Quick Facts – HB 1131 Food Tax Swap

Added January 27th, 2011 by

House Bill 1131 – a proposal to take the sales tax off groceries. 

On Thursday, 1-27-11, the House Taxation Committee heard testimony on HB 1131 – a proposal to take the sales tax off groceries and replace the revenue with an increase on other taxable items.  Following testimony, the Committee voted to defer the bill to the 41st legislative day, effectively killing the bill.  The SD Budget & Policy Project provided testimony providing fiscal analysis of the bill’s impact. 

In layman’s terms, this bill proposes:

  • dropping the state 4% sales tax on grocery food items (except pop and candy)
  • increasing the state sales tax on all other goods and services (currently taxes at 4%) enough to make up the lost tax revenue.

The bill suggests a 0.35 cent increase (increasing state sales tax from 4 cents to 4.35 cents).

Fiscal analysis of South Dakota’s food tax and this bill reveal the following points:

  1.  Raising state sales tax 0.388 cent would have offset the estimated cost of removing state sales tax from groceries in 2010.  See Figure 2.
  2. Raising sales tax 0.388 cent and eliminating taxes on groceries would decrease annual sales tax paid by all South Dakota income groups except the top 1% of earners (those earning $424,000 or more with an average group income of $1.22 million per year).  This top income group is currently paying the lowest percentage of its income in state and local taxes.  See Figures 2 and 3.
  3. A former program to provide food tax refunds in South Dakota was changed in 2009.  This reduced a $3 million food-tax refund program serving 42,161 households by over 97%, leaving only 726 South Dakota households receiving benefits in FY2010.  (See Figure 1.  Data source:  SD Dept of Social Services Annual Statistical Report FY2010).

 Figure 1  

Figure 2

The above table depicts the impact of the proposed sales tax change on South Dakotans by income group, based on 2010 data.  Each income group would see their current state sales tax on food disappear and their state sales tax on other 4% items increase.  The Averge Tax Change represents the combined effect of the “revenue-neutral tax swap.  Illustrations are provided at various rates of increase. 

 The top 1% income group, which would experience a tax increase, currently pays the lowest percentage of their income in state and local taxes (see Figure 3).

                                                                    Figure 3

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