Will development suffer without big business tax refunds?

South Dakota State Roundup

Published July 1, 1996  | July 1996 issue

Until the end of 1996, business construction projects of at least $20 million may receive a refund of at least one-third of construction-related taxes, and up to a full refund of those taxes for projects over $40 million. Next year—no deal, unless that project is an ag product processing facility.

The state Legislature voted earlier this year to abolish the construction-related tax refunds, except for ag-processing facilities. The refund program had been in place for utilities and ag-processing plants since 1991, and the provision to include all major construction projects was added in 1994. Some say that addition to the law was made merely to help builders of Deadwood's Dunbar convention center and resort. Dunbar developers asked the state to support higher betting limits to increase the resort's economic viability, but a citizens' referendum defeated the proposal.

Four projects are currently certified to receive refunds through the end of '96, including The Dunbar conference center and resort in Deadwood, the Sioux Falls Convention Center and a soybean processing plant in Volga, which would still qualify after the current law expires.

Special tax refunds are not the most important factor for a state's development, rather, it's the long-term benefits of a good business tax climate that count, says Bonnie Untereiner, commissioner of the Governor's Office of Economic Development. "Certainly the law helped, but it was not a decisive factor," she says. South Dakota, which has no corporate income tax, no business inventory tax, and no personal income or personal property tax, had the highest growth in manufacturing employment of any state over the last three years, Untereiner adds.

"Large projects tend to need more infrastructure," and that extra cost falls to the local community, Untereiner says of the decision to end construction tax refunds. Instead, local communities that receive the increased revenues from construction taxes can use those dollars, for example, to provide property tax relief to their citizens, she says.

However, recognizing the battles that occur between states for large business projects, some worry that without special incentives, South Dakota may be at a competitive disadvantage for large projects. "Although there are a limited number of projects in that size range, South Dakota doesn't have a lot of tools in its economic incentive pouch," says Dan Scott, president of the Sioux Falls Foundation, that city's economic development organization.

But Scott admits that even if the construction tax rebate was continued, "With no income tax and limited tax revenue opportunities, South Dakota communities can't compete for something like a General Motors plant with communities that have millions to spend." However, he says, on a level playing field with no business incentives, South Dakota—with its good workforce, infrastructure and a business-friendly tax structure—can compete. "If government would make it illegal or impossible for any incentives to be given, I couldn't be happier," Scott says.

Kathy Cobb