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Absence of taxes gives South Dakota businesses an edge-South Dakota’s favorable business climate is luring dozens of companies from neighboring states.

And while Iowa and Minnesota offer incentives to draw and retain businesses, they don’t have South Dakota’s not-so-secret weapon: the absence of a corporate or personal income tax.

By:
Jay Kirshenmann
Sioux Falls Argus Leader

Fleeing their higher-cost home state, more than 20 businesses from Minnesota alone have set up shop in South Dakota since 2000. Dozens more from other states either have relocated or expanded into South Dakota in recent years.

"In Minnesota, I think they feel that ‘profit’ is a dirty word," said Jim Lampy, president of American Concrete Products. He moved his entire operation from Fergus Falls, Minn., to Rapid City two years ago. "I love the business climate here."

An Iowa company, AmeriPharm, a subsidiary of Vet Pharm Inc. of Sioux Center, opened this week in Sioux Falls. It fills prescriptions by mail and serves as an information provider for maintenance drug recipients.

For years, companies have made similar moves, and references to home echo in their names: Twin City Fan, Minnesota Rubber, Luverne Fire Apparatus and 3M (Minnesota Mining & Manufacturing).

The border battle is heating up as a new biotechnical industry develops in the region.

Iowa, home to Trans Ova Genetics in Sioux Center, is offering incentives to keep the biotech company’s business as it plans for significant growth.

Trans Ova is looking for a location to build an animal biotechnology center, which could cost up to $100 million. David Faber, president and co-founder of the company, said it’s too early to tell which state will be home to the new center.

"We’re still open to any and all possibilities," said Faber, who added that the company is interested in developing a "biotech region" in the Midwest.

Trans Ova made a name for itself with its efforts to clone cattle and produce special proteins for use in human and animal drugs and other products.

The company works closely with Hematech, a Connecticut-based biotech company that moved 20 scientists and labs to Sioux Falls from Massachusetts and Kansas last year.

Faber said he likes the momentum of biotech development in the area.

"State lines are not as important to us as attracting animal biotech businesses into this area. We’re not as concerned about the state lines as perhaps the state officials are."

Faber said his company still is "basically an Iowa company," and he is pleased with Iowa’s leadership and help.

"But when (a company) has more ideas and potential than capital, one looks for the greatest opportunities," he said. "We’re not trying to place one state against the other. In the long run, we just want to continue developing this region."

Competition Healthy

South Dakota "stole" a well-known Iowa business in 1990 when the Gateway headquarters moved from Sioux City, Iowa, across the state line to North Sioux City, S.D. Gateway’s headquarters moved to the San Diego area in 1998, but factories remain in North Sioux City and Sioux Falls.

Iowa doesn’t hold a grudge.

"It’s a piece of history that can teach both states a lesson," said Jeff Rossate, division administrator for the Iowa Department of Economic Development.

"It was an eye opener, teaching us both how hard it is to attract a company back again after it leaves," he said. "I think that for the most part, South Dakota and Iowa come pretty close to each other when we have to be competitive on projects.

"But a bigger issue we all face is how to attract and keep markets in our regions, not necessarily just our states," Rossate said.

From the perception of Iowans, South Dakota is more of a partner in business than an adversary, he said.

"As with Trans Ova, in a perfect world, both states could assist in growing them as a regional cluster business," he said.

Meanwhile, Minnesota doesn’t like to call competition a border war, said Mark Lofthus, director of marketing and business development for the Minnesota Department of Trade and Economic Development.

"Every state, and many towns in those states, are offering incentives, so I don’t want to comment on whether South Dakota is doing more or less than they should," Lofthus said. "If there’s a battle, it’s with all other states, since we want to keep our businesses in Minnesota."

He said proposed legislation now being considered by the Minnesota state Legislature would create tax-free zones to help boost the economy in Minnesota towns.

Going for Businesses

South Dakota makes no apologies for its aggressive recruitment techniques or its concentration on courting Minnesota and Iowa companies.

"We market to businesses primarily in Minnesota — manufacturing, and what we call Ôback office’ expansions for existing companies," said Toby Morris, director of business and community development for the Governor’s Office of Economic Development. Officials from the Sioux Falls Development Foundation say the same.

