In a modern global economy, the question of what to do about tax havens, or places where wealthy individuals and corporations can hold their wealth with little to no taxation, has vexed policymakers from every country. With the recent release of the Pandora Papers, a 2.9-terabyte collection of nearly twelve million documents documenting systematic tax evasion and avoidance by leading figures in global politics, business, and media, a nondescript Midwestern state has emerged as a tax haven to rival the likes of Switzerland, Ireland, and the Cayman Islands: South Dakota. Not only is it one of only seven states without a state-level income tax, the Mount Rushmore State has aggressively protected foreign investment in trusts from taxation by other countries in an attempt to draw greater economic investment, which has made it the premier destination in the United States for wealthy foreigners looking to shield their fortunes from scrutiny by governments in their home countries.
Historically, the US has attempted to mitigate the perpetuation of extreme intergenerational wealth with an estate tax, which taxes money passed down to heirs from the estate of someone who has recently died However, South Dakota repealed its estate tax in 2001, which, in tandem with the lack of a state income tax, has ensured that enormous sums of money can be held in South Dakota trusts far from those looking to tax them. Of the approximately 200 miscreant trusts identified in the Papers, 81 were based in South Dakota. Florida, the state with the second-most among these trusts, has fewer than 40; California, which has a population nearly 50 times that of South Dakota, is home to only one.
Guillermo Lasso, a former executive for Coca-Cola and Banco Guayaquil and recently elected President of Ecuador, is one individual who, in order to comply with Ecuadorian finance laws, transferred investments in Panamanian shell companies to two trusts incorporated in South Dakota. In reaction to the Papers’ release, Lasso stated that he has “complied with Ecuadorian law that forbids... public servants from holding offshore companies.” In reality, this amounts to little more than a cosmetic difference when the South Dakotan trusts he shifted his investments to serve the same purpose as the original Panamanian shell companies. The difference in perception, however, between the traditional conception of a tax haven as a small, usually geopolitically insignificant country and the reality that a state in the world’s richest country can function equally well as one has limited international regulation of investment in trusts like those in South Dakota significantly.
Other beneficiaries of these trusts include Estéfano, Roberto, and William Isaías: three brothers who make up the Isaias Group, a corporate conglomerate with investments in media, commerce, and real estate. Since fleeing to the US after being convicted of embezzlement in Ecuador, the brothers have transferred their holdings to South Dakotan trust funds where they are protected from seizure attempts by the Ecuadorian government. Similarly, former Dominican vice-president and sugar executive Carlos Morales and his family evacuated their investments in the longtime tax haven of the Bahamas once the island nation enacted a law requiring the disclosure of the identities of those invested in its businesses, and like so many others, they moved their finances to South Dakota.
While South Dakota’s solidly Republican government has embraced its newfound status as a global tax haven, some of its citizens remain ambivalent about their state’s newfound source of notoriety. According to former Democratic State Senator Susan Wismer, “legislators do not have a clue what it is that they are really voting on, other than that these attorneys that deal with big money are telling them that it’s good for South Dakota’s economy to do this.” The revelations revealed in the Pandora Papers have also likely shaken the Biden administration, which has committed to combating the abuse of global tax loopholes and is unlikely to take well to the presence of such a prominent tax haven in the United States. The money is inarguably big: investments in South Dakota trusts have more than quadrupled over the last ten years to over $360 billion, and in the absence of greater regulation, this number will continue to grow exponentially.
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