Lawmakers to study tax exemptions

Dakota Digest - 05/17/2011

By Jackelyn Severin

In 2009 the South Dakota Department of Revenue and Regulation estimated state tax exemptions totaled over 500 million dollars. This summer 15 lawmakers have been appointed to review those tax exemptions and find out if they are really needed.

Joy Smolnisky is Director of the South Dakota Budget and Policy Project. Smolnisky is a strong advocate for reviewing the states tax exemptions. She says the money not collected because of tax exemptions adds up to about one-third of the state’s annual general fund budget.

Smolnisky says, “That money were it collected would be available to fund services or to lower or affect other tax rates. So it’s important to have a sense of how much forgone revenue those tax exemptions represent so that we can weigh the value of the tax exemptions against either cutting services or raising revenues in other ways.”

Smolnisky says South Dakota has hundreds of exemptions on a variety of goods and services and the state does nothing to re-examine those exemptions on a regular basis. She says a review is well overdue. 

“Not because exemptions are bad but because exemptions should be balanced against other decisions in providing services and expanding tax bases to make sure that we keep our tax system up to date, current with our economy, and current with our priorities.”

Also, says Smolnisky, repealing tax exemptions is a practical way for the state to gain more revenue.

“It only takes a simple majority to remove a tax expenditure. It takes a two-thirds majority to raise taxes. Therefore increasing revenue by removing a tax expenditure is more politically feasible than raising revenues in the legislative process,” says Smolnisky.

For now the summer study on tax exemptions is a one-time assessment that just looks into sales and use tax. Smolnisky says there are also many property tax exemptions that need to be taken into account as well.  However, she says this is a good start for the legislature. She hopes this summer study leads to a regular tax expenditure review. She says 43 states have a tax expenditure report which is available to their legislatures on an ongoing basis.

Smolnisky says, “A tax expenditure report is really part of an overall revenue review and that looks not only at how much money you’re collecting but also where is that money coming from? How is that distributed across your population as far as a tax burden goes and how is that changing over time? Because you want to be aware if over time in economic changes you’re beginning to tax one segment of the population more than another.”

Smolnisky says a good tax expenditure report uses objective data based on factual information.

“It should be adequate in scope so it should, ideally, look at all taxes that are collected in the state and what the exemptions from those taxes include. There should be enough detail in it that you can not only determine the cost for the current year but also for future years and there should be details on the taxpayers who benefit from the tax expenditure,” says Smolnisky, “And the analysis coming out of the report should be able to make a reader able to assess what was the original purpose of the tax expenditure, whether that purpose continues to be accomplished by that tax expenditure and how those benefits are distributed across the population of the state.”

For the study conducted this summer it’s up to the 15 lawmakers appointed to the committee to determine what type of information they want to receive and how it will be gathered. Smolnisky says although she’s not on the committee she will be testifying and monitoring the committee’s progress. Smolnisky says it’s important for voters to be involved in this process to make sure lawmakers have good information for this study and future reports.

“I think whether this type of comprehensive fiscal analysis gets done on a regular basis is really dependent on whether constituents ask for it. If constituents don’t say hey I want to see what data you made this decision based on. Show me the facts that you consider both about the choice, the route you went and the route you didn’t go. We want to see good information just like our businesses rely on good information to make good business decisions, we want our government to rely on good information they can communicate clearly to the population.”

Smolnisky says ideally the legislature will require by statute that a tax expenditure report is done on a regular basis.

She says looking into the states tax exemptions isn’t just about money rather its about making the entire budget process more transparent giving lawmakers more information and better data. Smolnisky says this will lead to more informed budget decisions and better use of taxpayer money. 

 

 

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