Sales tax revenue collected in South Dakota rose by roughly 9 percent in the first quarter of fiscal year 2017 relative to the first quarter of fiscal year 2016. Normally an increase of this magnitude would send legislators scrambling for ways allocate new found revenue. However, the increase can largely be attributed to the 0.5 percentage point increase in the sales tax enacted in June. As a result of the increase, sales tax revenues were expected to climb by approximately 16 percent.
Why did revenue fall short of expectations? The baseline forecast of taxable sales might be to blame. While budget analysts forecasted around a 3 percent annual increase in taxable sales, the first quarter of fiscal year 2017 saw taxable sales decline by 1.8 percent relative to the first quarter of last fiscal year.
How did budget analysts arrive at a 16 percent growth in revenue from a half-point increase in the sales tax rate and 3 percent forecasted growth in the base? A half-point increase in the rate (from 4.0 percent to 4.5 percent) represents an increase of 12.5 percent. Coupled with modest growth and moderate inflation, revenue growth of 16 percent isn't out of the question.
What caused the decline in taxable sales? This is more complicated. Slower economic growth, more un-taxed e-commerce sales, and shifting big purchases forward to avoid the higher rate all might have contributed. In the first edition of our forthcoming monthly newsletter, we plan to explore these potential factors in greater detail.
For more information on the economy in South Dakota, visit the South Dakota Dashboard economy page.