Seven years later, wind farm tax change still irks some South Dakota landowners 

It wasn’t the fault of the wind farms, nor the landowners; rather, a compromise in Pierre to better fund education across the state effectively punished schools previously awash in wind farm cash.

The agreement gave these schools the full windfall for five years from the beginning of a given wind farm’s production and then, over the next five years, in practice moved some of those dollars into the statewide education fund.

“We got screwed over,” said Headley, a White Lake landowner who was one of the chief proponents of the wind farm project at the time. “The politicians in Pierre socialized the wind farm money that was supposed to go locally.”

The change was referenced multiple times during an April 27 hearing in Platte over a proposed pumped storage project on the Missouri River in Gregory and Charles Mix Counties. Though the current tax code would keep those pumped storage tax dollars local, landowners felt their worries of lawmakers “equalizing” those dollars across the state were substantiated by the recent memory of the wind farm change.

“We just went through this in Tripp with the wind turbines in the last five, six years,” Rep. Marty Overweg, of New Holland, said during the presentation put on by the energy companies behind the project. “The big schools and lawmakers got the law changed in South Dakota then. So your money is not going to come to the small schools in the vast number you said.”

Outside of some minor changes to how schools can handle wind energy funds and how they’re counted, lawmakers representing the mainly rural districts affected by the change have had little luck fighting back.

“I’m just learning to live with it. Not saying I’m really happy about it. It’s just what it is. You win some, you lose some,” said Sen. John Wiik, of Big Stone City. “We moved the needle at times to try and make a difference, but I think that’s as far as we’re ever going to move it in the current political landscape.”

Change in wind farm windfall stems from statewide education funding overhaul

The changes to the status quo of some of the taxes generated by wind farms and their relationship with local schools came in 2016, part of an overhaul to education funding that came alongside the half-cent sales tax increase and increased teacher salaries.

To keep things simple, schools in South Dakota are a sort of glass. The size of the proverbial glass is determined by an annual calculation unique to each district, based on total need.

Once the size is determined, the glass is first supplied with “local effort” dollars, mainly made up of local property taxes, and then filled to the brim with state funding.

However, prior to 2016, several sources of funding, including the bank franchise tax, nameplate capacity tax – an annual $3-per-kilowatt levy on a wind farm’s potential energy generation, half of which goes to local schools – and a few other categories such as utility and pipeline taxes were not counted as either local effort or state aid.

For the mainly rural schools within an area that had agreed to host wind turbines, the categorization of these funds as outside local effort and state aid allowed them to punch above their weight in per-student spending and lower the property tax burden on local landowners.

But, according to those pushing education funding reform, including current Sioux Falls Rep. Tony Venhuizen, who in 2016 was the chief of staff for Gov. Dennis Daugaard, the arrangement had some drawbacks.

“It created kind of a weird disparity. You could have a district that, on paper, didn’t have very much local effort. It was pretty poor from a property tax perspective. So they get a lot of state aid to get them up to their total need,” Venhuizen explained. “And then, off to the side, they’re collecting all this money from one of these other revenue sources, that they just keep on top of what they get through the formula.”

According to Dianna Miller, a public education lobbyist intimately involved in those 2016 discussions, putting “everything on the table” in terms of other funds was an integral part of convincing Daugaard to go along with the state sales tax increase, part of an “equalization” of school funding across the state.

“Anytime you put in a new formula, there are going to be winners or losers,” she said.

Rather than immediately including wind farm revenue in the calculation of local effort, a compromise was formed: for the first five years of a given wind farm’s life, 100% of the nameplate capacity tax would be counted as outside local effort.

The calculation would then gradually count these funds as local effort: 20% in the sixth year, 40% in the seventh year and so on until all of the wind farm proceeds counted as local effort, leaving schools with a net loss of total revenue due to lowered state aid earnings.

Miller says that compromise, which was not extended to any other of the other non-local-effort funds, was political, too.

“It was totally about getting the votes,” she said.

Fallout touches local schools, wind developers

Despite some other changes that favored smaller schools in the total funding formula, chiefly in the form of better student-teacher ratios, the new inclusion of wind farm taxes and these other funding sources in local effort left some who had supported wind farms feeling as if the rules had been changed in the middle of the game.

Though it may have been unfair for taxpayers statewide to give more than their fair share in state aid to schools sporting coffers loaded with other uncounted funds, the reverse has inequities, too.

Headley pointed out that some counties, such as Lincoln County in the southeastern part of the state, have stringent setback laws that make building wind farms nearly impossible; as he puts it, shouldn’t the community living with some of the aesthetic downsides and other costs of wind farms be compensated as a whole, beyond the direct payments to landowners?

“The people in Lincoln County, [wind farms] don’t bother them any, but they get money from it,” he said.

Caleb Finck, a former state lawmaker from Tripp, agreed.

“It was a fairness issue to folks who, like myself, thought that since these projects were put up because of the local community effort – raising the funds, doing the studies and finding the companies that were willing to come in – the local communities should get the reward,” he said.

However, in the current reality, formerly wind-rich schools have had to begin making choices of their own, especially in areas that have seen a slowdown in new development.

Take the Waverly/South Shore School District in northeastern South Dakota as an example. At the moment, several wind projects with turbines in Codington County offer the district a windfall of about $400,000 per year, a sizeable portion of a total budget of $2.4 million.

But, according to Superintendent Jon Meyer, the short window attached to the significant amount of dollars is a blessing and a curse. Simply saving it in the school’s general reserves only works to a point; if a school’s reserves go above a certain point, the excess is counted against state aid. Nor can the district spend the temporary money on permanent expenses.

“It’d be wonderful if we could take this wind tower money and use it to more adequately compensate our teachers for everything they do,” Meyer said. “But knowing that just a few years down the road, that money essentially disappears with the offset, we can’t do that.”

The money has mainly gone to one-time infrastructure upgrades or curriculum needs.

Meyer added that the timing of the glut of wind farm money, which is set to begin waning little by little in about two years, is also a bit unlucky for the school. At the same time as this excess money, the school has also benefited from the federal government’s pandemic spending that transferred dollars directly to local schools across the country.

“We’re essentially in a very short time down the road looking at two revenue sources drying up,” he said.

Another potential fallout from the change is an increase in some landowner opposition to wind farms, though the myriad reasons that landowners and communities around the state agree to host turbines mean that a change to school funding has not stopped further development.

During a Senate committee hearing in 2020 over a proposal to allow 40% of wind farm tax dollars to remain outside of local effort following the gradual step-down instead of going down to 0%, Bill Van Camp, a lobbyist in Pierre who at the time was representing wind energy interests, warned about the potential for slowed development.

“One of the things that incentivizes the development is the local benefit that these projects have brought to these communities,” Van Camp told the committee. “But in developing these projects, it impacts our ability to do that, because when we go into a new area of the state we look at who wants us in their neighborhood and who doesn’t.”