South Dakota voters will determine the fate of Initiated Measure 28, which could eliminate the state sales tax on groceries.
Illinois, Oklahoma, Kansas, Arkansas, Utah, Tennessee, Alabama and Virginia have eliminated or reduced this tax, in accordance with the Urban Institute Tax Policy Center.
“Grocery taxes are considered a regressive style of taxes, and cutting or eliminating these taxes are imagined to ease the financial burden for low-income households, especially in light of rising food prices and inflation,” said Lucy Dadayan, principal research associate on the Urban Institute Tax Policy Center. “Cutting grocery taxes is a way more prudent policy decision compared with cutting income taxes, particularly for higher-income taxpayers, which is what most other states did.”
The South Dakota Capitol’s dome. After state legislators temporarily cut the state’s sales tax in 2023, South Dakota voters will determine this November whether to eliminate the grocery tax.
South Dakota Bureau of Administration
But opponents of the South Dakota measure have raised concerns that IM 28 could impact the state’s bond rankings, which might be triple-A from Fitch Rankings and S&P Global Rankings and Aa1 from Moody’s Rankings.
In 2023, state legislators lowered the state’s sales tax to 4.2% from 4.5% until 2027, which cost the state an estimated $100 million annually in revenue. The additional hit from the shortage of the grocery tax could affect rating agencies’ and investors’ views of the state’s budgetary stability, critics said.
“Money runs from instability,” Republican Matt Michels, South Dakota lieutenant governor from 2011 to 2019, told the South Dakota Searchlight last month.
Dadayan acknowledged, cutting grocery taxes can lower state revenue, which can affect funding for public services and end in budget instability.
“To offset the shortage of revenue from grocery taxes, states should explore other revenue sources,” she said. “While eliminating grocery taxes can improve tax fairness and support low-income families, states must fastidiously consider the very best approach to manage the associated revenue loss and make certain that their tax systems remain equitable and sustainable.”
Opponents also say the language of IM 28 is so broad it might thoroughly be construed to comb up not only groceries but many other goods and services. That vagueness prompted a revenue loss estimate from the state’s Legislative Research Council of anywhere from $134 million to $646 million annually, the Searchlight reported.
The measure reads: “The state may not tax the sale of anything sold for human consumption, except alcoholic beverages and prepared food. Municipalities may proceed to impose such taxes.”
“The crux of the matter is the language on the ballot — ‘sold for human consumption’ — just isn’t currently defined in South Dakota law, so there could also be some dispute about how that is perhaps interpreted,” said Fitch Rankings Director Tammy Gamerman. “But from our perspective, South Dakota has an prolonged history of maintaining structural balance. And our expectation is that the state would take motion if essential to take care of revenues in line with spending, whatever the revenue effects end up being.
“We’re monitoring the measure,” Gamerman added. “And if it passes, we’ll be looking for to see what the legislature and the governor do within the approaching session to incorporate that into the budget for the approaching 12 months and make certain that they’re maintaining structural balance.”
Supporters of the measure include the South Dakota State Federation of Labor, AFL-CIO. Its president, Kooper Caraway, didn’t reply to requests for comment.
Opponents include the South Dakota Education Association and Sioux Falls Mayor Paul TenHaken, who leads the group South Dakotans Against a State Income Tax. TenHaken didn’t reply to questions by press time.
Gamerman noted South Dakota just announced a surplus of about $80 million at the highest of fiscal 12 months 2024, the fourth consecutive 12 months the state has had a giant surplus.
The state’s most recent bonds were unrated governmental lease-purchase revenue bonds issued in 2016 that matured in 2022, in accordance with postings on the Municipal Securities Rulemaking Board’s EMMA website.
Moody’s had no comment and S&P didn’t reply to emails by press time.