Video lottery revenues that have become essential to the state budget have flattened out in recent years, possibly because gamblers who are already strapped by the rising cost of fuel and other essentials are cutting back on their bets.

But the slowdown in video lottery revenue, which pays for property tax relief by being disbursed through the school aid formula, is a relatively rare sign of financial trouble in a state that remains relatively well insulated from national economic highs and lows.

So far.

"Overall, compared to a lot of other states, I think we're in pretty good shape," state-government economist Jim Terwilliger of Pierre said.

Powered by a strong agriculture economy and a broad-based sales tax that covers food and other essentials, South Dakota has avoided the brutal economic bath taken by other states. The state has dodged the sharpest edge of a national credit crunch, a drop in housing values and sales and reductions in corporate profits.

"We've said from day one that in South Dakota, because we've got an ag base and because we're a little more conservative than other states, we don't go up or down as fast as some of the other states in term of our revenue," Gov. Mike Rounds said.

Revenue from the state's all-important sales-and-use tax, which contributes more than 56 percent of ongoing revenues to the state general fund, seems to be recovering from a sluggish December that worried Rounds and his budget-office team, including Terwilliger.

Receipts from the contractor's excise tax, an indicator of new building and remodeling activity for businesses and homes across the state, have softened. So has revenue from the state's 2.5 percent tax on insurance premiums. Even so, both continue to increase, if slowly.

Lottery slows down

Video lottery stands virtually alone among major state revenue sources in its stunted growth. Revenues from the controversial-but-lucrative machines, which are split between the state and the industry, have not increased in two years and shows signs of a slight decline early in 2008.

That doesn't surprise Fred Schoenfeld, chief fiscal analyst for the South Dakota Legislative Research Council, who believes the price of gas and other rising costs are leading to some restraint among video-lottery fans.

"My theory on that is that as people's disposable income has tightened up, their willingness to put money in the video lottery has diminished," Schoenfeld said. "It used to be they'd go in to fill up a car with gas and buy a pack of cigarettes, drink a beer, play video lottery. Now, by the time you buy your cigarettes and your tank of gas, you figure you've got nothing left."

A continue fall in video lottery revenues could become more of a drain on the state budget as shortfalls must be replaced in order to maintain the tax relief program begun in the 1990s by former Gov. Bill Janklow.

Rounds said video lottery is a "mature industry" that might no longer be able to provide the inflation-matching growth it offered in the past. The state's diversified sales tax, which includes food and clothing, is able to match inflation because it covers so many necessities, Rounds said.

"People still have to eat; therefore, there's a consistency there," he said. "Because we do have a very broad sales tax, we don't get hit as hard as some of the other states do."

Those include states that have built income-tax revenues into their budgets in ways that can become problems when corporate and personal incomes falter, Rounds said.

"If we were an income-tax-based state, we'd have negative numbers, not just lower numbers," Rounds said. "Some of the other states, because they're income-tax states, get big ups when the economy is really good but really take it hard when the economy starts to slow down."

As a state without income taxes, South Dakota relies heavily - too heavily, critics say - on the sales-and-use tax and an assortment of other taxes and fees at the state level and property taxes locally. Typically, a weak economy in South Dakota means slower growth in tax receipts rather than sharp declines.

Last December was an example. Receipts from the state sales-and-use tax grew by a modest 3.7 percent during a holiday month in which the Santa Claus effect should have produced an increase of 5 percent to 8 percent.

Rounds and his budget office were looking for 8 percent growth in December, an expectation based in part on good commodity prices and a generally successful harvest.

"We thought there'd be some pent-up demand there," Rounds said.

When actual growth was less than half that expectation, Rounds urged lawmakers to be especially cautious about committing state dollars to long-term spending needs. They are noted for that, anyway. But receipts from the sales-and-use tax, a key indicator of economic activity across the state that funds everything from school aid to corrections, rebounded in January to a more comforting level of 6.3 percent. The governor's budget staff expects receipts from the tax to grow by 7.1 percent overall for the state fiscal year that ends June 30.

Slower growth ahead

The governor's budget office, officially called the state Bureau of Finance and Management, predicts slower growth of 4.9 percent for the fiscal year beginning July 1, which is closer to the 4.6 percent growth in the tax during fiscal year prior to this one.

South Dakota is likely to benefit this summer from the economic stimulus package developed by President Bush and Congress. The Internal Revenue Service says South Dakota could receive about $300 million through the stimulus package for individuals and families, and addition incentives for businesses.

Bush is encouraging recipients to spend rather than save the money or pay off debt. Rounds questions the overall benefit of the federal gift that could put $200 to $400 million into a state economy with a gross product of $32 billion.

"That's a 1 percent impact," he said. "And whether or not they use it for credit-card debt or bring checking accounts up, I think the jury is still out."

Schoenfeld said that despite their conservative nature, South Dakotans might respond with open checkbooks to the easy money and encouragement to spend from the White House.

"I don't know. You've got the president out there saying, 'Spend, spend spend.' And a guy's got 600 bucks in his hand and that new Ruger calling to him from the sporting goods store," Schoefeld said. "I've got a feeling he's going to say, 'Ma, I gotta do the patriotic thing.'"

Although housing prices and sales have fallen hard in some areas, the impact has been noticeable but more subdued in most of the Black Hills, Spearfish real-estate agent John Teupel said.

"The market stalled. I don't think prices have gone down that much - probably about a 5 percent hit in our area," he said. "If the market were not to pick up, I think you could see more. But I think we're going to see it pick up."

Teupel agreed that South Dakota's economy isn't subject to the extreme ups and downs of other states. But even the housing implosion in California and other areas can be felt here, if only because losses consumed money that might otherwise be spent buying property in the Black Hills, he said.

"The hits in some of those urban markets have had an impact on our market, simply because those buyers out there don't have that huge chunk of cash from their house sales," Teupel said.

And just because South Dakota has weathered the worst of the national housing slump well doesn't mean its worries are over, Rounds said.

"I'm nervous because of all the anecdotal discussions I'm having with real-estate professionals," he said. "The message out there is that some of our larger communities are soft. I'm not ready to suggest that we're through with the housing crunch."

Contact Kevin Woster at 394-8413 or kevin.woster@rapidcityjournal.com.