Research & Commentary: South Dakota House Considering Tax Increases for Select Businesses
In this Research & Commentary, Samantha Fillmore examines a House Bill in South Dakota that would increase taxes on the gross receipts of all mamajuana sales in the state.
Today, the South Dakota House Taxation Committee will be holding a hearing on House Bill 1045, an act to increase taxes on the gross receipts of all sales of marijuana in the state. If HB 1045 were to pass, all taxes levied under this bill would be distributed to a portion of the annual revenue to counties.
While Heartland takes no official position on the legalization and consumption of marijuana, the citizens of South Dakota have done so. On the 2020 ballot, South Dakota voters approved South Dakota Constitutional Amendment A, Marijuana Legalization Initiative. Overall, the “Yes” to the initiative received 54 percent of votes while the “No” received 45 percent of votes.
Residents of the Mount Rushmore State have made it clear they condone the use of marijuana through the democratic process. The negative economic effects HB 1045 would have on small and locally owned businesses in South Dakota outweighs the moral and philosophical debate that surrounds cannabis regulation on the state level. Levying heavier tax burdens on this commodity only harms small businesses and individual economic prosperity in South Dakota.
According to the South Dakota Department of Revenue, cannabis sales are subject to a statewide 4.5 percent sales tax in addition to municipal taxes, and a 15 percent excise tax. The most recent revenue statistic for marijuana taxes in South Dakota was $29.3 million. This revenue has initially been allocated to cover costs associated with implementing the use and taxation of marijuana while the remaining revenue was broken into two categories for allocation: 50 percent of the remaining revenue was appropriated to fund state public schools, while the other 50 percent of the revenue was deposited into the state’s general fund.
HB 1045 stipulates a new system of revenue allocation should the additional 15 percent tax increase take effect. The bill states that the department would first appropriate the revenue collected to cover the costs incurred by the department in carrying out its duties. If the remaining revenue does not exceed $10 million in a tax year, then the entirety of the remaining revenue would be allocated to the state’s general fund. However, if the remaining revenue does exceed $10 million in a tax year, 50 percent of the remaining revenue must be divided proportionally among the counties based on where the revenue was generated.
Under this system in HB 1045, the revenue must be distributed to the respective counties by September 1 of each year to be used for the construction, repair, and renovation of courthouses, jails, county roads, and bridges with any revenue not used for these purposes to be used to reduce the property tax levy in the county. Then, the remaining 50 percent of revenue would be deposited into the state’s general fund.
Though attempts to improve infrastructure at the state and county level through higher projected revenues is laudable, the overall economic effects of this lofty tax increase would accomplish neither of those worthy goals. According to the Pew Research Center, funds from sin taxes is a historically unreliable source for long-term revenue, particularly for funding reoccurring budget items such as those listed in the allocation stipulations for HB 1045.
As is the case with most top-down taxes, an increase in marijuana taxes would hit small business owners harder at a time when small businesses do not need any more hurdles. According to Wallethub, 87 percent of small business owners are struggling due to the ongoing pandemic.
Furthermore, if the cannabis market can escape crushing regulatory and tax burdens, small businesses would be allowed to thrive in a free and open market inevitably creating jobs throughout the Mount Rushmore State.
Failed businesses don’t pay property taxes, income taxes, sales and use taxes, and the dozens of other licensing and regulatory fees that governments rely on for revenue. Therefore, arbitrary and sharp tax hikes in any market have the potential to result in further restricting government revenue, exacerbating budget deficits caused by the pandemic.
As this bill progresses, the Committee should consider the economic harms associated with tax increases. Further, it is evident that there are employment and economic benefits associated with allowing small businesses to engage in the cannabis market without exorbitantly high tax burdens in South Dakota.
The following articles provide more information about sin taxes.
Richard Williams and Katelyn Christ examine several myths about sin taxes in this Mercatus Center paper. “Recently, however, the arguments for imposing new excise taxes and increasing existing ones have reemerged across party lines and have spawned several myths about the efficacy of sin taxation,” they wrote.
Sin Taxes: When the State Becomes the Sinner
Andrew J. Haile uses the Master Settlement Agreement between the states and major tobacco companies to illustrate the moral hazard created when states become dependent on sin tax revenues. Haile also draws out lessons from states’ experiences with taxing tobacco products to identify problems to consider as state legislatures weigh whether to enact new sin taxes.
The Political Economy of Excise Taxation: Some Ethical and Legal Issues
Excise taxes are used not only to raise revenue but also to alter or punish behavior. In many cases, excise taxes can be called “sin” taxes, because they punish people for politically incorrect behavior, such as smoking or consuming alcoholic beverages. In this article, Robert W. McGee examines the nonrevenue uses of excise taxes and analyzes their propriety from the perspectives of economics, law, and ethics.
The Economics of Sin Taxes
James Sadowsky considers sin taxes, how they affect the products they are imposed on, and the public’s recent backlash against such taxes.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Heartland Daily News website, The Heartland Institute’s website, our Consumer Freedom Lounge, and PolicyBot, Heartland’s free online research database.
The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Samantha Fillmore, Heartland’s government relations coordinator, at firstname.lastname@example.org or 312/377-4000.