There is broad consensus in South Dakota that teacher salaries need to be competitive to attract and retain good teachers – but who is going to pay for it? Two options have been floated thus far to fund the increase. Some in-depth fiscal analysis and charting helps clarify the difference between these options.
I. Impact on Tax Structure
Option 1: House Bill 1182 Raises $107 million by increasing state sales tax by 1/2 cent. This option makes sales tax more regressive.
Option 2: Senate Bill 151 Raise $128 million by removing current 4 cent state sales tax on food and increasing state sales tax by 1 cent. This option makes sales tax less regressive.
QUESTION: Why is Option 1 more regressive than Option 2?
Answer A tax system that requires low- and middle-income families to pay a larger share of their income in taxes than upper income families is considered regressive. Under Option 1 lowest income households would pay more while highest income households would pay less. For the rest of South Dakotans (those in households with incomes between $24,000 and $199,000) their tax increase would be nearly the same under both options.
II. Non-residents contributions
Non-resident contributions are nearly twice as much under Option 2 ($46 million) compared to option 1 ($24.5 million). The amount of dollars raised under each option from South Dakota resident households is nearly identical at $82 million.
QUESTION: Who are non-resident tax payers?
Answer: Non-resident sales tax payers include out-of-state visitors and in-state businesses that are not fully passing on their sales tax share to in-state residents. South Dakota businesses pay sales tax on many business infrastructure costs (utilities, manufacturing equipment, etc.) and pass the cost along to their customers in the price of their product. Some of their customers live outside South Dakota so these non-resident customers are actually covering some of the cost of the South Dakota sales tax increase on businesses.
QUESTION: What is the source of this analysis?
Answer: Data source for tax analysis is the ITEP Microsimulation Model (see the chart displaying their findings below). Graphics and analysis by SD BPI.
Note: On 2/12/16 the author updated this article to include the bill number for Option 2 (SB151) and replace the term “Business inputs” with the more descriptive phrase “business infrastructure costs (utilities, manufacturing equipment, etc.)”.