South Dakota’s Tax Structure
South Dakota uses a mix of several different taxes including sales tax and property tax to fund state and local government. The state is known for its low tax environment, particularly when it comes to income taxes, which it and eight other states do not impose. In fact, according to the Tax Foundation, South Dakota has a relatively low overall tax burden rate of 8.4%, ranking fourth lowest, behind Alaska, Wyoming, and Tennessee. Despite this, property taxes have become a growing concern for some homeowners.
As a result, some legislators are now proposing a reduction in taxes for homeowners. They see that as a simple fix to a single issue; constituent concern about homeowner taxes.
I can understand the impulse by elected officials to apply a band aid rather than taking the time to fully understand the overall problem. But perhaps they should instead take this opportunity to review the big picture of the state’s overall tax structure. Then they would be in position to make cohesive, thoughtful changes to address any problems that exist.
Voters Concerned About Property Taxes
State and local governments have various revenue sources available, including income, sales, property taxes, gas taxes and estate taxes. In South Dakota, we made the decision long ago not to tax personal or corporate income. We also don’t impose estate or inheritance taxes. So we rely more heavily on sales and property taxes.
In 2024, legislative candidates in South Dakota reported that high property taxes were one of the most frequently raised concerns during their house-to-house campaigning. According to Tax-Rates.org, South Dakota ranks 16th highest for property taxes, based on the yearly property tax burden as a percentage of home value. Meanwhile, the state may be leaving money on the table with a low sales tax rate.
South Dakota’s Sales Tax Rate is Relatively Low
Tax-Rates.org reports that South Dakota has a relatively low state sales tax rate of 4.2%. In comparison, neighboring states like North Dakota, Minnesota, Iowa, and Nebraska have higher rates. Additionally, it is worth noting that a portion of sales taxes is paid by non-residents.
State sales taxes primarily fund state government, while property taxes generally support schools and local governments. Municipalities also have the authority to levy up to a 2% sales tax to fund local government.
Time to Reevaluate South Dakota’s Tax Strategy
Perhaps it is time for the legislature to take a big picture look at our state’s tax system. I’m not sure when they last studied our property and sales tax rates to ensure a balanced approach. There may be opportunities to eliminate the regressive tax on groceries while providing some property tax relief by adjusting our sales tax rates to be more in line with neighboring states. And while they are at it, they could review all the special interest sales tax exemptions to make sure they still make sense.
The State Sales Tax on Groceries
South Dakota is one of two states that imposes a sales tax on groceries. In November, voters rejected a poorly worded proposal to eliminate it. Many supported the idea in principle but expressed concerns about potential unintended consequences due to the proposal’s ambiguous wording. The legislature should consider making this change as part of a comprehensive effort to improve our tax structure.
I understand that a small increase in the state sales tax rate—by a quarter of a point—could offset the loss in revenue from eliminating the grocery tax.
Raising Sales Tax to Fund Property Tax Relief
The legislators proposing a reduction in homeowner property taxes have focused on reducing property taxes for owner-occupied homes, to be funded by increasing the state sales tax rate from 4.2% to 5.0%. While this proposal may seem reasonable, given that property taxes are relatively high and sales taxes are low, perhaps it is time for the legislature to review and refresh the state’s overall tax system.
Well said, Joe!
Unfortunately South Dakota’s past increases in regressive taxation have clearly demonstrated a track record of failure- they newly generated revenues went off target. When video lottery was implemented in 1989 it was marketed as a way to fund education. Predictably most of the revenue ended up in the general fund, except for 1997-2015 when lottery revenues were used for the Property Tax Reduction Fund. In 2016 the state’s sales tax was raised to fund increases in teacher pay. Once again, a significant portion of the increased revenue went off target and teacher pay is again bottomed.
In addition to cutting state expenses and consolidations at the local level, any support for increasing/ shifting tax burdens would have to include air-tight earmarks, transparency, and accountability. Not sure if any of the above mentioned is achievable in politics.
In agreement, Joe. At its base, the proposed property tax relief bill makes good sense. A more comprehensive look would be welcome, providing the perfect doesn’t get in the way of the premise.
I recently read a WSJ article pointing out the inverse relationship between higher residential property taxes and workforce in-migration. That could be another strong rationale to re-balance the property and sales taxes.
I couldn’t agree with you more Joe. As an outgoing member of the Joint Appropriations Committee and District 15 House rep, this is LONG overdue. We can’t keep using short term solutions and summer studies to make changes. Summer study committees don’t meet long enough and take a deep dive approach. Whoever the Governor is for the next two years should appoint a commission to work through our tax code. We currently exempt $1.4B for goods and services in sales tax. These consist mainly of medical and agriculture expenses.