S.D. Grocery Tax Up for Vote in November

South Dakota voters will answer a simple question Nov. 2. Should they repeal sales taxes on groceries?

When the issue was presented in recent scientific polls, the results varied widely. One poll suggested that voters were nearly evenly split on the ballot measure. The other sampling indicated just 27 percent support for eliminating grocery taxes.

Unwilling to take chances, state, city and tribal governments collecting those taxes are bracing for the worst: estimated loss of nearly $62 million in annual revenues.

Government officials have chastised the repeal measure, which was placed on the ballot after the state Democratic Party launched a p a 4 percent tax on groceries, and cities also may collect up to 2 percent on food.

Twenty-eight states exempt groceries from sales taxes, and five others charge lower taxes on food than other retail items.

If Initiated Measure 1 passes, the tax on groceries will end July 1 in South Dakota.

Not all groceries would be free from tax if the ballot measure passes. Soft drinks and candy still would be taxed.

Groceries account for slightly more than 9 percent of all retail sales in South Dakota, and it is estimated that repeal of the food tax would dent state coffers by $41.3 million, cities by $19.7 million and American Indian tribes by $760,000.

Scott Peterson, business tax director in the state Revenue Department, says four of the state's nine tribes — the Standing Rock, Cheyenne River, Rosebud and Oglala — collect a 4 percent sales tax on food and keep most of the revenue under agreements with the state.

Jason Dilges, state government financial chief, says more than 70 percent of the tax on food comes from families that earn more than $30,000 a year. The proposed repeal would save $3.85 a week for a family of four with $23,802 in annual income; a family of four with annual income of more than $70,000 would save $5.85 weekly, Dilges said.

Dilges, at the request of Gov. Mike Rounds, is preparing two budget proposals for next year. One assumes the sales tax remains and the other subtracts lost revenues.

Those favoring repeal argue that lost revenues will be far less than has been suggested and that the state can pinch pennies, tap reserve funds, use natural growth in tax collections, and gain revenue from more consumer spending on other items.

Tax repeal supporters also suggest raising the current 3 percent tax rate on vehicles, boats and snowmobiles to 4 percent. And the shortfall could easily be erased if Congress ever gives states the authority to tax Internet purchases, they say.

Cathy Brechtelsbauer, volunteer coordinator in South Dakota for Bread for the World, says it is immoral to tax groceries. The tax is especially unfair to poor families that must pay higher shares of their incomes for one of life's essentials, she says.

"Ending the food tax will reflect South Dakotans' care about their neighbors, about agriculture, and about fairness," Brechtelsbauer says. "They certainly care about education and realize that for children to do well in school, all the nourishment they need must be in place for their brains to develop and learn."

Rounds persuaded the 2004 Legislature to pass a refund program for low-income people. About 24,000 households are enrolled in the program so far, mostly due to automatic inclusion of families on food stamps. It began July 1.

The governor hopes 45,000 families will be getting refunds by June 30, the end of the state's budget year. The program targets tax relief for those who most need the help, Rounds says.

Brechtelsbauer says many poor families will miss out on the refund effort.

Rounds, who has been governor for nearly two years, says some state services might end and increased spending for other programs might be iffy if the repeal passes.

A state effort to provide local property tax relief of 30 percent on homes and farmland, which began in 1995, may be in jeopardy if the grocery tax is eliminated, the governor says. Those taxes are held down by the $130 million a year in extra state funding to schools.

A reduction in state aid to schools could result in higher local property taxes, Rounds warns.

If the grocery tax is repealed, it will mark the second time in four years that voters have voiced disdain for taxes.

South Dakotans soundly repealed the state inheritance tax in 2000. That cost state government about $25 million a year, and the state still hasn't fully recovered, Rounds said.

Repealing the grocery tax will make the current refund program unnecessary, Peterson says.

"Otherwise, people would get refunds on something that wasn't taxed in the first place," he says.