In Fiscal Year (FY) 2013, South Dakota collected $3 billion in state and local taxes. While this is an impressive sum of money, it tells us little about whether or not the average South Dakota taxpayers can afford this level of taxation.
As shown in Chart 1, South Dakota’s state and local tax burden (tax collections divided by personal income) was the lowest in the nation for 2013 at 7.7 percent—or 25 percent below the national average of 10.3 percent. Interestingly, as shown in Chart 2, South Dakota is one of only 5 states where the tax burden has declined over time—the other states are Arizona, Florida, Louisiana, and Oklahoma. The tax burden declined by -25 percent to 7.7 percent in FY 2013 from 10 percent in FY 1950.
South Dakota’s low state and local tax burden is driven by the fact that it does not have a state individual income tax or state corporate income tax. Additionally, relative to the national average, the state and local property tax burden is 16 percent lower (2.7 percent vs. 3.2 percent) and all other taxes are 9 percent lower (1.8 percent vs. 2 percent). However, the sales tax is the 11th highest in the country which offsets lower taxes elsewhere (3 percent vs. 2.3 percent).
The sales tax burden is a concern even beyond its high burden. According to the Tax Foundation, as of June 1, 2014, South Dakota’s combined state and local sales tax rate (South Dakota allows for local option sales taxes) is only 5.83 percent—the 40th highest in the country. As such, the sales tax appears to be levied on a very broad-based number of goods and services which lead to a concern of tax pyramiding. Sales tax pyramiding creates all kinds of very bad economic distortions most often associated with a gross receipts tax (pdf).
Nevertheless, even a bad sales tax does not offset the economic benefits of having the country’s lowest tax burden. South Dakota taxpayers need to make sure their policymakers understand that point first and foremost.
Of course, the tax burdens for local government can vary just as much as they do among the 50 states. As such, we have also calculated the local government tax burden for every county in South Dakota—this includes every taxing jurisdiction within the geographic county borders whether it is a city, a special district, or county government itself.
The South Dakota counties with the highest local government tax burden include: Hyde County, SD (6.6 percent), Jones County, SD (6.4 percent), and Sanborn County, SD (6 percent). The South Dakota counties with the lowest local government tax burden include: Shannon County, SD (0.3 percent), Buffalo County, SD (0.8 percent), and Todd County, SD (1.2 percent).
J. Scott Moody has over 18 years as a public policy economist with a specialty in tax policy and has over 180 publications. He has worked for numerous national and state-based think tanks such as Federalism In Action, Tax Foundation, Heritage Foundation, and The Maine Heritage Policy Center.