South Dakota’s favorable business climate helping to attract companies

South Dakota lacks the national exposure of more populous states like California, Texas, New York and Massachusetts that are more known as business hotbeds. But the state is quietly making a name for itself as an affordable, less regulated alternative for companies looking for a Midwestern site.

South Dakota has the lowest per capita state taxes in the nation, according to the U.S. Census Bureau, and the Milken Institute economic think tank ranked the state as having the lowest cost of doing business in the country in a 2007 report. Last year Forbes magazine and CNBC both ranked South Dakota as the best state for business. South Dakota has also been ranked among the top states in the nation in business climate, corporate business climate and having a business-friendly state legislature.

The state doesn’t have corporate income taxes, personal property or income taxes, business inventory taxes or inheritance taxes.

“Our taxation is very reasonable to business and is structured so businesses can make a profit,” says Kim Olson, director of the South Dakota Governor’s Office of Economic Development. “Our regulations are also reasonable. We don’t want to muck things up with red tape, we want to keep things working and stay out of businesses’ way when they are doing business.”

SIOUX FALLS STRENGTH

Partly because of the state’s regulatory environment, Sioux Falls has become a financial services stronghold. Sioux Falls’ financial services location quotient, a measure of the concentration of economic contributions to an area by industry, is double the national average.

Sioux Falls has become a popular location for credit card processing and the state’s favorable business and regulatory environment has led a number of banks and credit card companies to incorporate in the state and set up some operations in Sioux Falls, while keeping their physical corporate headquarters facilities in their home states.

Earlier this year Wayzata, MN-based TCF Financial moved the legal headquarters of its TCF National Bank subsidiary and charter to Sioux Falls, mostly for regulatory reasons.

STATEWIDE INFLUENCE

The state’s favorable business climate has made it easier to sell relocating or adding locations throughout South Dakota to businesses, especially in the current economic environment with companies struggling with cash flow and with financing more difficult to obtain.

“It makes my job a lot easier,” says Ben Snow, the new president of the Rapid City Area Economic Development Partnership, who previously held a similar position in a Denver suburb. “Places in California have to continually sell businesses on not leaving the state because of its regulatory environment and high business taxes. We don’t have that problem here. I think there are opportunities for states like South Dakota to promote the advantages of doing business in a smaller state with less regulation.”

MINNESOTA BUSINESSES RELOCATING

For years businesses have been lured across the border from Minnesota by South Dakota’s more pro-business tax structure and regulations.

“That has been a long-term historical trend,” Olson says. “A company might want to make some changes, but still stay in the region. They come over because it is a better business environment for them.”

While South Dakota has been successful in attracting Minnesota businesses, Olson says the state is not focusing exclusively on Minnesota or trying to recruit businesses that aren’t looking to relocate.

“There’s not a poaching mentality where we want to steal all Minnesota’s businesses,” she says. “Our borders are open for business. If Minnesota businesses are interested in coming, we’re going to talk with them, but our strategy looks for businesses nationally and internationally.”

Arlen Kangas, president of the Detroit Lakes, MN-based Midwest Minnesota Community Development Corporation, says South Dakota has become an attractive destination for many Minnesota businesses, especially those located in border communities.

“South Dakota’s tax code is very business friendly,” Kangas says. “I don’t see a problem with using that to attract business because all businesses are affected equally. With tax increment finance some companies get subsidies and others do not, leading to charges of inequality. South Dakota has a low tax system for everyone. I think that’s a good approach.”

But Kangas adds that Minnesota’s Job Opportunity Building Zones or JOBZ program, which provides local and state tax exemptions to new and expanding businesses in targeted rural areas, has helped to offset some of the benefits of moving to South Dakota for many Minnesota companies in border communities.

TARGETED APPROACH

Olson says the state has traditionally fared well in attracting companies in the agriculture, manufacturing and financial services sectors. She says South Dakota is currently focusing concerted efforts on the energy, biotechnology, agriculture, information technology and firearms fields.

The Governor’s Office of Economic Development, which works on growing the state’s domestic product by increasing jobs, income and wealth, primarily focuses on primary sector jobs, but also works to help attract some retail businesses to rural communities.

Despite the global recession and recent signs of slowing economic activity in South Dakota and throughout the region, Olson sees plenty of bright spots.

“We’re definitely in a tough time,” Olson says. “There is no getting around that. But we continue to see story after story of companies in South Dakota that are expanding and reinvesting in their business. I am very optimistic that even though we are going through a tough time as a nation, South Dakota and the region has a real opportunity to come out of this stronger.”

Tags: economic development, economy