South Dakota legislature doing away with construction tax refunds for large projects

PIERRE, SD — The Legislature’s leaders reached an agreement Thursday to cut back and eventually shut down South Dakota’s program that has provided millions of dollars in construction-tax refunds for large business projects and agricultural processing plants.

The changes are intended to save an estimated $11.5 million during the coming year that could be used to help pay for state government’s operations rather than be returned to project developers.

The Senate voted 21-14 to accept the final package, and the House of Representatives gave final passage 53-14 at 6:08 p.m. The legislation, SB 195, now goes to the governor, who is expected to sign it into law.

“It’s one in which I can safely say everybody is a little dissatisfied with,” Rep. Val Rausch, R-Big Stone City, said.

The program was broadly expanded in 2005 to assist the Big Stone II power plant expansion, which was derailed last year by the Obama administration’s position on coalfired electricity.

House Democratic leader Bernie Hunhoff of Yankton urged support, although he said concessions made to benefit oil pipeline projects came at the expense of potentially better tax treatment of large wind farms.

“It still represents a major drain on the treasury of the state of South Dakota at a time when we can’t get our budget straight,” Hunhoff said.

“Sometimes the best compromise leaves everybody a little bit mad,” House Republican leader Bob Faehn of Watertown said.

Senate Republican leader Dave Knudson of Sioux Falls said the compromise treats fairly the projects that are pending, is responsible to taxpayers in general and broadens eligibility to smaller projects.

“I think it’s a fair compromise between the desires of industry and protection of the taxpayers,” Knudson said.

Through Dec. 31, the refund program has cost the state treasury more than $59 million, including $14.85 million in 2008 and nearly $18 million in 2009.

Ethanol plants and electricity projects, including wind farms, have been the biggest recipients.

Senate Democratic leader Scott Heidepriem of Sioux Falls said the purpose of the program is to entice development, rather than reward projects that would have been coming to South Dakota anyway such as the TransCanada oil pipelines.

“This is not a version of this bill I would prefer,” Heidepriem said. He wanted to exclude pipelines. “But I have lost that battle, and that’s all right. … This bill returns tax policy to what I would say is a sensible approach.”

A conference committee of three Senate and three House leaders put together the final deal Thursday after two months of back and forth between legislators, Gov. Mike Rounds and business lobbyists, especially those from the energy industry.

Under the changes, project costs from $10 million to $40 million would be eligible for a 45 percent refund of the sales taxes and contractor excise taxes paid, while project costs from $40 million to $500 million would be eligible for a 50 percent refund.

There would be no refunds on taxes paid on the costs above $500 million. Pipelines would remain eligible to participate in the program.

The program in total would expire on Dec. 31, 2012, unless the Legislature chooses to renew it at some future time.

The panel rejected two amendments that included keeping the program beyond 2012 solely for wind energy projects.

“Frankly, I think the reality is we’re back here next year or the year after carving out a sweet deal for wind,” Sen. Bob Gray, R-Pierre, said. “I think long-term it has wind in it but that’s for another day.”

The legislation, SB 195, was originally sponsored by Gray. It was amended in major ways several times in the Senate and the House before the conference committee’s final deal.

Gray voted against the deal in the conference committee.

“I continue to believe that discussion needs to continue,” he said. He voted against it again when it came up the last time in the Senate.

Steve Willard, representing the South Dakota Electric Utility Companies, said he expects there will be a group proposal to create a new version of the program for beyond 2012.

“I think we’re setting the stage to solve this,” David Owen, president of the South Dakota Chamber of Commerce and Industry, said.

The governor, a Republican, proposed legislation that called for smaller reductions to produce an estimated $3.5 million of savings.

Heidepriem and Hunhoff suggested ending the program this year. Republican leaders set a joint goal to get $11.5 million through changes in the program.

The refund amounts and recipients were secret until last year.

A reporter for this newspaper and four other separately owned papers in South Dakota won an administrative ruling in early 2009 that the state Department of Revenue and Regulation must turn over permit information regarding projects seeking refunds.

The Legislature, meanwhile, passed a law requiring the department to make public the amounts and businesses.

The program is complex.

It provides a 100 percent refund to agricultural processing projects costing more than $4.5 million. The refund applies to the contractor excise taxes paid for construction and the sales and uses taxes paid for processing equipment.

For business projects, the refund percentage increases with the amount spent.

• For costs of $10 million to $15 million, there is a 25 percent refund of the contractor excise taxes and the sales and use taxes;

• For $15 million to $20 million, the refund is 33 percent;

• For $20 million to $40 million, the refund is 50 percent;

• For $40 million to $60 million, the refund is 67 percent;

• For $60 million to $600 million, the refund is 75 percent; and

• For more than $600 million, the refund is 90 percent.

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