South Dakota Income Tax -- A Proposal

Replace All Current South Dakota Taxes with a State Income Tax
[posted 2005.01.09]
If only everything were this simple:


My wife read an article online last night that said South Dakota has one of the most regressive tax systems in the US. It is true. We have no income tax, personal or corporate. We fund our schools mostly through property taxes, which put a significant burden on farmers who look rich on paper, since they own lots of land and machinery, but may make very little income during the year (due to bad weather, grasshoppers, our demand for cheap grocery prices, and the squeeze put on family farms by big corporate farms... but reforming agriculture is another entry!). Over half of our state budget comes from sales and use tax, classic examples of regressive taxes, which have no relation to a person's ability to pay. To quantify the regressivity of our system, the article my wife read gives the following figures:
[Source: Institute on Taxation and Economic Policy, “South Dakota Taxes Hit Poor & Middle Classes Far Harder than the Wealthy,” http://www.itepnet.org/wp2000/sd%20pr.pdf, 2003.01.07. Downloaded 2005.01.10.]

According to the above chart, the lower four quintiles of South Dakotans—the lower 80% of income earners, or everyone making under $64,000 a year (and this English teacher would like to note that that includes every K-12 teacher in the state)—are paying 7% to 10% of their income in state and local taxes. Factor in the deductions we can take for these taxes from our federal taxes, and those percentages drop a little. Consistently from quintile to quintile, in South Dakota, as you earn more, you pay less of a percentage of your wealth in taxes. Sounds like a textbook definition of regressive taxes, doesn't it?
Now I've often wondered how big of an income tax it would take in our state to cover our government expenditures. We aren't a wealthy state, so I've wondered if maybe we don't have enough income to produce sufficient revenue through an income tax. But if we can afford all the current taxes, we should be able afford an income tax in their place, right? So I went searching for some numbers.
First, let's look at just the South Dakota state revenue for FY2005 and Governor Rounds's proposed/projected revenue for Fiscal Year (FY) 2006:

	(Millions of $)
Source	FY2005	FY2006
Sales and Use Tax	536.3	567.8
Video Lottery/Telecom Tax	114.6	117.7
Contractor's Excise Tax	62.9	66.8
Insurance Company Tax	53.7	57.2
Bank Franchise Tax	36.8	37.8
Other Continuing Receipts	150.9	152.5
Total Continuing Receipts	955.2	999.8
One-Time Receipts	8.8	0
Total Receipts	964	999.8
Transfer from Reserves	22.5	17.1
Total General Fund Revenues	986.5	1016.9
source: Governor Mike Rounds, FY2006 Budget Address, December 7, 2004, Pierre, SD. http://www.state.sd.us/Online%20Docs/BudgetSp2006.pdf. downloaded 2005.01.09 18:56 PST


According to Governor Rounds, we need just a snudge over one billion dollars to run our state in the coming fiscal year. Again, notice that over half that amount comes from sales and use tax. Another tenth comes from video lottery, a remarkably regressive tax in that motivation to play the lottery varies inversely with wealth, and the telecom tax, which is equal for everyone who has a phone, regardless of income (although I suppose it may have a hint of progressivity in it, since wealthy people might be more likely to have more than one phone).

Now some people argue that we need more funding for programs (like education) in South Dakota, and they advocate adding a state income tax to the existing taxes in order to increase revenue. Such a proposal stands a snowball's chance in Presho in July of passing. I'm not interested in increasing South Dakotans' tax burden, either—our state government is big enough. I just want to redistribute the tax burden more justly. So let's not argue here about how much funding programs should get, what we should increase, etc. Let's look strictly at the proposed revenue and find out how much income tax it would take to generate that same amount.

How much income do we have available to tax in the state? There are various (and surely more detailed) ways to calculate that. Let's keep it simple and look just at gross state product (the total wealth produced in the state each year). Two sources, both working from U.S. Department of Commerce Bureau of Economic Analysis data, calculate South Dakota's gross state product (GSP) in 2001 as between $24.251 billion¹ and $25.003 billion². (A million here, a million there—who can tell the difference?) Now let's assume 3% annual economic growth (and South Dakota's economy has been chugging along rather nicely lately), we get projected 2006 GSP between $28.114 billion (extrapolated from $24.251B) and $28.985 billion (from $25.003B).
Now, as Ross Perot would have said, take a look at this chart:

Source	FY2006	Change	% income tax on entire GSP required to fully replace this revenue, based on SDGovOED GSP	% income tax based on NEMW GSP
Sales and Use Tax	567.8	31.5	2.02%	1.96%
Video Lottery/Telecom Tax	117.7	3.1	0.42%	0.41%
Contractor's Excise Tax	66.8	3.9	0.24%	0.23%
Insurance Company Tax	57.2	3.5	0.20%	0.20%
Bank Franchise Tax	37.8	1	0.13%	0.13%
Other Continuing Receipts	152.5	1.6	0.54%	0.53%
Total Continuing Receipts	999.8	44.6	3.56%	3.45%
One-Time Receipts	0	-8.8	0.00%	0.00%
Total Receipts	999.8	35.8	3.56%	3.45%
Transfer from Reserves	17.1	-5.4	0.06%	0.06%
Total General Fund Revenues	1016.9	30.4	3.62%	3.51%


The fourth column is the kicker: given the lower 2006 GSP estimate, a 3.62% tax on all wealth generated within the state in that year (which I am assuming is equivalent to a state tax on personal and corporate income) would produce all the revenue necessary to run South Dakota state government for FY2006. In other words, require every South Dakota resident and business to pay 3.62% of their income to Pierre, and we could eliminate all the revenue sources listed in the governor's budget proposal and still not cut a single program or job (other than perhaps some state employees who currently handle video lottery, sales tax, etc.).