Recruitment is ongoing through direct mail, personal contacts, site visits, advertising campaigns, trade shows and more.

Businesses across the nation can find out how their state compares to South Dakota by using an automated feature on the governor’s office Web site.

At http://www.sdgreatprofits.com, entering two state names — Minnesota and Iowa — brings these results:

Corporate Income Tax:

South Dakota: zero.

Minnesota: 9.8 percent.

Iowa: The first $25,000, 6 percent; next $750,000, 8 percent; next $150,000, 10 percent; and over $250,000, 12 percent.

Personal Income Tax:

South Dakota: zero.

Minnesota: Earnings of zero to $26,480, 5.35 percent; $26,481 to $105,200, 7.05 percent; and more than $105,000, 7.85 percent.

Iowa: Percentages ranging from 5.35 percent to 8.92 percent in nine earning categories.

One of Morris’ print-media advertising campaigns in Minnesota features sports themes, such as a frustrated man in business attire between hockey players in a penalty box, with a caption: "Tired of being penalized for making money? Call us."

The campaign followed each sports season, from football to golf.

"We have a productive labor force and a great work ethic here," Morris said. "Add to that our favorable tax climate and there’s a lot we can offer companies."

Marketing Works

American Concrete moved from Fergus Falls, Minn., to Rapid City in September 2000.

"Taxes were the No. 1 consideration," said Jim Lampy, company president. "Minnesota has a high personal income tax and corporate income tax, and South Dakota has zero. It was an easy decision to make."

Lampy said he likes South Dakota’s business-friendly environment. He studied the state Web site and the Rapid City Area Economic Development Partnership site, then began talks with the state and city.

Minnesota worked hard to keep his 7-year-old company from moving, Lampy said.

The state offered far more money and incentives, and it would have been to his benefit for the short term. But Lampy calls the efforts "bait to stay" that would have cost him more in the long run.

American Concrete makes concrete block manufacturing equipment, about 80 percent of which is exported outside of the United States.

"Moving here was the best thing we ever did in our lives," he said. "You can talk all you want about civic obligation, but whoever complained that they have too much money in their checking account?"

American Concrete took advantage of South Dakota’s Revolving Economic Development Initiative loan program and the Rapid City’s low-interest loan funding program, said Bob DeMersseman, president of the Rapid City’s Economic Development Partnership.

"Our first contact with Mr. Lampy was through our Web site," DeMersseman said. "In the face of competition from other states, South Dakota still has the edge. We do marketing, and Minnesota still is our happy hunting ground."

Sioux Falls’ Efforts

The Sioux Falls Development Foundation constantly recruits business. That includes Iowa’s Trans Ova Genetics.

"We’ve had discussions," said Dan Scott, foundation president. "I’ve been down there; they’ve been up here. Wherever they end up, we wish them great success . They are why Hematech is in Sioux Falls."

Aside from the financial incentives, there are other advantages over neighboring states, said Dan Hindbjorgen, vice president of the development foundation.

South Dakota offers up a brew of low-interest revolving-loan funds, no taxes on business inventory, and economic-development bonds.

The state also has a growing, well-trained and highly motivated work force, and a government attitude that encourages profit and growth, Hindbjorgen said.

Add to that available and affordable buildings and land, and an increased profitability because of low costs of doing business, and more businesses will come.

It doesn’t hurt to be located at an accessible location, Hindbjorgen said, at the crossroads of two major interstate highways.

"We also have the capability of fast-tracking projects, allowing companies to be up and running faster in Sioux Falls than in any other location in America," he said.

From first meetings in the early 1950s, through the 1972 partnership with the U.S. Geological Survey which brought the EROS Data Center to Garretson, to the location of the first Citibank credit card processing center in 1980, the development foundation has been the central force for economic development in the Sioux Falls area.

The group administers industrial parks, provides information and services for growing and relocating businesses and coordinates economic development strategies.

Through the years, cities such as Watertown and Brookings also have benefitted by luring out-of-state businesses.

