State revenue projections ‘cautiously conservative’ as COVID federal funding ends

Joint Appropriations Committee Chair Rep. Mike Derby, R-Rapid City, left, and Co-Chair Sen. Jean Hunhoff, R-Yankton, participate in a hearing Feb. 13, 2024, at the Capitol in Pierre. (Joshua Haiar/South Dakota Searchlight)

Financial experts are cautious heading into the 2025 fiscal year, expecting South Dakota to have one of its lowest increases in revenue in the last 15 years.

At the Joint Committee on Appropriations meeting Tuesday morning at the Capitol, the Legislative Research Council projected $2.43 billion in ongoing revenue for fiscal year 2025 – a 1.1% increase in revenue from its revised fiscal year 2024 numbers.

The Bureau of Finance and Management presented a slightly lower estimate of $2.41 billion for ongoing revenue — a 1.24% increase over its revised fiscal year 2024 numbers.

A chart presented to to the Joint Committee on Appropriations shows the historic ongoing revenue increases since fiscal year 2010. The Legislative Research Council’s projection for fiscal year 2025 revenue growth is the lowest since 2010. (Courtesy of LRC)

South Dakota’s historical average revenue growth hovers around 4%. Both estimates project millions more in revenues than Gov. Kristi Noem’s budget address in December .

The legislators on the committee use the revenue projections to set the fiscal year 2025 budget. The fate of several bills is dependent on the numbers in that budget.

“This year’s forecast looks cautiously conservative with a hint of optimism,” Legislative Research Council Chief Fiscal Analyst Jeff Mehlhaff told lawmakers.

It’s a stark contrast from the “aggressive” projections the LRC and BFM made last year, hoping to take advantage of federal stimulus money still entering the economy. In the coming years, South Dakota will see a “return to normal” in revenue as those federal dollars exit the economy, said Mehlhaff and BFM’s state economist Derek Johnson.

Mehlhaff has cautioned lawmakers for years about that effect, expecting it to hit South Dakota’s revenue in 2025.

Lawmakers on the Revenue Projection Subcommittee planned to meet later Tuesday to consider ongoing revenue estimates for the remainder of the current fiscal year and fiscal year 2025, which will be a combination of the revenue estimates the two state offices presented to legislators.

Bureau of Finance and Management State Economist Derek Johnson speaks to lawmakers during a Joint Appropriations Committee meeting on Feb. 13, 2024. (Joshua Haiar/South Dakota Searchlight)

The revised fiscal year 2024 revenue and the fiscal year 2025 revenue will be presented at Wednesday’s Joint Committee on Appropriations meeting.

The revenue estimates factor in federal stimulus dollars circulating in the state’s economy, increased wages due to a tight labor market, housing growth in the state, and inflation. Financial experts expect inflation will sit at 3% for the foreseeable future, Mehlhaff said.

A chart presented to to the Joint Committee on Appropriations shows the historic sales tax revenue since fiscal year 2010. The Legislative Research Council’s projection for fiscal year 2025 revenues is below average. (Courtesy of LRC)

Johnson added that the revenue estimates are impacted by interest rates remaining high, which can stress businesses and consumers, and farm income expected to decrease due to lower prices and increased costs – both leading to lower sales and use tax revenue, which is the biggest source of revenue for state government.

The state is seeing a decrease in year-over-year sales tax revenue due to a 0.3 percentage-point reduction in the state sales tax rate implemented last July. But adjusting for that rate change, South Dakota would still have positive revenue growth.

BFM projects a 4% increase in real sales tax revenue growth for fiscal year 2025, while LRC holds to 2.2% growth.

Lottery revenue is also slowing down, and contractor’s excise tax is growing at a slower rate than recent years. The drastic decrease in revenue growth – the lowest projection since 2010 – is also driven by a decrease in unclaimed property, which reached a record high this year. The state treasurer has said the record was driven by banks catching up on unclaimed property work that went undone during office-work disruptions caused by the pandemic.

Sales tax revenue is cyclical, Mehlhaff told lawmakers, noting that there is always a decline in sales tax revenue after it peaks.

“The trend is starting to maybe peak,” Mehlhaff said. “That could be next year, that could be this year. It will peak eventually. It’s just what year will that federal money run out.”

The post State revenue projections ‘cautiously conservative’ as COVID federal funding ends appeared first on South Dakota Searchlight .