I have not been able to find reliable, comprehensive numbers on how much South Dakotans pay in city and county taxes (local sales taxes, property taxes, etc.). But let's suppose that the total tax burden at the local level is equal to that at the state level. Let's say we need another billion dollars to run our schools (the state and the local districts split the bill about equally, I believe), pay the police and the dog catchers, fix the sewer lines, and so on. Double the above estimate tax. If South Dakotans paid an overall state income tax of 7.24%, we could pay for all of our state and local government services and eliminate every other tax in the state. No state or local sales tax (watch the Iowans flood the Empire Mall in Sioux Falls!), no property tax (farmers save millions and need fewer second jobs and government subsidies), maybe not even so much as a car license fee or state park entry fee. One tax (one tax!), and everything is paid for. It doesn't get any simpler than that!

And as a political bonus, not only do we equalize the tax burden, but 60% of South Dakotans pay less in taxes. The only people who pay more are people with larger incomes—i.e., the people with the ability to pay more without much pain, which is exactly the purpose of a progressive tax.
I would like to consider one specific area of local revenue and funding: education, which is perhaps the largest single chunk of South Dakota's state and local spending. According to South Dakota's Department of Education, in FY2003, the state gave $297 million to education, while the local districts ponied up $245 million³. Extrapolate with 3% annual growth again, and you get total state and local education expenditures for FY2006 of $591 million. According to the analysis presented on this page, we could cover all the state and local funding of education in South Dakota with a 2.10% income tax, which again would replace (not reduce, but replace) the property tax and more.

This English teacher also calculates that a 1.60% state income tax would allow us to pay every teacher in the state $50,000 a year, a 41% increase from the projected average teacher pay for 2006. But again, I'm not arguing for increasing the revenue the state takes in or adding to the funding of any particular program. No way—that's a different debate. All I want is a simple, fair tax system. And consider that under a state income tax, we will ease the financial pressure on teachers without giving them an official raise. Since average teacher pay is down in the $30-$40 thousand range, and many teachers are making less than $30,000, especially in the smaller rural districts, a majority of South Dakota teachers would find themselves paying less in total state taxes and thus having more money left in their pocket at the end of the year, an effective raise! Consider my situation:

	Under Status Quo	Under State Income Tax
My teaching salary (approx)	$28,000	$28,000
State and Local Sales Tax (~7% on $12000 in purchases)	$840	$0
Property Tax	$1,600	$0
State Income Tax (7.24%)	$0	$2,030
State Tax Burden	$2,440	$2,030
State Tax Burden as % of income	8.71%	7.24%
Money saved under State Income Tax		$410


Under a state income tax, I come out $410 ahead, and that's only calculating savings on property and sales tax. That doesn't include the other government fees that the income tax would replace.
South Dakota should stop overtaxing its lower income brackets and implement a progressive tax system it can be proud of. We can use a state income tax not to increase revenue, but to replace the multitude of state and local taxes that currently overburden the majority of wage-earners while giving an easy ride to the wealthy minority (and a free ride to corporations!).

Notes to “Replace All Current South Dakota Taxes with a State Income Tax"

http://www.bea.doc.gov/bea/regional/gsp/, downloaded from South Dakota Governor's Office of Economic Development, http://www.sdgreatprofits.com/DemoStats/index.htm, 2005.01.09 19:40 PST. [back to text]
Northeast-Midwest Institute, “Total Gross State Product by State: 1998-2002,” http://www.nemw.org/gsp.htm, Updated 2004.12.21, downloaded 2005.01.09 20:29 PST. [back to text]
South Dakota Department of Education and Cultural Affairs, “State Aid and Other Historical Data for State Totals,” http://www.state.sd.us/deca/finance/applications/stateaid/results.asp, downloaded 2005.01.09 21:01 PST. [back to text]

Think it'll work? Tell a friend, tell a legislator, and make it happen! Think I'm dead wrong? Say so -- and come up with a better plan! Either way, let me know what you are thinking.

Cory Allen Heidelberger
1883 Cottonwood Cove Trail
Lake Herman, South Dakota 57042 USA
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THE PLAN:	1) Repeal every existing municipal, county, and state tax in South Dakota.
	2) Replace that revenue with a state income tax (suggested rate = 7.24%).
	3) Apply state income tax to all income, personal and corporate.
	4) Use state income tax form consisting of two lines: —“Enter income claimed on federal tax return: _________” —“Multiply by 7.24% and send that amount to Pierre.”
	Passage: Either through the State Legislature (requires 2/3 vote to impose new tax, majority vote to eliminate current taxes) or through ballot initiative (16,728 petition signatures to place on ballot, majority vote to pass)