As recent numbers show, South Dakota’s economy is slowing down in line with the rest of the region.
At the Heartland Energy Summer Conference in Madison, economists and businessmen spoke about how the numbers in South Dakota actually look better than they really are.
“South Dakota has sort of this unfortunate distinction of having been negative or flat all three of the last quarters: Q3 2024, Q4 2024 and Q1 2025. It is not great," said Jared McEntaffer, CEO and Chief Economist for the Dakota Institute.
He said in the short-term, South Dakota’s economy won’t be picking up steam anytime soon. That’s despite certain data some might view as promising.
One aspect of that, he said, is because of how people are viewing growth. McEntaffer said to properly assess South Dakota’s economic health, we need to look at inflation-adjusted numbers, rather than nominal.
He said if you look at the numbers, the state’s sales tax revenue both nominally and inflation-adjusted were relatively the same for a while.
“And then they really separate kind of starting in 2022. Anybody have an ideas what happened? Inflation," McEntaffer said. "So, we had inflation spike to about 8.5% annually during that time frame. But that’s when we see this real divergence.”
In 2022, the state opened the session with a $423 million surplus. As a result, the state Legislature dropped the sales tax, the state’s primary revenue source, from 4.5% to 4.2% to give taxpayers a break.
Since then, the state has continued to see a decline in sales tax revenue growth. That came into focus this year, when the state faced a tight budget year. McEntaffer said that growth and cash on hand were a peak.
He said that, paired with the Legislature looking at numbers without an inflation adjustment, made the state’s economic health look a lot stronger than it really was.
“This was not money raining from the sky. Well, it was; it was fake money. It was imaginary money. It wasn’t real. Once we adjust for the inflation, we can see over the last 18 months our taxable sales growth’s averaged –1.3%. Nominal basis, it’s 1.5%," McEntaffer said. "So, the problems that we’re seeing, revenue shortfalls, discussions about what are we going to do and how are we going to fund the programs, the problem’s actually worse because the tax base is contracting. It’s not that it’s growing more slowly than we expected. It’s that it’s shrinking.”
He makes the argument that the issue isn’t how the cut made things worse, but to focus on how numbers are being crunched.
“But, the important lesson, I think, is not necessarily to focus on this red line and what happened when we cut the sales tax rate, it’s just to realize we never really could have afforded to in the first place," McEntaffer said. "When we were not properly taking into account the effective inflation on what was happening in our economy.”
He said this plays into program funding discussions. McEntaffer also mentions a low unemployment in the state paired with low childbirth rate doesn’t bode well for the economy.
Mike Bockorny, CEO of the South Dakota Economic Development Professionals Association, agreed and particularly points to its future impact for workforce. He said it means people are leaving for better jobs elsewhere.
“Forty-nine of South Dakota’s 66 counties lost population between 2020 and 2023. That is 74% of our counties. More than half of those same counties have lost residents every year since 2020. This is not just happening in our rural areas," Bockorny said. "Midsize population centers are plateauing and shrinking, while the cost of maintaining roads, schools, emergency services and infrastructure continues to rise.”
He said that leads to either more taxes on the people who remain or cuts to essential services to maintain budgets.
In his opinion, he said that’s where economic development comes in.
“When critics oppose business development, they are not just rejecting an industry. Rather, they are endorsing a future of higher taxes and fewer services," Bockorny said. "The real true threat is letting these projects and their economic benefits go to other states while South Dakota’s counties continue to lose population.”
Bockorny added that some of the other problems the state is facing today, like high property taxes, could stand to benefit from economic development.
However, not everybody is buying stock in economic development. Some legislators have criticized the way the state does business in providing grants or loans to certain businesses. That includes critics of the Governor’s Office of Economic Development.
Regardless, the Dakota Institute’s Jared McEntaffer said while we aren’t in the best economic position the state’s ever been in, that means "there’s room for growth.” But he said that means there’s some lifting to do.
