PIERRE, S.D. — Gov. Kristi Noem’s first veto of the session will stand.
Though the South Dakota House of Representatives on March 7 voted 41-29 in favor of a proposal raising an occupancy tax in the state, overriding a veto requires a two-thirds majority in each chamber, representing 47 votes in the House and 24 in the Senate.
The governor’s rejection of the proposal and accompanying statement swayed several House lawmakers — in its first run through the legislative process, the increase to the occupancy tax cap passed the House by a 45-23 vote and edged out of the Senate 19-16.
In a statement last week accompanied by photos of Noem emblazoning her veto on House Bill 1109 with a custom branding iron, the governor reminded lawmakers that the state “should be working to cut taxes this legislative session, not increase them.”
In practice, House Bill 1109 would have at least doubled the allowable occupancy tax that business improvement districts can impose on lodging.
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Municipalities in South Dakota create business improvement districts, mainly in areas zoned for commerce, as a way to collect extra tax revenue from local businesses. Under the agreement, these districts then invest that money into certain collective benefits in the area, often related to tourism, such as hosting and marketing events or beautifying the neighborhood.
“The revenue generated from [business improvement districts] to promote tourism or infrastructure that grows tourism, our second industry in South Dakota, comes back to local communities,” Rep. Becky Drury, of Rapid City, said during debate on the House floor. “These districts are working for the betterment of South Dakota. They create the jobs, earnings and critical sales tax collections at the state and local level that fund municipal, county and state structures and services. When something is working, doesn't it make sense to support it?”
Business improvement districts are allowed several funding mechanisms: they can levy a special assessment property tax, an occupancy tax or a business license fee.
The occupancy tax is restrained at $2 per night. Under the proposal, that cap would increase to $4 and add in an option for a percentage occupancy tax of up to 4%, though proponents hammered home the point that raising rates would be entirely up to each individual district.
“No matter how you slice this, no matter what kind of a pretty box you put it in with a pretty bow, it is still a tax, a tax, a tax, a tax,” Rep. Mary Fitzgerald, of St. Onge, said during floor debate. “This tax increase benefits private business, it does not benefit South Dakotans.”
While proponents argued that attracting visitors to towns in South Dakota would become more difficult were the $2 cap, first implemented in 2005, left in place, opponents argued that this tax burden would not just be felt by those outside the state, an argument paralleled by Noem in her veto statement.
“Those of us in rural areas are forced to go to our metropolitan areas for health care,” Sen. Ryan Maher, of Isabel said during a Senate floor debate on the bill last month. “And so now that we’re looking at increasing this tax, folks seeking these treatments are going to have to pay more on these hotel room taxes without any choice.”
While Drury noted that a subset of rooms in Rapid City and other municipalities offers medical treatment discounts, the optics of raising taxes while the chamber is marred in a tax cut debate was too much for proponents to overcome.
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“I think the governor’s veto message was powerful,” said Rep. Scott Odenbach, of Spearfish, who voted in favor of the legislation the first time but changed his mind this time around. “I think the argument about rural South Dakotans having to pay a disproportionate amount was what moved a lot of people to agree we should sustain her veto.”
Jason Harward is a Report for America corps reporter who writes about state politics in South Dakota. Contact him at 605-301-0496 or jharward@forumcomm.com.
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