Impact of grocery tax ballot measure could range from $134M to $646M Estimates depend on ‘human consumption’

A new analysis of the Nov. 5 ballot measure aiming to eliminate state sales taxes on groceries projects state revenue losses ranging from $134 million to $646 million annually.

On Tuesday in Pierre, the Legislative Research Council presented the analysis to lawmakers on the state budget committee. Council employees provide research, analysis and administrative support to legislators.

Backers of the citizen-initiated ballot measure only aim to prohibit state sales taxes on groceries, but the measure references items sold for “human consumption.” The wide range of potential revenue losses depends on how “human consumption” is interpreted. 

“This is why words matter,” said Jeff Mehlhaff, the council’s chief fiscal analyst.

A narrow interpretation limits the measure’s impact to groceries. A broader interpretation includes many goods and services used by people, based on definitions and interpretations of “consume” and “consumption.” Utilities, toiletries and car repairs are some examples cited by the council as goods and services technically “consumed” by humans. 

The narrow definition would reduce state revenues by an estimated $133.6 million. The broader interpretation would result in an estimated revenue loss of up to $646.2 million. The state’s total annual budget is $7.3 billion.

A coalition formed to oppose the ballot measure says that in addition to affecting state sales taxes, the measure would affect city sales taxes, due to a state law that say cities cannot tax anything the state doesn’t tax. Yet the actual language of the measure says “municipalities may continue to impose such taxes.”

When asked about that, Mehlhaff said, “I’m just leaving that where it is because it says municipalities may continue to impose such taxes.” 

Rep. Tony Venhuizen, R-Sioux Falls, said voter passage of the measure could precipitate the worst budget cuts since the 10% across-the-board reductions during the 2011 legislative session.

“If the people vote for this, they need to know that when we come during January, we are not going to be doing increases for anything,” he said. “We’re going to make significant budget cuts.”  

Retailers such as Walmart, Sam’s Club and Dollar General, which classify a significant portion of their sales as groceries and consumables, could see a substantial portion of their sales untaxed under the new measure, according to the analysis. It estimates that 59% to 81% of sales at those retailers could be affected.

The analysis says the Legislature would need to clarify the definition of “human consumption” to determine the measure’s full fiscal impact, should the measure pass.