PIERRE, S.D. — If all goes according to plan, Gov. Kristi Noem will deliver her final budget address Dec. 3 at the South Dakota State Capitol in Pierre, outlining her economic vision with an eye toward the next stage of her political career.
It’s natural for governors to emphasize the positive in these circumstances, but legislators might not have that luxury at a time when lagging state revenue and rising expenses signal significant belt-tightening for the 2025 session, where the budget for Fiscal Year 2026 will take shape.
“I don’t envy the governor’s position in putting out this budget,” said Rep. Will Mortenson, who served as Republican House majority leader the past two years. “If you’re someone coming into this session planning to create some big new government program or spend a bunch of money in a new way, you're going to be in for a rude awakening. We're just not going to have the money.”
That’s a marked contrast to the “foot on the gas” mantra pushed by Noem the past few years, when federal stimulus money and inflation-fueled sales tax receipts fattened state coffers.
Last year's budget proposal for fiscal year 2025, largely adhered to by the Legislature, called for $7.3 billion in spending, an increase of nearly 30% from two years earlier.
After budget increases to the big three – education, health care providers and state employees – ranging from 5% to 7% the past three years, a more modest hike is expected for FY 2026 due to flat overall revenue, prison construction costs and a larger state share of Medicaid payments.
“You've got ongoing sales tax collections that are $22.5 million behind legislative projections, you’ve got a men’s prison with a high maximum cost of $825 million and you’ve got conversations about property tax relief coming up,” said Nathan Sanderson, executive director of the South Dakota Retailers Association.
“Just on those conversations alone, it’s going to be a very tight budget year, and I don't know what the answers are going to be.”
With Noem nominated as Homeland Secretary secretary and preparing for confirmation hearings, the long-range responsibility will fall to Lt. Gov. Larry Rhoden, who could become the first South Dakotan to take the oath of office in the heat of a legislative session.
Here's a look at key factors to watch heading into Noem’s budget address and the 2025 legislative session in Pierre:
Sales tax revenue falling short
At a meeting of the Joint Committee on Appropriations on Nov. 14 in Pierre, state economists outlined revenue trends showing that sales tax collections for July through October 2024 were $22.6 million behind legislative projections, more than 4%. That trend could lead to a shortfall of nearly $80 million compared to projections for the fiscal year, which ends June 30, 2025.
Overall tax receipts for fiscal year 2025 fell nearly 3% short of expectations through October.
“There are areas that seem to be showing more weakness than others,” Derek Johnson, an economist with the Bureau of Finance and Management, told legislators. “Areas like building materials, hardware, garden supply, home furnishings, durable goods and communications. And then our farm equipment is down as well.”
Sales taxes are the largest source of state government revenue in South Dakota, one of seven states without a state income tax. The revenue ceiling is lower because legislators voted during the 2023 session to lower the general sales tax rate from 4.5% to 4.2%. That rate sunsets, or expires, in 2027.
Talk of eliminating that sunset clause and making the sales tax cut permanent might lose steam in this year’s session based on the latest state revenue projections.
Problems with property tax relief
When the decision was made to temporarily lower the general sales tax rate in 2023, the other two options were to repeal the state’s grocery tax, which Noem supported, and to provide property tax relief.
Voters strongly rejected a grocery tax repeal in the 2024 election, at least temporarily taking that issue off the front burner.
But property tax is a hot topic entering the 2025 session, given that total payments have increased by nearly 60% for homes and nearly 50% for commercial property over the past decade in South Dakota.
The problem with cutting property taxes, which help fund local school districts and city and county governments, is that typically you need to backfill that lost revenue with general fund dollars to pay for education and reduce the local effort for school districts.
State's Medicaid payments going up
South Dakota voters passed Medicaid expansion in 2022, extending health care coverage to more low-income residents under the Affordable Care Act, with the federal government covering 90 percent of the cost for the first three years.
That "bonus" in federal payments ends this year, said Venhuizen, who opposed expanding Medicaid without a plan to pay for the state's share. That price tag is about $35 million for FY 2026 after the state set aside $31 million earlier to ease the cost.
"The good news is that the Legislature and the governor planned for this by beginning to build in these extra costs over the past two years," said Venhuizen. "The bad news is that we have to absorb the rest of it this year, which means it will limit available ongoing revenue that much more."
Additionally, the Federal Medical Assistance Percentage (FMAP) for regular Medicaid has changed for South Dakota, with the state's funding responsibility increasing from 45% to 47%, which means as much as $25 million for FY 2026.
— This story was first published on southdakotanewswatch.org.
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