SIOUX FALLS, S.D. — Tax increases being implemented nationwide as states work to cover budget deficits could be to South Dakota's benefit in bringing businesses to the state.
As South Dakota and the nation slowly recover from the recession, state and local officials see potential in leveraging business-friendly and low-tax status to attract more out-of-state companies who are looking to save money as it becomes more expensive to operate in their home states.
Coupled with a pent-up demand by companies that have held off with major expansions for years, South Dakota could stand to gain from other states' challenges.
The Governor's Office of Economic Development and the Sioux Falls Development Foundation separately are pondering plans to develop more direct marketing strategies focused on getting the word out about South Dakota in specific areas of the country.
"To me, if we play our cards right, we can convince people, 'Hey, come here to South Dakota. We're a well-managed state,' " said Dennis Breske, president and CEO of NAI Sioux Falls, a commercial brokerage firm. Breske recently worked with a California company looking to expand in Sioux Falls.
South Dakota continuously is ranked near the top when it comes to a business-friendly tax structure. The state has no corporate or personal income taxes, nor does it have personal property, business inventory or inheritances taxes. While South Dakota is confronting its own budget deficit, legislators so far have been committed to balancing the budget without tax increases.
The opportunity to attract businesses comes from other states where the recession has hit hard and in some cases led to increases in state business taxes.
The Illinois Legislature, for instance, recently approved a plan to increase that state's individual income tax by two-thirds and its corporate tax rate by 30 percent to help close a $13 billion budget deficit, a move some people say will undermine job growth and economic development in the state.
The increases don't mean every business is going to pick up and move, but companies probably won't be as interested in the state for expansions, said Kail Padgitt, economist with The Tax Foundation. That's good news for states such as South Dakota, though he cautioned that a state's tax structure is just one of several factors businesses consider.
"As the divide in tax burdens grows, that's going to do nothing but benefit states that have better tax climate," Padgitt said. "That's something that South Dakota can look forward to, is perhaps more interest from businesses to locate there."
California-based Legacy Electronics, which announced last month plans to expand operations in the Sioux Falls area, is an example of what some local officials hope will be more businesses choosing Sioux Falls. The company, which manufactures and designs digital memory and other computer products, will employ about 50 people in manufacturing, sales and administrative jobs in the area.
Legacy, which has operated in California for almost 20 years, was at a juncture this past year as officials planned for expansion. Though CEO Jason Engle said he's remained competitive in California, the cost of doing business there makes it difficult to expand.
"We compete globally, so we have to try to structure our costs so that we're able to effectively compete on a global basis," Engle said.
Though Engle reached out to California legislators, he received no indication that the situation would improve. As he began looking at his options, South Dakota emerged as one of several possible sites. In talking with then-Gov. Mike Rounds, Engle said, he was impressed with the state's commitment to bringing in businesses. The state's business-friendly tax climate and available work force also made it a frontrunner, he said.
Breske, who has worked with Engle in finding space in the area, said he's in discussions with two other out-of-state companies interested in Sioux Falls — one that would be a new player in the city and another that already has a facility but is considering a significant expansion. He thinks there will be more interest in South Dakota's largest city.
Michael Bender, principal owner of Bender Commercial Real Estate Services in Sioux Falls, said he's noticed increased inquiries from out-of-state companies in the past few months.
"It's not necessarily because of the budget problems, but it's because of the fear of future taxes," Bender said. "They clearly think that wherever they are right now, there is going to be more and more taxation on their business model, and so they're considering alternative locations for expansion."
Slater Barr, president of the Sioux Falls Development Foundation, said his organization is aware of the opportunity South Dakota has as other states struggle. The state has the potential to make it known that "this is a location that you can be safe and secure in, and you can continue to operate and grow and prosper."
The Governor's Office of Economic Development also sees that potential, Secretary Pat Costello said.
"South Dakota's decision to maintain our regulatory environment speaks to our stability," Costello said. "It can take several years for a company to plan and implement an expansion or relocation decision. It's important for companies to know a state's regulatory environment isn't going to drastically change on a whim."
Information from: Argus Leader, http://www.argusleader.com