South Dakota considers ending state grocery tax

South Dakota voters will determine the fate of Initiated Measure 28, which would eliminate the state sales tax on groceries.

Illinois, Oklahoma, Kansas, Arkansas, Utah, Tennessee, Alabama and Virginia have eliminated or reduced this tax, according to the Urban Institute Tax Policy Center. 

“Grocery taxes are regarded as a regressive form of taxes, and cutting or eliminating these taxes are meant to ease the financial burden for low-income households, especially in light of rising food prices and inflation,” said Lucy Dadayan, principal research associate at the Urban Institute Tax Policy Center. “Cutting grocery taxes is a far more prudent policy decision compared to cutting income taxes, particularly for higher-income taxpayers, which is what most other states did.”

But opponents of the South Dakota measure have raised concerns that IM 28 could impact the state’s bond ratings, which are triple-A from Fitch Ratings and S&P Global Ratings and Aa1 from Moody’s Ratings. 

In 2023, state legislators lowered the state’s sales tax to 4.2% from 4.5% until 2027, which cost the state an estimated $100 million annually in revenue. The additional hit from the loss of the grocery tax could affect rating agencies’ and investors’ views of the state’s budgetary stability, critics said.

“Money runs from instability,” Republican Matt Michels, South Dakota lieutenant governor from 2011 to 2019, told the South Dakota Searchlight last month.

Dadayan acknowledged, cutting grocery taxes can lower state revenue, which can affect funding for public services and lead to budget instability. 

“To offset the loss of revenue from grocery taxes, states should explore other revenue sources,” she said. “While eliminating grocery taxes can improve tax fairness and support low-income families, states must carefully consider how to manage the associated revenue loss and ensure that their tax systems remain equitable and sustainable.”

Opponents also say the language of IM 28 is so broad it could be construed to sweep up not just groceries but many other goods and services. That vagueness prompted a revenue loss estimate from the state’s Legislative Research Council of anywhere from $134 million to $646 million annually, the Searchlight reported.

The measure reads: “The state may not tax the sale of anything sold for human consumption, except alcoholic beverages and prepared food. Municipalities may continue to impose such taxes.”

“The crux of the matter is the language on the ballot — ‘sold for human consumption’ — is not currently defined in South Dakota law, so there is some dispute about how that would be interpreted,” said Fitch Ratings Director Tammy Gamerman. “But from our perspective, South Dakota has a long history of maintaining structural balance. And our expectation is that the state would take action if necessary to keep revenues in line with spending, whatever the revenue effects end up being.

“We are monitoring the measure,” Gamerman added. “And if it passes, we’ll be looking to see what the legislature and the governor do in the coming session to incorporate that into the budget for the coming year and ensure that they are maintaining structural balance.”

Supporters of the measure include the South Dakota State Federation of Labor, AFL-CIO. Its president, Kooper Caraway, did not respond to requests for comment.

Opponents include the South Dakota Education Association and Sioux Falls Mayor Paul TenHaken, who leads the group South Dakotans Against a State Income Tax. TenHaken did not respond to questions by press time.

Gamerman noted South Dakota just announced a surplus of about $80 million at the end of fiscal year 2024, the fourth consecutive year the state has had a large surplus.

The state’s most recent bonds were unrated governmental lease-purchase revenue bonds issued in 2016 that matured in 2022, according to postings on the Municipal Securities Rulemaking Board’s EMMA website.

Moody’s had no comment and S&P did not respond to emails by press time.