Lawmakers battle tax exemptions

Some lawmakers are suggesting the state target some of the $525 million in sales tax exemptions it provides as a way to help eliminate South Dakota’s budget deficit.

Gov. Dennis Daugaard has proposed $127 million in cuts. Other lawmakers, led by Sen. Stan Adelstein, R-Rapid City, have proposed raising $50 million through higher tax rates.

“We have $500 million worth of tax exemptions per year,” said Sen. Elizabeth Kraus, R-Rapid City, at Saturday’s legislative crackerbarrel. “Some of them you wonder where they came from.”

Three bills were introduced this session to eliminate some of the tax exemptions, and two of them were summarily defeated Monday. Rep. Jacqueline Sly, R-Rapid City, a sponsor of all three measures, isn’t optimistic that the third will fare any better.

But top Republican leaders in both houses are sponsoring a bill to study South Dakota’s system of tax exemptions, to examine which products, services and organizations currently get a break on their taxes and to present their findings to next year’s Legislature.

Some of those exemptions add up to big dollars. It costs the state an estimated $120 million per year to exempt certain medical services, equipment and drugs from sales taxes. Local governments, tribes and schools also don’t pay taxes, an estimate of $100 million per year.

Agriculture is the biggest recipient of tax exemptions, totaling $165 million. Among the tax-free purchases are $83 million in tax-free livestock sales, $25 million for bulk fertilizer purchases, and $10 million for farm product warehousing.

Apartment and home rent is also sales-tax-free, a cost to the state of an estimated $48 million.

Some lawmakers say it’s important to examine each exemption carefully and determine whether it should be kept.

“Maybe at the time 20 years ago, 30 years ago, maybe it was an appropriate exemption,” said Sly. “But as with anything, we should review decisions that were made in the past and see if they’re still solid decisions.”

Some of the exemptions seem illogical, Sly said.

“If someone comes to your house and sprays fertilizer on your lawn as a service, that is tax-exempt,” she said. “But if you go to the store and you buy it yourself and put it on, that’s not tax-exempt.”

Recipients of some of those tax exemptions say those exemptions are crucial.

The financial benefit of just one exemption, $4.5 million in tax-free agricultural parts and repairs, to farmers “can range, depending on the size of the farmer, from several hundred to many thousands of dollars,” said Scott VanderWal, president of the South Dakota Farm Bureau.

VanderWal said the tax exemptions for farmers are a matter of fairness.

“I don’t believe that other manufacturing businesses pay sales tax on their parts and repairs for their manufacturing, and that’s basically what farming is,” he said. “It’s manufacturing a raw product that goes into other projects, or the food and feed chain.”

Chris Studer, communications director of the South Dakota Farmers Union, said South Dakota’s neighbors don’t tax farm equipment. If the exemption were removed, he said many farmers who live near South Dakota’s borders might cross state lines to buy their expensive equipment.

“You pay the $20 in gas to save the sales tax,” Studer said.

Mary Masten, vice president of legal services for Regional Health, said the medical tax exemptions help keep the cost of health care down.

“Like any other business, I would presume that you try to pass on the sales tax that you pay to your customers,” Masten said. “That’s why it would end up being a tax on the sick.”

But even though this year’s attempts to remove sales tax exemptions have been rejected, proponents say nothing should be taken off the table.

“This year is an opportunity to look at a lot of different options,” said Sly. “That’s why those bills were brought forward, to open conversations. I think we have to look at all areas.”

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