A tax expenditure report is one of several fiscal tools that could help inform South Dakota budget decisions
South Dakota, like most states, is struggling to resolve a structural deficit while maintaining essential state services. Many states take advantage of budget analysis tools that help clarify the options and consequences budget alternatives present.
The South Dakota Budget & Policy Project believes public access to the following budget tools could help South Dakotans and their legislators as they engage in public dialogue, seeking a course of action that best matches the values of South Dakota citizens.
TAX EXPENDITURE REPORT
What is a tax expenditure?
Each year millions of South Dakota tax dollars are waived or given back to taxpayers. These tax give-backs, resulting from exemptions, credits or rebates specified in the state statute, are called Tax Expenditures. They lower total state revenue.
- Unlike direct spending, tax expenditures do not automatically get annual scrutiny in the budget process.
- Without information on particular tax expenditure’s costs and benefits, the public and their elected lawmakers cannot make an informed decision on whether its continuation is in the state’s best interests.
- Forty-one states and the District of Columbia produce tax expenditures reports that list their state’s tax breaks and how much each one costs, along with other relevant information that helps policymakers and others evaluate them.
CURRENT SERVICES BUDGET
What is a current services baseline?
A current services budget is an estimate of the expenditures required to maintain the current level of state services and benefits in an upcoming year.
- A state current services baseline estimate takes into account inflation, caseload and population changes and previously-enacted program expansions and eliminations.
- Without a current services budget it is difficult to determine if a proposed spending level results in an increase or a decrease in public services.
- A good current services budget will present information in a way that makes it easy to identify and evaluate the budgetary impact of any proposed changes in policy.
- Thirteen states plus the District of Columbia prepare some form of current services baseline.
How is this different from the annual revenue projection?
A revenue review looks at the trends in revenue growth/reduction over time for each element of the state revenue stream. The anticipated future rate of growth from the current mix of revenue sources is compared to the current services budget to determine if the current mix of revenues is likely to be adequate to maintain current government services into future years.
- Revenue reviews allow citizens and their elected lawmakers to understand the implication of changes in various taxes or fees.
- Revenue reviews allow a longer “lead time” to make corrections to revenue sources or spending plans before a structural deficit grows unmanageable.
- A revenue review also includes a tax incident analysis (see below) to demonstrate who, among the state’s population, is paying the taxes, both in nominal dollars and as a percentage of available income.
TAX INCIDENCE ANALYSIS
Why is it important to track who is paying taxes in the state?
Tax incidence analysis highlights how the responsibility for paying taxes is spread across the population by level of income.
- The impact of a tax change differs depending on the financial circumstances or spending patterns of each household.
- Tracking the distribution of taxes among households by income level allows elected officials to evaluate tax-reform strategies from the perspective of “who will pay more” or “who will pay less”.
- When a state’s overall revenue mix has been evaluated to determine the distribution of taxes, the effect of policy change proposals can be compared to the current distribution.
Addressing a structural deficit is the first step in a long-term responsible budget process. South Dakota citizens would benefit from having on-going access to additional budget analyses to help them understand and discuss their state’s financial future.