A bill aimed to make groceries a bit cheaper was once again defeated before reaching the floor of the South Dakota House of Representatives.
House Bill 1154, which would have eliminated the sales tax on food items while raising it .35 percent on other goods and services to compensate, was killed by 10-4 vote along party lines in the House Taxation Committee on Thursday.
Proponents said abolishing the tax would make it easier for poor families to buy food, while opponents said it would disrupt a stable revenue stream.
This is the fifth time the bill has come before, and been struck down by, a committee in recent years, and a ballot measure to remove the tax was soundly defeated by voters in 2004.
Rep. Marc Feinstein, D-Sioux Falls, one of the bill’s sponsors, characterized the legislation as helping lower-income families afford food. South Dakota has the three poorest counties in the nation, 40 percent of its public school students qualify for free or reduced lunches and one out of every eight of its citizens are “food insecure,” he said.
Feinstein said eliminating the tax would give $350, or roughly three weeks worth of groceries, back to families. And by increasing taxation slightly on other goods and services, the bill was revenue neutral, he said.
He also read a letter from Chairman Kevin Keckler of the Cheyenne River Sioux Tribe stating his support for the bill. The tax was creating extreme hardships on tribal members, Keckler’s letter said.
Feinstein ended his testimony by saying eliminating the current tax was a necessity.
“We have a sales tax on baby food and baby formula, but we do not have a sales tax on the feed and food for pigs and horses. That is wrong,” he said.
Minority Leader Bernie Hunhoff, D-Yankton, also said the current tax structure is fundamentally wrong, pointing out that South Dakota is only one of seven states that taxes groceries.
“We have an immoral tax system and we can do something about it,” Hunhoff said.
According to a recent study by the Institute on Taxation and Economic Policy comparing tax distribution across all 50 states, South Dakota was ranked as the third most regressive tax system in the nation. Families in the state who fall into the lowest 20 percent for income pay 11.6 percent of their earnings in taxes, compared to the 2.1 percent of earnings paid by those in the highest 1 percent of income.
Nationally those figures are 11.1 percent and 5.6 percent, respectively, the study shows.
Joy Smolnisky, director of the South Dakota Budget and Policy Project, said the state was also ranked third in regressivity when the study was conducted four years ago. The state’s lack of an income tax and inclusion of grocery tax are two of the reasons for that assessment, she said.
Smolnisky emphasized that labeling the system as “regressive” is not a value judgment, but more a descriptor for how it operates. Her organization only researches facts and promotes education, leaving policy decisions to lawmakers, she said.
Opponents said lifting the tax would not substantially help lesser income families and instead disrupt a steady revenue stream for the state. Food sales taxes make up between 7 and 8 percent of the state’s general fund, with total sales taxes making up 56 percent to 60 percent.
Jane Page, the assistant director of the state Department of Revenue’s business tax division, said the sales tax is one of the largest sources of revenue for the state since it does not have an income tax.
Other states that have no income tax or grocery tax often have other revenue streams that South Dakota doesn’t, such as oil in Alaska, gambling in Nevada, and property taxes in Texas, Page said.
Also, eliminating the tax on groceries while raising it elsewhere only redistributes the burden, making other essentials such as utilities, clothing, diapers, toothpaste and laundry detergent cost more, she said.
Poorer families buying food on the Supplemental Nutritional Assistance Program, or food stamps, are already not paying that sales tax, she said.
Jim Terwilliger, a state economist with the Bureau of Finance and Management, said that South Dakota owes its overall low sales tax rates to the fact that it taxes a broad variety of goods and services.
Cutting down that tax base to more discretionary items, would create a more volatile revenue source, and only increase the sales tax rate, he said. Taxing a smaller basket of goods and services is the reason other states’ sales tax revenue, unlike South Dakota’s, decreased during the recession, Terwilliger said.
The current system has worked in past, and is the reason former Legislatures and governors have kept a low, widely dispersed tax philosophy, he said.
“Our tax policy is that everyone pays a little bit, everyone pays their fair share,” Terwilliger said.