Why It Matters
Several Republican-led states are shifting their tax burden away from income and property taxes toward sales taxes, a policy change with significant implications for lower-income households. Sales taxes are considered regressive because they take a larger percentage of earnings from lower-income families, who spend most of their income on essential goods and services, compared to wealthy households that can save portions of their earnings. South Dakota has emerged as a leading example of this trend, recently enacting legislation that raises the state’s sales tax rate while reducing property tax obligations. The policy shift raises questions about tax fairness and affordability across multiple states pursuing similar strategies to fund government services and provide tax relief to specific constituencies.
What Happened
South Dakota Governor Larry Rhoden signed two bills into law in March 2026 that restructure the state’s tax system. Under the first law, South Dakota’s sales tax rate will increase from 4.2 percent to 4.5 percent beginning next year. The increase ends a temporary sales tax cut that lawmakers implemented in 2023. The second law allows counties to levy a half-cent sales tax for the first time, with revenues directed toward offsetting property tax burdens on homeowners.
Republican Senate Majority Leader Jim Mehlhaff acknowledged the regressive nature of the tax shift but defended the legislation as necessary. “It is regressive,” Mehlhaff said. “There’s no denying that.” He argued that the sales tax increase would provide needed relief from rising property taxes in the state.
South Dakota’s approach mirrors efforts underway in other Republican-controlled states. Georgia and Missouri are pursuing broader tax restructuring as part of yearslong initiatives to reduce or eliminate state income taxes entirely. Supporters of these efforts argue that lower income taxes make states more competitive for attracting businesses and residents. Other states are focusing specifically on sales tax increases as a mechanism to reduce property tax pressures.
By the Numbers
South Dakota’s sales tax increase from 4.2 percent to 4.5 percent represents a 0.3 percentage point rise. The state projects the increase will generate approximately $114 million in additional annual sales tax revenue. One state finance official estimated that a family of four in South Dakota would spend an additional $160 per year if their county implemented the new half-cent sales tax option, though property tax savings projections were not fully detailed in available estimates.
Zoom Out
The shift toward consumption-based taxation is occurring across multiple states but hits lower-income residents disproportionately. According to Aidan Davis, state policy director at the Institute on Taxation and Economic Policy, the regressive nature of sales taxes stems from spending patterns. “Rich families have the luxury of taking away their incomes into savings, but then low-income people, middle-income people, they spend all their income to make ends meet or to pay for necessities,” Davis said. “And that’s really the reason why these consumption taxes fall so much harder on everyday people.”
The national trend reflects a broader philosophical divide among states about tax structure. Republican-led states argue that reducing income and property taxes improves economic competitiveness and provides relief to property owners facing rising residential costs. Conversely, tax policy advocates contend that shifting the tax burden to consumption disproportionately affects those with the fewest resources.
Property tax increases have driven the debate in some states, including South Dakota, where residential property tax growth has prompted lawmakers to seek alternative revenue sources. The strategy of using sales tax increases to fund property tax relief attempts to address both fiscal demands and affordability concerns, though the trade-off creates winners and losers within the income distribution.
What’s Next
South Dakota’s sales tax increase takes effect next year following the governor’s signature. Counties have the option to implement the new half-cent sales tax but are not required to do so, meaning the actual impact will vary by jurisdiction as local officials decide whether to adopt the measure.
Similar legislative efforts are ongoing in other states. Georgia and Missouri will continue pursuing income tax reduction strategies, while additional states may consider their own sales tax adjustments. The effectiveness of these measures in achieving stated goals—economic competitiveness, property tax relief, and adequate state funding—will likely generate continued debate among policymakers and tax policy advocates across the nation.