PIERRE | South Dakota lawmakers based their state spending plan for this year on an expectation that tax revenues would rise, and rise significantly.

But Gov. Dennis Daugaard's top economic advisers received bleak financial news on Tuesday: Not only are state tax revenues not growing, they're behind compared with the same period last year.

Three months into state government’s 2017 fiscal year, South Dakota’s economy isn’t close to generating enough tax revenues to cover the 2017 budget set by the Legislature.

Taxable sales for July through September ran 1.8 percent behind the similar quarter one year ago.

Making the arithmetic more complicated was the decision by Daugaard and majorities in both chambers of the Legislature to increase the state sales tax rate to 4.5 percent from 4 percent.

The tax increase was targeted for improving teacher salaries and providing property-tax relief for businesses. Combined with other spending increases, sales tax revenue needs to climb 16.9 percent to cover the budget.

Now, more growth is needed to also offset the first-quarter downturn.

“We need about 20 percent (growth) the rest of the year,” state economist Jim Terwilliger told the business people and university faculty members around the table in the governor’s large conference room at the Capitol on Tuesday.

South Dakota’s agriculture sector, which depends on crop and livestock prices set nationally and globally, is part of the weakness. The peaks seen in the 2011-2013 period are replaced by deep slumps of late.

“From $4 billion to $600 million is a very significant drop,” retired University of South Dakota business professor Ralph Brown said.

The council members offered their views and raised questions during the four-hour meeting. Their opinions and information help shape the governor’s budget plans each year.

“You’ve got some challenges,” businessman Dave Sweet of Sioux Falls told Terwilliger and Jason Dilges, the governor’s commissioner of finance and management.

Dilges said state government doesn’t collect large amounts of taxes from farmers and ranchers, other than for equipment purchases. Their real estate taxes support schools, counties and townships.

“But because of the indirects,” Dilges said about the ripple effect through the economy from farmers’ and ranchers’ spending, “it is a huge driver.”

Teachers aren’t going to give back their pay raises, so other components of the budget would have to take cuts if they become necessary, Dilges said.

Terwilliger suggested other currents have been shifting in the economy. For the first time, he offered charts showing gaps between taxable sales and other economic measurements such as state domestic product, nonfarm income and personal consumption.

“It’s e-commerce. There’s no doubt about it,” he said.

Around the table, nearly every person acknowledged he or his spouse bought goods over the Internet that often aren’t taxed. Susan Johnson, who books lodging for tourists in the Black Hills, said the conversation should change.

“We should accept this is going to happen and we should figure out a way to drive more taxable sales to our state,” Johnson said.

The governor will make his budget recommendations to the Legislature in early December.

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