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Panel Defers Controversial Sales-tax and School-construction Package to "40 First Day" After Wide Debate

House Tax Committee, South Dakota Legislature · February 19, 2026

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Summary

House Bill 12-81 (as amended) that would eliminate the state grocery sales tax, raise the general sales tax and cigarette tax, and create a school construction fund was deferred to the "40 first day" after witnesses cited complex fiscal, distributional and administrative impacts.

The House Tax Committee voted to defer House Bill 12-81A, a package that would cut the state sales tax on food to 0% while raising the general sales tax rate and increasing the cigarette tax to help seed a new school building construction fund.

Sponsor Rep. Eric Muckey (District 15) said the "Feed Families Fund Schools Act" is one option to provide property-tax relief and to sustain school construction funding. He told the committee LRC estimates showed eliminating the grocery sales tax would reduce revenue by about $121 million while a combined sales-tax and cigarette-tax increase could yield an aggregate revenue change that, depending on elasticity assumptions, might provide $60 million to $90 million annually for a school construction fund and leave additional general-fund revenue.

Ellie Bailey, representing the South Dakota Advocacy Network for Women, supported the bill's grocery-tax relief component as a tool to relieve family budgets and cited consumer spending data.

Opponents, including Derek Johnson of the Bureau of Finance and Management, the South Dakota Retailers Association and farm groups, warned the package likely amounts to a substantial net tax increase with uneven distributional effects. Johnson said the bill "is a significant overall tax increase" and flagged administrative, equity and program-design concerns, estimating the total impact could be closer to $200 million depending on elasticity assumptions. Retailers and farm groups noted a 2024 ballot measure to repeal the grocery tax failed and cautioned the proposal could disadvantage renters and lower-income households.

Rep. Muckey said he designed the amendment to exclude non-food consumables and to address school-fund eligibility to reduce inequities and suggested that precise fiscal impacts require detailed LRC work.

After committee discussion about FTE needs, administrative cost estimates and distributional effects, Representative Mortensen moved to defer HB 12-81A to the "40 first day." The roll call recorded 11 ayes, 0 nays (2 excused) and the motion passed, sending the bill forward for later consideration.