SD Republicans pitch fixed 4.2% sales tax without property tax caveat

PIERRE — South Dakota’s top Republican leaders want to make the state’s reduced sales tax rate permanent.

Senate President Pro Tempore Chris Karr, R-Sioux Falls, and House Speaker Jon Hansen, R-Dell Rapids, plan to bring Senate Bill 195, which would permanently fix the state’s current sales tax rate at 4.2%. This bill was filed on Jan. 29.

The sales tax percentage was previously set at 4.5%. The 2023 Legislature passed House Bill 1137, which instituted the deceased tax rate starting on July 1, 2023, with a planned expiration date of June 30, 2027.

In a Jan. 29 press conference held after the Legislature adjourned for the day, Karr said the money not generated from the additional three-tenths percentage amount—about $111 million per annum—would directly to tax payer savings.

The Senate leader was explicit in saying his proposal would not go towards property tax relief.

“Would you rather pay more in sales tax to offset somebody else’s owner-occupied property tax?” Karr said “I think most people would say, ‘No, I don’t want that. I don’t want to pay an increased sales tax on food and clothes and the other things I buy to pay for somebody else’s house, their property taxes specifically.’”

Karr expressed concern that allowing the sales tax rate to return to 4.5% would mean the additional revenue generated to go toward “things that aren’t core government.”

“We start using it on shiny objects and things that are for political purposes, so I want to protect these dollars while we can,” Karr said.

More than half of the state’s overall revenue picture is made up of an ongoing sales and use tax, which saw a fiscal year-to-year decrease.

South Dakota FY2025 collected about $1.43 billion from the state sales and use tax — a 1.5% decrease compared with FY2024. Data from the state’s Bureau of Finance & Management indicates several months measured in FY2025 saw dips in sales and use tax growth.

But the Sioux Falls senator argued the state’s average growth in sales tax revenue has remained steady.

South Dakota benefited from billions of dollars of federal pandemic aid during the COVID-19 crisis, which skewed the state’s budgeting and spending priorities in past years, according to South Dakota Searchlight.

Without accounting for those years, Karr said South Dakota’s sales tax growth has increased by 4.3%

Gov. Larry Rhoden noted during his 2025 budget presentation that the FY2026 collections are estimated to reach about $1.5 billion and $1.56 billion in FY2027. State sales and use tax revenue has seen month-to-month growth since June, with a more-than-8% increase in October.

Acknowledging the state’s tight belt appropriators may want around the budget for fiscal 2027, Karr said he believes the expected growth means state government should be able to “absorb” some of the lost sales tax revenue.

“I think we’ll still see some good growth going into next year and hopefully have those dollars for the ‘Big Three,’” Karr said. The “Big Three” refers to South Dakota’s three largest spending areas: Medicaid, K-12 education, and state employee pay.

“I think we can do it, and if I’m wrong, then let’s start ratcheting the sales tax up. But I don’t think it needs to go all the way back up to 4.5% at this time,” Karr said.