Gov. Kristi Noem pulls support for grocery tax measure over jeopardized tobacco money

Editor’s note: This is the second in a series of South Dakota News Watch stories providing analysis of potential South Dakota ballot initiatives for the 2024 election.

A citizen-led campaign to eliminate South Dakota’s state grocery tax through a measure on the 2024 ballot won’t have the backing of Gov. Kristi Noem’s administration despite earlier indications she would support it.

The sticking point is concern expressed by Attorney General Marty Jackley in his official ballot explanation.

As stated, the measure would prohibit collecting sales tax on “anything sold for human consumption.” That might include tobacco, which could impact revenue the state receives from a master settlement agreement reached in 1998 between 46 states and major cigarette manufacturers as part of litigation for health-care costs and deceptive trade practices.

Jackley said South Dakota receives about $20 million annually from the settlement. His ballot explanation also notes that the measure’s wording could impact revenue received from the streamlined sales tax agreement, a cooperative effort of states, local governments and the business community to standardize the collection of sales and use tax.

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Jim Terwilliger, the governor’s budget director, told News Watch that these concerns distinguish the citizen-led effort from Noem’s much-publicized campaign pledge to repeal the state’s 4.5% grocery tax.

State lawmakers rebuffed that proposal and instead passed a temporary reduction in the overall state sales tax from 4.5% to 4.2%, handing Noem a significant political setback.

“Repealing the sales tax on groceries was the governor’s biggest priority this past session — and something the people of South Dakota clearly want,” Terwilliger, who runs the Bureau of Finance and Management, wrote in an emailed statement.

“As drafted, the ballot measure would bring us out of compliance with streamlined sales tax and prevent the state from taxing tobacco or medical marijuana. The language from the governor’s proposal during session did not have these issues and is the better direction for the state.”

Gov. Noem signaled support of food tax ballot measure in 2022

The petition effort by Dakotans for Health, a grassroots organization collecting signatures for both an initiated measure and constitutional amendment to eradicate the food tax, loomed large in state budget negotiations and Noem’s political calculus.

The group’s founder, former Democratic U.S. Senate candidate Rick Weiland, told News Watch that he would welcome Noem’s support and even mused about the Republican governor signing the group’s petition.

During the legislative session, Noem told KELO-TV that she would back the citizen-led grocery tax measure if the Legislature failed to pass her bill, which the House of Representatives killed on March 7 after an attempt to revive it in the Senate.

“It would be impossible for me to come out against it,” Noem said on March 1. “I think it’s the right tax cut at the right time. The Legislature needs to realize if they choose a different tax cut this year, they better make sure they can afford the repeal on the sales tax on groceries in a couple years too. They’re going to have to do both.”

Senate GOP lawmakers proposed softening the overall sales tax target from 4.2% to 4.3% and adding a sunset clause over concern that voters would repeal the grocery tax at the ballot in 2024, potentially causing budget woes if economic conditions worsen.

“We cannot afford both this and that,” Sioux Falls Republican Sen. Jim Stalzer said of the overall sales tax and grocery sales tax cuts.

Weiland disputed that assertion and stressed that South Dakota is one of only three states that fully taxes food without offering credits or rebates for the poor. Repeal supporters say that has a disproportionate impact on low-income families and individuals.

He also noted that Noem’s boisterous support for cutting the grocery tax as a Republican governor undermines long-held GOP talking points about the state not being able to afford such a cut without sacrificing public support of education and children’s health programs.

South Dakota voters rejected Democratic-led food tax repeal in 2004

In 2004, the South Dakota Democratic Party gathered enough signatures to put a state food tax repeal on the ballot after legislative attempts to eliminate the tax fell short.

Opponents of the effort, including then-Gov. Mike Rounds, warned that passing the repeal would likely reduce the amount of state aid available for schools and health care.

Voters responded to that message and rejected the measure by a margin of 68% to 32%. Later attempts by state legislators to lower the tax on food or exempt groceries from the general sales tax rate also failed.

Noem shifted the dynamic in September 2022, six weeks before being reelected with 62% of the vote.

At an event in Rapid City, she unveiled her plan to repeal the grocery tax for the “largest tax cut in South Dakota history.” She vouched for its affordability because of double-digit increases in sales tax revenue in 2021 and 2022, a budget surplus last year of $115 million and $423 million in reserves.

“That changed things,” said Weiland.

