PIERRE, S.D. (AP) — A legislative task force recommended Wednesday that the state cut construction taxes for wind farms to help South Dakota compete with nearby states in attracting projects that generate electricity from wind.
However, the Wind Energy Task Force will leave it up to Gov. Dennis Daugaard and the full Legislature to decide exactly how to reduce the contractor's excise tax and sales tax that apply to construction costs of wind farms.
Based on information presented by developers, the task force also found that South Dakota's construction taxes are substantially higher than those charged by neighboring states.
Task force member John DiDonato, an official with developer NextEra Energy Resources, said construction taxes play an important role in determining the cost of a wind project, and South Dakota's contractor's excise tax puts it at a disadvantage to other states that do not have the tax.
"I think there are tax problems," DiDonato said.
Deputy Revenue Secretary David Wiest, also a task force member, cast the only vote against the recommendation to reduce construction taxes, saying he is not convinced South Dakota's taxes on wind farms are significantly higher than other states. South Dakota has other advantages, such as wind that keeps turbines turning a higher percentage of the time than in other states, he said.
"I don't think we're that far off kilter," Wiest said.
South Dakota charges a 4 percent sales tax on materials used in constructing wind farms and other projects. It also levies a 2 percent excise tax on a contractor's gross receipts for a project.
The task force report includes an analysis done by developers that found the South Dakota sales tax and contractor's excise tax on a 200-megawatt wind project, with an estimated price tag of about $360 million, would be $12.9 million under current law. Construction taxes on the same project would be $2 million in North Dakota, $2.8 million in Minnesota and $3.4 million in Iowa, according to the analysis.
The issue is complicated by uncertainty about South Dakota's existing tax refund programs for wind farms and other large construction projects.
The current law, set to end in December 2012, allows developers of large wind farms to get a 45 percent refund of construction taxes for projects costing $10 million to $40 million, and 55 percent of those taxes for projects costing more than $40 million. Construction tax refunds have exceeded $20 million a year to wind farms and other large projects in recent years.
A new law, passed this year, is supposed to replace the current refund system in January 2013 by allocating money each year to the state Board of Economic Development, which would have the discretion to decide which large construction projects get incentive grants. However, the fate of that law is uncertain because opponents have referred it to a statewide public vote in the November 2012 general election.
Wiest said he is worried about passing any new tax refund or incentive when no one knows whether the incentive law passed this year will actually take effect in January 2013.
Task force member Brett Koenecke, a Pierre lawyer who represents developer Iberdrola Renewables, said he believes the wind farms should get an up-front exemption from construction taxes so projects do not have to pay the taxes and then wait for a rebate.
However, Wiest said states are legally required to apply construction taxes equally to all projects, no matter which kind of company or government is building a project. The state cannot discriminate against specific kinds of projects, he said.
Rep. Roger Solum, R-Watertown, chairman of the task force, said it makes sense to give tax breaks to wind projects that would not otherwise be built in South Dakota. Those projects pay other taxes and help boost the economy, he said.
The task force also recommended that tax breaks be given to companies that manufacture components used in wind farms, such as blades and turbines. The panel also urged that property taxes on wind farms be left unchanged.
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