In Fiscal Year (FY) 2016, South Dakota collected $3.4 billion in state and local taxes—or $3,994 for every man, woman, and child. 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?
To better answer this question, this analysis will calculate South Dakota’s tax burden relative to the private sector. Ultimately, it is the private sector that creates new wealth and income. A high tax burden means a state is hobbling its private sector relative to other states and reducing their long-run economic growth potential.
Fortunately for taxpayers, as shown in Chart 1, South Dakota’s state and local tax burden (tax collections divided by private sector personal income) was the third lowest in the nation for FY 2016 at 11.4 percent—or -20 percent below the national average of 14.3 percent.
#SouthDakota state and local #taxburden in FY 2016 was the 3rd lowest in the nation at 11.4%— -20% below US average of 14.3% http://bit.ly/2FX9C8F @keypolicydata #SDpol #SDleg #SDsen #SDgov #PolicyData (click to tweet)
As shown in Chart 2, South Dakota’s tax burden has decreased over time by -5 percent to 11.4 percent in FY 2016 from 12 percent in FY 1950. Only Florida and Alaska (since statehood in 1959) have accomplished this amazing feat.
To put South Dakota’s tax burden into perspective, let’s compare it to size of major industries in the state (as a percent of private sector income). As shown in Chart 3, South Dakota’s 11.4 percent tax burden is greater than manufacturing (10.6 percent)
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 -8 percent lower (4.1 percent vs. 4.5 percent). However, the sales tax is 34 percent higher than the national average (4.5 percent vs. 3.4 percent) and is the 10th highest in the country which offsets lower taxes elsewhere.
The sales tax burden is a concern even beyond its high burden. According to the Tax Foundation, as of January 1, 2017, South Dakota’s combined state and local sales tax rate (South Dakota allows for local option sales taxes) is only 6.4 percent—the 31st highest in the country.
As such, in order to raise such a high amount of revenue, the relatively low sales tax rate has to be levied on a very broad-based number of goods and services which leads 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 3rd 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 20 South Dakota counties with the highest local government tax burden include:
The 20 South Dakota counties with the lowest local government tax burden include:
Finally, don’t forget to watch our exclusive time-lapse video of state and local tax burdens over the last 66 years! See if your state has been above or below the national average?
Scott has nearly 20 years of experience as a public policy economist. He is the author, co-author and editor of over 180 studies and books. His professional experience also includes positions at the American Conservative Union Foundation, Granite Institute, Federalism In Action, Maine Heritage Policy Center, Tax Foundation, and Heritage Foundation.