Under one of the new laws, South Dakota’s sales tax rate will rise from 4.2% to 4.5% next year, collecting an estimated $114 million in additional annual sales taxes. It ends a temporary sales tax cut lawmakers agreed to in 2023. A separate law passed this year allows counties for the first time to levy a half-cent sales tax to offset homeowner property taxes.
Last month, Bureau of Finance and Management Commissioner Jim Terwilliger estimated his familyof four would spend an additional $160 each year if his county implemented a new sales tax. But he projected the average property tax savings statewide would be about $660 per owner-occupied home.
Mehlhaff said sales taxes can help some counties, such as those in the Black Hills, collect more from tourists rather than local homeowners.
“And it makes some sense,” he said. “Because the people who come here are driving on our roads, they’re using our water and sewer systems, and those are things that are supported by property taxes.”
But he does worry that some counties could take advantage of the new provision, raising sales taxes even if homeowners don’t need significant property tax relief.
“It depends on how you look at it,” he said. “People who are coming here from Montana visiting Mount Rushmore, they might say, ‘Hey, why are we paying your property taxes?’”
Lawmakers have been facing mounting complaints over homeowner property taxes, which have increased since the COVID-19 pandemic, when a wave of migration and other factors drove up home values. As home prices soared, South Dakota home property tax collections surged from about $482 million in 2016 to about $815 million last year, according to the staterevenue department. Mehlhaff noted the state, which has no income tax, currently touts one of the lowestsales tax rates in the country.
While South Dakota is outright raising sales taxes, other Republican-led states are looking to broaden what categories of goods and services are taxed. But progressives worry that these moves could increase the burden on lower-income residents to fund schools, transportation and other state services.
Already, 40 states have tax structures tilted in favor of the wealthiest earners, according to the Institute on Taxation and Economic Policy.
With booming economies and an infusion of federal funds, Republican and Democratic states alike have repeatedly slashed taxes in recent years. But now, the federal government is cutting support to states and raising state costs for safety-net programs such as Medicaid and food assistance, Davis noted.
“So the conversations are more transparent and clear than in previous years,” she said. “The result of tax cuts that are permanent is that ultimately we’re going to make it up somewhere, and you’re going to make it up either through cuts to programs that people care about or you’re going to make it up by increasing consumption taxes.”
She said more states — including Florida, Ohio and Oklahoma — may be forced to look at increased sales taxes as some lawmakers and advocates push measures to abolish property taxes, which would constrict state revenues.
Shifting the Tax Burden
Last week, the Missouri House approved a ballot measure that would ask voters in November if they want to replace the income tax and give lawmakers broad authority to expand sales taxes.
While the state’s income tax provides about 65% of Missouri’s general revenue, Republicans have framed it as an unfair tax that undermines economic growth by taxing productivity and creativity.
Republican Gov. Mike Kehoe has said he wants to phase out the individual income tax to better compete with Florida, Texas and other states without income taxes. The proposed constitutional amendment, which passed the House on a nearly party-line vote, will now go to the Senate for consideration.
Lawmakers would have three years to expand the sales tax to currently untaxed services and end sales tax exemptions to raise enough revenue to replace the income tax without having to seek another statewide vote.
Elias Tsapelas, director of state budget and fiscal policy at the Show-Me Institute, a Missouri free market think tank, said eliminating the income tax would help the state compete for residents and business, while also providing lawmakers an opportunity to scrutinize state spending. Missouri’s budget has nearly doubled since 2019 — from about $28 billion in fiscal year 2019 to about $55 billion proposed for the upcoming fiscal year.
Tsapelas said Missouri loses hundreds of millions of tax dollars in annual sales tax exemptions. Among its dozens of exemptions, the state currently does not tax prescription drugs, agricultural supplies and digital goods such as e-books.
Expanding sales taxes to services could have a mix of effects: Taxing child care, for instance, would prove regressive, hitting working parents. But taxing financial services would likely affect those earning more.
“You can look at all the different things that are not taxed today in terms of goods or services, and they’re not consumed evenly across the income distribution,” he said. “So it really just depends on what all gets included.”
Democratic lawmakers argued that eliminating the income tax would lead to massive cuts to services like public schools, while shifting the tax burden onto the working poor.
In opposing the billon the floor last week, state Rep. Yolanda Young, a Democrat, said haircuts and plumbing services are among those likely to be taxed if the measure passes at the ballot box.
“If the income tax disappears, the burden will not disappear with it. The burden shifts to you,” Young said.
Framing the Argument
In some states, lawmakers have been explicit about increasing sales taxes to pay for other cuts. In other states, opponents worry that cutting property or income taxes means lawmakers will have to raise sales taxes later to fund state services.
In Georgia, Republican Gov. Brian Kemp proposed cuttingthe personal and corporate income tax rate from 5.19% to 4.99%. If enacted, the change is expected to cost about $750 million per year, funded with reserve state funds and an end to certain tax exemptions.
But tax cut proposals from other lawmakers could create billions in future state deficits, said Daniel Kanso, vice president of public policy at the Georgia Budget and Policy Institute, a left-leaning think tank in Atlanta.
“I think if they directly said, ‘We want to replace income taxes with sales taxes,’ it would be hugely unpopular, and that’s why they basically just said, ‘Trust us, we’ll find a way to pay for this later,’” Kanso said.
Georgia Republicans have framed the tax cut push as a way to address growing affordability concerns.
Republican state Sen. Blake Tillery has proposed more aggressive tax cut legislation that would waive income taxes for all Georgians on the first $50,000 a year for individuals and $100,000 for married couples. He says that would eliminate state income taxes for nearly two-thirds of Georgians, as Republicans work to phase out the income tax altogether.
With no statewide property taxes, Tillery said income tax cuts are the state’s best option to help families afford the rising costs of groceries, gas and other necessities.
Tillery said the tax cut wouldn’t require a sales tax hike because it would be funded by eliminating special interest tax exemptions, including the controversial sales tax exemption for the state’s booming data center industry. He said his bill, which passed the upper chamber last month, asks lawmakers to prioritize people over corporations.
“If you buy a laptop for your child to go to the University of Georgia, you pay sales tax,” he said. “But if you buy $15 million worth of computers because you’re building a data center, you pay no sales tax at all. That’s not helping anybody in Fulton County pay for child care.”
State Sen. Harold Jones II, the chamber’s Democratic leader, said he expects the governor’s tax plan to find bipartisan support this year. But he said the legislative proposals cut too far into state revenues.
“You have to make that up through sales tax. You’re not going to grow yourself out of that,” he said.
He said the state could provide more targeted relief to taxpayers through plans like a bipartisan legislative proposal to exempt feminine hygiene products, diapers and baby formula from sales taxes.
“We weren’t able to even get a hearing on that,” he said. “So when they start talking about actually trying to help the middle class, it’s not really a serious argument.”
This story first appeared in Stateline. Read the original here.
