Budget reckoning looms in South Dakota as Kristi Noem talks tax cuts and discipline

Gov. Kristi Noem set the tone for the 2024 South Dakota Legislature not with her session-opening State of the State Address but with her budget message in December.

The second-term Republican touted a doctrine of financial discipline and austerity, embracing a tradition of South Dakota governors relishing not the breadth of executive achievements but the fruits of their frugality.

“It’s a budget that prioritizes people, not programs,” Noem told legislators gathered in Pierre, S.D. “It’s a budget that shows what can be done with smart, conservative fiscal policies. And it’s a budget that focuses on our core responsibilities of state government.”

The fact that the governor’s proposed Fiscal Year 2025 budget is $7.28 billion – nearly 30% higher than just two years ago – muddles that belt-tightening mantra. It also highlights uncertainty about the state’s long-term financial outlook, according to News Watch budget analysis and interviews with legislators, business leaders and current and former executive staffers.

The Republican-controlled Legislature is, to borrow Noem's metaphor, keeping its foot on the gas. Lawmakers overshot Noem’s budget request last session while cutting the state sales tax rate from 4.5% to 4.2%, a dangerous mix in most times but considered palatable due to federal stimulus money still boosting state coffers.

The current fiscal year budget they passed, which runs through June 30, stands at $7.38 billion, an increase of nearly 35% from the previous year. If you go back four years to pre-pandemic FY 2020, it’s an increase of 57%.

Despite Noem’s public criticism of President Joe Biden’s stimulus strategy, federal money accounts for 47% of the state's current budget, fueled by surplus from COVID-era initiatives such as the American Rescue Plan and the Bipartisan Infrastructure Law.

“Pull that out of our budget and see what happens,” said Democratic Rep. Linda Duba of Sioux Falls, S.D., who entered the Legislature in 2019 and serves on the Appropriations Committee.

The rising tide and inevitable ebb of federal money is what concerns Duba and others who see a budget reckoning down the road, most likely after Noem leaves office. The governor's term ends in 2026, but it’s no secret that she covets a vice presidential nod from the GOP primary front-runner, former President Donald Trump.

Other potential landing spots for Noem include a Cabinet role in a potential Trump administration or filling the leadership void left by longtime National Rifle Association chief executive Wayne LaPierre, who resigned Jan. 5 amid corruption charges.

Even if she stays, many of the budget-related decisions made today won't germinate until 2026 or 2027, when stimulus money wends its way out of the state economy and the enormity of costs for new prison projects become clear. The sentiment among many stakeholders in Pierre is that it's going to be somebody else's problem.

The governor’s proposed Fiscal Year 2025 budget for state general funds is $2.39 billion, an increase of 8.3% over last year’s proposal. That follows an increase of 11.3% from 2023 to 2024.

Noem chided lawmakers in her budget address for going above and beyond her recommendations last session, resulting in general fund spending of $2.28 billion. Legislators also rejected her much-ballyhooed 2022 campaign promise to repeal the state grocery tax, choosing to lower the general sales tax rate instead.

Republican Rep. Tony Venhuizen of Sioux Falls, a former chief of staff to Govs. Dennis Daugaard and Noem, sees these budget trends as a positive reflection of South Dakota’s economy. The general fund budget is tied to sales tax projections, the state’s largest source of non-federal revenue.

“One thing you have to keep in mind is that these (budget) increases accumulate,” said Venhuizen, who also serves on the Appropriations Committee. “If you go up 12% one year, then you go up 9% and then the third year you’re only going up 3 or 4, that’s still on top of the previous increases. It’s not as if we’re going backwards. We’re going back to a more normal growth pattern.”

That “back to normal” message is prevalent in Pierre these days, though abnormalities exist. Circumstances are unique because of pandemic stimulus and infrastructure funds, creating pools of uncertainty as the federal spigot slows.

Most of the federal money is spent on one-time projects within certain parameters – housing, broadband, water projects, construction at universities. Its effect on the general economy is harder to predict, but there are warning signs that people could spend less money in 2024. The impact of stimulus checks on personal savings has started to wane and credit card debt is at an all-time high, according to the Federal Reserve Bank of New York.

"A year ago, many commentators were skeptical and calling for a recession, but the recession never came," Jack Kleinhenz, chief economist of the National Retail Federation, said in the January issue of NRF's Monthly Economic Review. "With each passing month, consumers kept spending despite inflation and higher borrowing costs. Nonetheless, those tailwinds are not necessarily sustainable."

To put it simply, people spending less money means less sales tax revenue. So does lower inflation, though economists differ on where prices are headed in 2024. The overall Consumer Price Index in December was up 3.4% nationally over the last 12 months, compared to 3.1% in November.

Jim Terwilliger, Noem’s top budget official as commissioner of the Bureau of Finance and Management, told News Watch that these factors are outweighed by a state economy that the governor calls "one of the strongest in the nation."

South Dakota's real gross domestic product went up 5.2% during the third quarter of 2023, tied for 15th nationally in rate of increase from the previous quarter, according to the U.S. Bureau of Economic Analysis. Personal income rose 3%, tied for 35th in terms of percentage increase.

“Although federal COVID stimulus funding has been ramping down, I expect our economic growth to offset those impacts,” Terwilliger said in an emailed response to questions. “The vast majority of COVID-related stimulus spending, such as direct checks to citizens and taxpayers in 2020 and 2021, has circulated through the economy and our economy continues to grow.”

Sales tax receipts are projected at $1.43 billion for FY 2024, down 3.1% from the previous year. Venhuizen noted that the downturn can be traced not to unforeseen factors but to the sales tax rate cut, which pruned about $100 million from annual receipts.

"That's an artificial change because of the rate change," he said. "Last year the sales tax (revenue) went up 9%, so the growth is slowing down, but it's also back to a more normal growth pattern. High inflation plays a role. If things cost more, then your sales tax (revenue) is going to go up. We've felt the effects of those things over the last two or three years, and now they're baked into the ongoing budget."

At Noem’s behest, Terwilliger testified Jan. 11 in favor of House Bill 1001, which would remove the 2027 sunset clause from last year’s sales tax cut and make the change permanent. The bill passed the House a day later on a 54-12 vote.

A battle is expected in the Senate, which pushed for the sunset clause as a compromise last session and will likely resist making the cut permanent. Republican Sen. Lee Schoenbeck of Watertown, S.D., President Pro Tempore of the Senate, told News Watch that he does not support HB 1001.

When asked if he thought it would pass the Senate, he responded, “I’ll leave to others to predict, but don’t bet your lunch money on it.”

This article originally appeared on Sioux Falls Argus Leader: South Dakota budget reckoning looms as Noem talks tax cuts and discipline