98th regular Legislative session ends with historic tax cut, funding increases

PIERRE — Lawmakers have spoken regularly during the Legislative session about how well the House of Representatives and Senate have worked together the past nine weeks. And it's difficult not to believe them when on Thursday afternoon, both bodies passed a historic $104 million tax cut as well as increased funding for the state's core obligations.

The record breaking $7.4 billion state budget now heads to Gov. Kristi Noem's desk for her final approval. If she vetoes it, lawmakers will return to Pierre on March 27 to either override the veto or hash out a new budget proposal.

"We came in and delivered a big tax cut but .... We are still taking care of our state's core obligations," Rep. Will Mortenson, R-Pierre, House Majority Leader, said Thursday.

More:SD lawmakers vote to lower overall sales tax to 4.2% until 2027; pass $7.4B budget

Cutting the overall sales tax

The biggest question during session was what kind of tax cut would South Dakotans benefit from. Noem made it a priority in her re-election campaign and December budget address to cut the overall sales tax on food, returning $104 million to tax payers.

The $100 million became the gold ticket item and various tax cut proposals fit into that number from property tax relief to cutting the overall sales tax.

Noem's proposal to cut what's become known as the food tax died multiple times throughout session, because of a lack of appetite in the Senate. The House made its position clear it wanted to see a broad-based tax cut, with Mortenson repeatedly saying it would impact "food, fireworks, fencing."

Enter Rep. Chris Karr's bill to reduce the overall sales tax rate. The Sioux Falls Republican has brought the bill three times in previous sessions with the goal to reduce the sales tax to 4%. But in 2023, through serious negotiations and compromises, Karr finally got a win.

While there's a sunset clause attached to the bill meant to appease the Senate, that will drop the sales tax to 4.2% until 2027 if Noem signs off. And Karr is still hopeful legislators will come back in the future and take the clause off.

"I thought that [the two-year sunset clause] creates way too much market disruption out there, especially in our business climates," Karr said. "We can keep talking about the sunset in the future."

More:Gov. Kristi Noem vetoes 2 bills tied to underage drinking and assaults on school employees

Sen. Casey Crabtree, R-Madison, Senate Majority Leader, said the sunset clause was meant to provide insurance in case the economy does falter.

"I'm hopeful that our economy will be really strong and that in four years, Rep. Mortenson and myself are back here debating who needs to put their name on top of that bill," Crabtree said of repealing the sunset clause.

Big Three funding

In Noem's budget address, she wanted 5% funding increases for state employees, Medicaid providers and educators. The Legislature went above that for two of the three.

Medicaid community service providers, like nursing homes, will be reimbursed at 100% methodology rate while hospital and clinical providers will receive a 5% funding increase, Sen. Michael Diedrich, R-Rapid City, said. He added rural hospitals will also benefit from the funding increase.

"Knowing they'll be reimbursed at least at cost, they can provide more access, they can invest in more equipment, they can invest more employees and help build that rural health system," he said.

Included in the budget is funding for Medicaid expansion, which will start on July 1.

More:Medicaid expansion cost up $21M because of DSS staffing needs

Educators and state employees will receive a 7% funding increase. Educators haven't seen such a large increase in funding since 2016, Mortenson said. However, not all the education funding will be earmarked for teacher raises. South Dakota ranked 50th in the nation for teacher pay as of 2022, according to the National Education Association.

The budget is also meant to look at the future, striking a balance between funding obligations and being fiscally conservative, Mortenson said.

"We are prepared for the notion that the boom times don't last forever," he said.

What happens now?

The budget will now head to Noem's desk. It's unclear if she'll sign, because of recent comments threatening a veto, before the budget was set. It's also unclear if she'll approve lowering the overall sales tax.

On Friday, in her weekly newsletter, she called the proposal a "temporary tax holiday."

She's not been thrilled the food tax was so soundly defeated, saying that specific tax cut would impact all South Dakotans.

"That's something that'll be very hard to put back in place and that's why I want to pursue it is," Noem told reporters Monday."It doesn't pick winners and losers. It prioritizes people who live here and shop for groceries every single week. And it doesn't set us up for a future tax increase."

Lawmakers will return on March 27 to Pierre for Veto Day. If Noem vetoes the overall budget or the sales tax proposal, the Legislature can overrule her by a two-thirds majority.

"We are very satisfied with where we're at," Crabtree said. "And it's certainly within the governor's right to do that. The process also allows for the Legislature to override that with two-thirds so both will have a chance to play in that should we end up in that direction."

This article originally appeared on Sioux Falls Argus Leader: 98th Legislative session ends with historic tax cut, funding increases