On the horizon are other companies coming to the state, such as Ware Manufacturing Inc. of New Hope, Minn. It plans to open in Lennox this spring.

President Dave Robertson said the company looked at locations in four states before deciding on Lennox. South Dakota’s attractive business climate was a factor.

Ware will move into a 68,000-square-foot building worth

$2.4 million. The company forms and shapes metal for numerous companies, including Toro for its lawn mowers.

Other companies have long called Sioux Falls home.

Hutchinson Technology Inc., which for 15 years has operated a computer-parts manufacturing plant in Sioux Falls, is still based in Hutchinson, Minn.

Both Scott and Hindbjorgen point to AmeriPharm as one of the more recent success stories. It is a subsidiary of Vet Pharm Inc. of Sioux Center, Iowa.

The company opened Feb. 1 at 2503 E. 54th St. N. in Sioux Falls. It operates in a 50,000-square-foot facility as a mail-service prescription drug and information provider for maintenance drug recipients.

About 30 employees have started working toward a Phase I goal of 5,000 prescriptions per daily shift, said Cordell Brooks, director of sales and consumer services. The location has a capacity of 15,000 prescriptions daily.

"There are a lot of pharmacy technicians and pharmacists, as well as call-center personnel available here," Brooks said.

"It was not only the favorable tax climate of South Dakota, but the quantity of technologically advanced workers available that was attractive. We’re glad to be here," he said.

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Montana tax structure is like a stool missing a leg

Though Montana’s standard of living has gone up through the years, average incomes have declined compared to the growth seen by people living in other states, says MSU economist Doug Young.

Montana’s tax system is like a three-legged stool with one leg missing, says a Montana State University-Bozeman economist.

"As late as the mid-1980s, we received as much from natural resource taxes as other states received from sales taxes," said Doug Young, professor of economics at MSU. "Since then, our tax system has been short one of the legs of the stool."

With Montana’s per capita income 77 percent of the national average (down from 110 percent in 1950), and prices for timber, mining and farming commodities all down, Montana’s state government has a limited number of tools it can use to balance its budget and improve the business climate in the state at the same time, Young told a gathering at the MSU Strand Union Building this afternoon.

"Taxes do matter when it comes to attracting businesses to a state," Young told the audience. "Because of that, and because Montana must balance its budget, effective tax reform probably requires reducing the top income tax rates, which are high compared to neighboring states, reducing residential and commercial property taxes (especially with reappraisal due this year), and implementing a sales tax to shift some of the tax burden out of state.

Young described Montana income tax, property tax and sales tax and why they need reform.

Montana taxes rank 43rd among the 50 states for people with an income of $25,000, but in the middle of the pack for those people with incomes of $150,000. When you look at all the direct taxes on individuals (income, sales, property and auto taxes), Wyoming, North and South Dakota have significantly lower taxes. Montana’s combined tax rate, at 9.3 percent, is about the same as the U.S. average of 9.7 percent, but for people and companies relocating to the West, the comparison would be to Wyoming’s 3.5 percent rate, or South Dakota’s 4.7 percent rate, or North Dakota’s 7.7 percent rate.

"Taxes are one of the factors that influence business and individual location decisions," says Young. "Tax reform would have a positive effect on our business climate, and encourage some of our part-year residents to make Montana their home for tax purposes."

"A sales tax is one option that exports part of the tax burden," says Young. "It provides revenue, and the burden on the poor can be reduced through changes in the income tax. There certainly are arguments against a sales tax, but we are missing the boat currently in terms of taxation of tourists and others who spend a lot of time and money in the state."

Much of the rest of Young’s presentation described Montana’s economy. Although living standards have risen over the last 50 years, Montana’s position has declined relative to the rest of the country. Prices for the outputs of Montana farms and mines has gone down to the extent that it now takes two or three times as much output to buy a basket of consumer goods.

Overall, Montana had positive net migration during the 1990s, but numbers varied dramatically by age and location. People in their 20s often leave the state in search of better opportunities. Older people are more likely to move into Montana, but in-migration is largely confined to the western and southern portions of the state.

Doug Young (406) 994-5622

http://www.montana.edu/commserv/csnews/nwview.php?article=746

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