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February 18, 2013
Special Report on Economic Development -
Will the future build on a successful past?
The last issue of Capitol-ism included a list of several bills being considered as part of a package of bills that will address economic development. The suggestions on what should be done to grow the state's economy have ranged from assisting local development organizations to having local incentives and enabling the state to match them. Housing, worker recruitment, worker training and building infrastructure have all been part of the various rumors and theories. It's beginning to be like the stock market - the herd runs at the latest rumor and will run in another direction when the final bills are presented.
As the legislative leadership works behind the scenes to forge an approach to economic development that is politically feasible, and hopefully effective, there is a sense that past accomplishments are being discounted. As this discussion continues to churn, there has been very little said about doing anything to preserve one of the major economic development incentives of the past 17 years, refunds on large projects.
It is obvious that voters rejected the idea of establishing a fund to provide incentives for major investments by rejecting RL 14 (okay, maybe the campaign just ran out of time but even Capitol-ism has to admit it still smarts to sit down after the hiney kickin'). It must also be said that those same voters did not reject the kind of job creating and tax base expanding successes of the past. Even leading opponents of RL 14 lauded the success of refunds for ethanol and wind power.
The refund policies worked - period. This report will set the record straight on the success of the refund policies that have been in place for over 16 years. The bottom line is clear - refunds created great paying jobs, brought tax revenue to the state during construction (revenue that would not have been paid otherwise), expanded the tax base creating additional annual taxes and made the economy stronger.
So . . . what have we gained from the past record of refunds for major investments?
First, the Facts About the Refunds
Refunds have been tracked since 1996
49 companies have received refunds
- 14 ethanol plants
- 9 wind farms
- 11 manufacturers (7 of which were value added agriculture)
- 8 service/utility/energy
- 2 pipelines
- 1 railroad
- 4 miscellaneous
Refunds Were Different for Various Industries
- Ethanol received a 100% refund for expenditures over $4 million dollars
- Projects before 2010 had six levels of refunds for expenditures over $10 million dollars
- Projects after 2010 had maximum refunds of 45% or 55% on expenditures over $10 million
- Capital-intensive projects have higher net refunds because of sales taxes on capital expenditures
For the calculations in this report, the net refund rates were:
- Ethanol - 95%
- Wind/Pipelines - 60%
- Manufacturing and others - 40-55%
Looking at the Refunds
- Refunds were given for a portion of the taxes paid -
Total tax payments are estimated to be $156 million
- Refunds totaled $95,345,149
- The state collected an estimated $60 million dollars in taxes directly from the projects
- The refunds ranged from $5 thousand (manufacturer) to $9 million (wind farm)
- $72 million (75% of the total) went to agriculture/wind/ag processing projects
- $33 million (34% of the total) went to 14 ethanol projects
- $34 million (35% of the total) went to 9 wind projects
Did Refunds Work?
What did South Dakota gain from refunds? Jobs, taxes, expanded tax base - here are details shared by a portion of the companies that received refunds. For both wind and ethanol, the numbers reported are from a "representative model", that is an average for all the facilities. Here is why the South Dakota Chamber of Commerce believes the refund policies were a success.
Jobs - 2,467 jobs were created by 27 of the 49 companies. This is the number of jobs created by the expansions and is not a total of the jobs offered by the companies. If all 49 companies hired at the average of the 27 that reported, the total jobs would be over 4,000.
Average Pay - $36,000 a year is the average pay for these jobs. The jobs ranged from $28,000 to $50,000. Annual payroll of nearly $90 million dollars.
Taxes Paid by Projects - $60 million to the general fund. Using the refund rates above, there was an estimated total tax payment of $155 million dollars (project taxes, not annual taxes) with $95 million refunded, leaving $60 million in the treasury. This is money that would NOT have been possible without the refunds.
Annual Taxes - $22 Million. After the projects are complete, the company continues to pay property taxes, sales/use taxes on items used during operations and their staff people pay taxes as well. The annual tax gain calculated for the 27 of 49 companies sharing information shows the following.
- $600 thousand dollars from sales/use taxes paid by companies during operations
- $15 million dollars in property taxes paid by the companies
- $7 million dollars in taxes paid by the employees. This calculation is based on applying a 6% tax rate to half of the employee annual pay (assuming the other half is for mortgage/rent, medical, payroll taxes and savings); PLUS a flat $2,000 from each employee for property taxes. There is no estimate for specialty taxes such as gasoline, alcohol, tobacco.
Annual payments - $3 billion dollars (yep, that's billion with a B). The average ethanol plant will spend approximately $175 million a year for corn. The cheese plants in South Dakota pay well over $200 million a year for milk. Add these up and farmers and businesses that supply these industries receive over $3 billion in checks each and every year.
Special note: That $3 billion number is NOT the result of "chamber of commerce fussy math" with "rollover" of"'turns on the dollar". Those are checks, direct payments that could include your crazy uncle Andrew who sold a load of Boy Scout popcorn to an ethanol plant . . . once.
What's Next?
The talks that are being conducted to shape the future of economic development have not sought formal input from beyond the talks. The Chamber hopes that whatever policies are adopted to address challenges such as housing or infrastructure and encouraging smaller development, that there is still a focus on remaining competitive for large investments that truly change the economy.
The key in this decision is whether or not the refunds made a difference in making sure that project was built. The 3M Company has made it clear that without the refund they would have invested elsewhere for a project that created over 200 jobs. A manufacturing plant in Mitchell would not have been built without addressing the combination of sales and use taxes, plus contractor's excise tax. In fact, the only project one can argue clearly didn't need an incentive was the Transcanada pipeline. It would be unfortunate to let that experience bring the legislature to the conclusion that the refund policies of the past failed. It is not true. They were a great success.
Join us for Business Day at the Legislature and hear from local developers and legislative leaders about their ideas for the essentials of a good economic development program.
http://www.sdchamber.biz/chambernews/businessdayatthelegislature/
Thank you for supporting the South Dakota Chamber of Commerce and Industry!
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