Economist: South Dakota income tax can be part of IM28 discussion

SIOUX FALLS, S.D. (KELO) — Economist Evert Van der Sluis said if South Dakotans vote to remove one sales tax option it will likely need to be replaced by another.

Voters will be considering ballot measure IM28 which would repeal the sales on items for human consumption, including groceries, in November. Supporters of IM28 say the tax is regressive and is unfair to those of lower incomes who pay a disproportionate amount of their income on groceries compared to those of higher income.

Opponents, including the recently formed Vote No on IM28 coalition, said if approved, the state would lose $176 million in revenue. Municipalities would also lose the ability to tax human consumption items because of the way IM28 is written, opponents said. A repeal of the tax on human consumption items could lead to income tax, which would not be good, opponents of IM28 said.

A sales tax on groceries is considered a regressive tax because it puts more burden on those of lower income, Van der Sluis said. An income tax option can be a fair and viable option, he said.

While income tax can be a “dirty word,” in South Dakota, “a flat, simple, income tax might not be such a bad idea,” Van der Sluis said.

Yet, “it probably wouldn’t fly” in the state, Van der Sluis said.

The state could consider changes in the property tax to gain more revenue or try to obtain more federal money, he said. The other option is income tax.

If the state chooses not to replace lost revenue, if, for example, IM28 passes, then what happens next is an “important question,” Van der Sluis said.

“If you don’t want to make changes, of course, services would have to be cut…,” Van der Sluis said.

The next questions are what services to cut and who decides, he said.

Van der Sluis said he’d argue that South Dakota provides the very basic services, so where would custs be made? The choices may be in education or prisons or health care or similar, he said.

States have been reducing or eliminating the sales tax on groceries over the past several years, because it’s considered a regressive tax, Van der Sluis said.

Thirty-three states do not tax groceries.

South Dakota and Mississippi have the highest sales tax on groceries in the nation, according to mutliple sources. The term sales on groceries or grocery sales tax is commonly used in reports and research.

Mississippi’s tax is 7% while South Dakota’s is 4.2%. Eleven other states have a sales tax on groceries, but it’s lower than the state’s general tax rate.

Vote No IM28 coalition members said during a Tuesday news conference that South Dakotans would have a higher tax burden if the state needed to have an income tax to replace lost sales tax revenue.

Taxes: Bad or good?

The idea of what the public gets in return for taxes isn’t frequently discussed, Van der Sluis said. There is a tendency, “to always look at taxes as a bad thing,” he said.

Generally, there is a correlation between higher wages and an income tax, he said.

As an economist, he’d argue the state should consider ways to diversify its income, Van der Sluis said.

A 1.5% flat income tax or similar should be discussed in the state, Van der Sluis said. Sixty percent of the general revenue for the state’s general fund comes from sales taxes, “in principle, tapping into another source of revenue, seems reasonable,” he said.

If IM28 passes or fails, or gets reworked in the Legislature after the November vote, lawmakers and others need to keep an open mind and keep options on the table, Van der Sluis said.

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