“The Republicans’ big argument has always been, ‘Oh, we don’t have the money to repeal the food tax. It will come on the backs of firefighters and teachers, or we’ll have to do a state income tax’ – all this crap they kept contending so the issue never got any legs in the Legislature or on the ballot. Well, the governor took all those arguments and threw them in the trash. They don’t exist.”

Opponents cite budget concerns with another tax cut

Those arguments, however, are still very much alive for Nathan Sanderson, the executive director of the South Dakota Retailers Association. He served as policy director under former Gov. Dennis Daugaard.

Sanderson testified against Noem’s food tax repeal in Pierre and has strengthened his opposition now that legislators agreed to reduce the overall sales tax rate starting July 1 and ending in 2027.

The overall sales tax cut is projected to bring $104 million in annual tax relief for South Dakotans, while the Legislative Research Council estimates repealing the food tax would bring another $124 million in savings for consumers.

While the Retailers Association has not taken an official position on any of the potential 2024 ballot measures, Sanderson is willing to state the obvious – that savings for taxpayers is synonymous with less revenue for the state.

‘Unintended consequences’ of citizen-led ballot measures

With a budget outlook boosted by federal stimulus dollars and inflation-impacted tax receipts, Sanderson is concerned about long-term impacts.

“Virtually everyone recognizes that it would be irresponsible to retain the overall sales tax rate cut and eliminate the sales tax on food,” he said.

“In the recent legislative session, lawmakers dramatically increased spending and reduced revenues, a proposition that is not sustainable long-term. The Legislature recognized this and included a sunset clause on the bill because the unusually high state revenues are driven by the highest inflation years in this century and billions of dollars of federal COVID money entering our state’s economy.”

Sanderson added that “South Dakota is fortunate to be the second-lowest taxed state, so if our low, broad-based sales tax is compromised by eliminating the sales tax on food, that will lead to higher overall sales tax rates or the implementation of an income tax.”

As for Jackley’s stated concern about jeopardizing state revenues from the tobacco master settlement and streamlined sales agreement, Sanderson said that’s part of the “unintended consequences” that sometimes come with citizen-led ballot measures.

“The attorney general notes that the measure ‘may affect’ both, and I agree that the potential to negatively impact tax collections exists,” Sanderson said.

“This is an example of the types of problems that often arise with initiated constitutional amendments. Because there’s no opportunity for discussion and debate, like with bills that come before the Legislature, the potential for unintended consequences is very high.”

Signature gathering effort got late start

This is not the first time that Dakotans for Health has encountered controversy with the wording of its ballot initiative aimed at eliminating the grocery tax.

Its first attempt experienced delays last year. Then-Attorney General Mark Vargo interpreted the measure as impacting municipal as well as state food tax revenue. However, municipalities weren’t mentioned in materials submitted by Weiland or the Legislative Research Council, which prepared a fiscal note seemingly in conflict with Vargo’s analysis.

Rather than take the matter to court, Dakotans for Health re-tooled the language – specifically exempting municipalities – and got a late start on collecting signatures as it waited on new framing from the LRC and Jackley, who took office in January.

Ballot measure’s wording sparks different interpretations

The language of the proposed constitutional amendment states: “The state may not tax the sale of anything sold for human consumption, except alcoholic beverages and prepared food. Municipalities may continue to impose such taxes.”

Jackley’s ballot explanation, filed Feb. 27, noted that the term “human consumption” is not defined by state law but that “its common definition includes more than food and drinks.” The statement added that “judicial clarification of the amendment will be necessary,” a harbinger of looming court battles if voters approve the measure.

Asked by News Watch for documentation or clarification to support the theory that tobacco settlement revenue could be altered by the measure, attorney general communications director Tony Mangan said the office “does not talk in detail about the work product or research done in putting together ballot explanations.”

The Legislative Research Council, which provides statutory and legal guidance for proposed ballot initiatives, did not factor in lost revenue from the tobacco settlement or streamlined sales tax agreement in the fiscal note sent on Jan. 5 to Secretary of State Monae Johnson.

But Reed Holwegner, the LRC’s director, alluded to potential ambiguity by stating that his office had not used the phrase “anything sold for human consumption” in its review of the measure, nor suggested that Dakotans for Health include that wording.

“For purposes of this fiscal note,” Holwegner wrote, “the LRC assumes that phrase only includes food items because of the modifying language “except alcoholic beverages and prepared food” and does not include personal tangible property and services, both of which can also be sold for human consumption. Other assumptions as to the meaning of this phrase may be just as reasonable, if not more so.”