Republican Gov. Mike Rounds is talking about structural deficits again. State Senate Democratic leader Scott Heidepriem is talking about irresponsible spending again. They both make points that sound good. Neither one is drilling down to the bedrock reasons why our state government is struggling financially.

First, Medicaid spending rises without control. The recession is a temporary reason. The long-term challenge is a birth rate that is much higher in impoverished areas of our state where depending on government support rather than employment is a fact of life for many people.

Perhaps I’ve missed it, but I haven’t heard any of the Republican or Democratic candidates for governor talk about what he would do specifically regarding training and job development in Indian country.

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The failure to address this challenge means there will be increasing stress on state government’s budget, growing pressure for legislators and governors to raise state taxes, and decreasing flexibility to provide state support for K-12 schools, state universities and public technical institutes.

Second, we are refunding millions of dollars in tax revenue to agricultural processing projects, large building projects and wind farm developers. This practice can be stopped just as easily as it was started and expanded, through action by the Legislature.

The annual reports published by the state Department of Revenue and Regulation show that $14.85 million was refunded during the 2008 fiscal year and nearly $18 million was refunded during the 2009 fiscal year that ended June 30.

State government and city governments rely heavily on sales and use tax in South Dakota. Contractor excise tax is another very large source of government revenue. The construction refunds come directly from those two sets of taxes.

Perhaps someone can point to jobs which were created in South Dakota directly as a result of the construction refunds. Looking at the list of applications for refund permits, it appears they are mostly or maybe all projects which would have been constructed anyway.

How significant are the construction refunds?

From 2007 to 2009, state sales and use tax collections increased a total of $57 million, while contractor excise tax collections slumped by a total of $7 million. During that same two-year span, state government gave nearly $33 million back through the refunds.

The refunds aren’t allowed for projects for retail, housing or health care. The refunds also aren’t allowed on projects which don’t pay property taxes.

Not that legislators haven’t tried. You can go through legislative sessions from past years and find failed attempts to provide construction-tax refunds for school projects, for example.

Now the system is twisted in an odd knot. While local taxpayers foot the bill for the construction taxes on a public project, a private developer might qualify for a refund.

 As for wind power, facilities which produce 10 megawatts or more (that’s five to 10 turbines, depending on the size) pay one-half of the excise tax; smaller facilities pay no excise tax. With the current push from the federal government for wind power, does this subsidy still make sense?

Third, revenue from state bank-franchise and bank-card taxes goes up and down like a roller coaster.

It climbed from about $61.8 million in fiscal 2006 up to $75.7 million in 2007, then slid back to about $69.9 million in 2008. Those are wild swings.

But things turned truly bad in fiscal 2009. Bank tax revenue plummeted to about $48.8 million, back to 2004-2005 levels. That’s a $21 million drop from 2008, and a $27 million drop from 2007.

Essentially, bank tax revenues returned in 2009 to a more traditional level. During the late 1990s and the first half of this decade, bank tax revenues generally ran in the $40 million neighborhood, ranging from about $38 million to a peak of $50 million.

The huge run-ups in the 2006-2008 period helped create a false security for the state treasury. Now when we need the money most, the bubble has burst in the banking sector.

The last thing anybody probably wants to hear is that another reserve fund needs to be created. Yet the fluctuations in the bank tax suggest that a different approach might be wise so that peaks are smoothed and valleys can be backfilled.

A simple concept might be stashing away the excess any time the bank tax revenues exceed the previous year. Then the money could be tapped in the down years.

A fourth reason for our state government’s budget difficulties is a choice made by voters in the 2000 election. They repealed the state inheritance tax.

The inheritance tax actually was the second state tax in the history of South Dakota. It was created in 1905. During the years when pressure was building for the repeal, the tax was producing large amounts of revenue for state government: $25.8 million in fiscal 1998; $26.4 million in 1999; and $28.4 million in 2000.

One of the arguments against the repeal was that roughly half of the tax came from heirs who lived outside South Dakota. Nonetheless, the simple point of a death tax being unfair made for an easy victory at the ballot box. Constitutional Amendment C passed with 80 percent support.

The repeal took effect July 1, 2001, at the height of the inheritance tax’s importance to state government. For the 2001 fiscal year, the inheritance tax generated $34.9 million. Because of the time inheritances take to be settled, the tax continued to bring significant amounts of money into the treasury with $23.5 million in 2002 and $27.2 million in 2003.

The fall-off accelerated from there. Inheritance tax revenues fell to $9.3 million in 2004; $4.4 million in 2005; and just $740,256 in 2006.

Reinstating the inheritance tax isn’t even an option for the Legislature to consider. The constitutional amendment specifically prohibits it. Only another statewide vote could reopen that door.

When you roll these developments together, you better understand how state government now faces the deficits it does, including a projected shortfall of $107 million for fiscal 2012.

We are in an economic slump, true, but there are major factors — Medicaid spending growth, large refunds and exemptions, unpredictable bank taxes, and permanent loss of inheritance tax without an identified replacement or offset in spending — which need to be frankly addressed.

It’s hard to row a leaking boat for very long.

Bob Mercer is a reporter and columnist on state government for the Capital Journal.