This story has been updated with comments from Rep. Chris Karr.

SIOUX FALLS, S.D. (KELO) — Gov. Kristi Noem said in her weekly column today that state revenue rates “are going back to normal” as the next legislative session approaches.

Noem also said the “huge revenues and surpluses” are gone. Now, the Legislature will need to stick to a tight budget for fiscal year 2025.

A decline in state revenue from the big booms of FY24 and FY23 shouldn’t be a surprise.

Earlier this year, the state’s Bureau of Finance and Management (BFM) predicted a 4.1% decline in sales tax revenue for FY24. Sales tax revenue declined by 3.1% in the first quarter according to data presented at this week’s Governor’s Council of Economic Advisors meeting.

The first quarter is July through September.

Republican Rep. Chris Karr said a decline in sales tax revenue means the increases are slowing down.

“Personal spending has not decreased despite inflation,” Karr said.

The state will still have sales and use tax revenue but “we still need to be mindful of our spending,” Karr said.

If high interest rates and high inflation continue for two or more year it would be concerning, Karr said. Credit card debt is growing which can indicate that people aren’t curbing spending, he said.

At some point the spending could change, so the state does need to take a conservative approach, Karr said.

What’s happening in FY24 is an indicator for FY25.

The BFM reported this week that sales and use tax revenue grew 12.2% for FY22, and rose 9.1% for FY23.

The BFM and the Legislative Research Council both evaluate and project revenue for the state.

The two entities differ on some of their expectations for FY24.

On Feb. 14, Jeff Mehlhaff of the LRC, told, the Legislature’s Joint Committee on Appropriations the agency was projecting a 7% increase in sales and use tax revenue for FY24. This was the projection before the Legislature approved a reduction in the state’s sales and use tax from 4.5% to 4.2%. The reduction was effective July 1.

The LRC estimated in March that a reduction to 4.2% would decrease revenue by $103.8 million.

In today’s column, Noem asked for the .3% tax cut to be permanent.

“Instead, there is already talk among legislators about repealing the sales tax holiday to free up money for more spending,” Noem said in her column.

Karr had originally proposed a cut to 4% but suggested 4.2% as a compromise. Karr said he’d be happy to work with Noem on making the cut permanent.

The Legislature’s Joint Committee on Appropriations sets the bulk of the spending for state programs and departments.

Republican Sen. Jean Hunhoff, the chairwoman of the Joint Committee on Appropriations, said the committee and the state tend to be conservative with fiscal projections.

Between the “BFM and the LRC…we have the best of both worlds,” Hunhoff said of fiscal advice and projections from both.

The first quarter FY24 report from the BFM this week is a glimpse of the entire year as well as what fiscal topics the Legislature may discuss in the next session.

A decline in sales tax revenue was expected, Hunhoff said of the first quarter of FY24.

A decline does not mean a loss but rather a drop from the high growth of the past several years.

There has been evidence that over the past several years, inflation and federal stimulus dollars has helped boost the state’s economy.

State Finance Commissioner Jim Terwilliger told the appropriations committee in July that inflation had contributed to growth in the sales tax receipts.

In January, an LRC report said federal stimulus money and inflation were driving sales tax growth, according to media reports.

In December of 2022, two business/economic analysts discussed how inflation would impact sales tax revenue in South Dakota. As inflation causes the price of goods to increase, the sales tax revenue would increase because the tax is applied to the higher price of the goods.

Back in August of 2021, the Council of Economic Advisors was discussing the impact of inflation on the state’s sales tax revenues. The council also discussed possible changes in the inflation rate.

This week, Noem’s budget office was discussing why state sales tax revenues grew faster than personal income in South Dakota during and after the COVID-19 pandemic. Staff and advisors said stimulus money and other pandemic steps taken at the federal level stimulated the economy. It caused a short-term increase in personal income.

The state is near the third month of the second quarter of FY24

“We (still) have a workforce shortage, we don’t have enough people to fill the jobs,” Hunhoff said.

Year to date, the state has also seen significant income from the contractor’s excise tax, Hunhoff said.

The state used a lot of federal money for infrastructure projects and in housing projects, Hunhoff said.

That has positively impacted the contractor’s excise tax revenue, she said.

But, those are one-time dollars and that revenue won’t continue, Hunhoff said.

Karr said the money invested in infrastructure and housing will have a positive impact on the state’s economy over several years because not all projects are completed in the same year.

“One thing we haven’t seen is the Medicaid expansion, was not as projected,” Hunhoff said.

The state’s department of social service and BFM estimated 52,000 South Dakotans eligible for Medicaid expansion. That’s 10,000 more from the 42,000 originally estimated by the LRC.

In July, social services reported that less than 2,000 people had enrolled in the Medicaid expansion.

“Right now, we are not where we anticipated…,” Hunhoff said. But it is still to early to say this is the long-term response, she said.