Governor won't seek tax increase to fix SD budget

South Dakota Gov. Mike Rounds said Monday he won't seek a tax increase to fix state budget problems that are expected to get much worse in the next two years.

Any tax plan likely would not get the required two-thirds vote from the Legislature, so the budget will have to be balanced with substantial spending cuts that can be made with simple majority votes, Rounds said.

"So the only thing we can do is make reductions in expenses at this time. That's kind of the direction we're going," Rounds told The Associated Press.

"As we work through the budget, everything is on the table," he said.

The governor starts meeting with his budget staff Tuesday to make final decisions on the proposed spending plan he will submit to the Legislature on Dec. 8. The details are likely to change as officials get more information about tax collections before the Legislature votes in March on a final budget for next year, he said.

While state tax collections have fallen because of the recession, the state also has been hit with more spending in programs that help unemployed people, particularly the state-federal Medicaid program that pays the medical expenses of low-income people, Rounds said, adding that 6,949 more people became eligible for the program the past 14 months.

South Dakota probably can use federal stimulus money and state reserve funds, along with budget cuts, to make it through the next fiscal year, which begins in July, the governor said. The gap between ongoing revenue and expenses is expected to increase later, he said.

"The scary part is the fiscal year 2012 numbers," Rounds said, referring to the year that runs from July 2011 through June 2012. The gap between ongoing revenue and spending could be as high as $200 million that year, he said.

Rounds, whose time as governor ends in January 2011 because he is term-limited, said he wants to reduce the growth in spending to help his successor.

"I don't want to leave office a year from now having drained all our reserves," he said.

The governor said he has not yet decided whether to recommend increases in state employees' salaries or in aid to school districts. He said he is bothered that the current budget did not give state employees a pay raise, but the state can't spend money it doesn't have.

A state law that ties school aid to the previous year's inflation would have to be changed to prevent that funding from rising 1.2 percent next year.

"We haven't gotten to the point of making a decision yet, but I have to be able to pay for any expenditure," Rounds said of financial aid to schools.

Senate Appropriations Chair Jean Hunhoff, R-Yankton, said she agrees that the Legislature will not ask people already hurt by the economic slowdown to pay more taxes. "I don't think anybody is willing to do a tax. You can't when the economy is like this."

If the Legislature has to cut programs, it will set priorities and use logic, Hunhoff said.

"I don't want to cut anybody, but the reality is we're going to have to do some things. I don't have the answers yet," Hunhoff said.

Rounds said the only good news lately is that employment numbers are better than were expected just a couple of months ago. With more people working and spending money, South Dakota will get more sales tax, the largest revenue source for state government, he said.

The governor and the Legislature had assumed this year's $1.1 billion general fund budget would be balanced with the help of $88.1 million in federal stimulus funds, but a decline in revenue and a rise in Medicaid spending may require the use of up to $29 million in reserves.

An additional $65.2 million in federal stimulus funds can be used next year, but that could still leave a gap of nearly $100 million between ongoing revenue and spending requested by state agencies, Rounds said. He said his recommended budget will cut some agencies' spending requests, but 84 percent of state spending goes to education and social services.

Collections from the state's top revenue sources were below projections for the first four months of the budget year, July through October. Sales tax collection were 5.2 percent lower than in the same period last year.