Read this Bloomberg article on South Dakota's blossoming dynasty trust industry, and try singing "Hail, South Dakota!" with a straight face. We're helping billionaires shelter $121 billion in assets, promoting income inequality and tax-dodging:
States like South Dakota are “creating laws that are conducive to a massive exploitation of a federal tax loophole,” said Edward McCaffery, a professor at the University of Southern California’s Gould School of Law. “We have a tax haven in our midst.”
South Dakota’s sudden popularity illustrates how, at a time of rising U.S. economic inequality, the wealthiest Americans are embracing ever more creative ways to reduce taxes legally. Executives at South Dakota Trust Co., one of the biggest in the state, estimate that one-quarter of their business comes from special vehicles known as “dynasty trusts,” which are designed to avoid the federal estate tax. Creation of such trusts has surged in recent years as changes in federal law enabled more money to be placed in them [Zachary R. Midler, "Moguls Rent South Dakota Addresses to Dodge Taxes Forever," Bloomberg, 2013.12.26].
Wait: so South Dakota doesn't really want the estate tax to go away. We depend on that tax to support our tax-dodging industry!
Citing South Dakota's "iron-clad secrecy" as another draw for these rich tax dodgers, Midler compares us to Bermuda and other offshore-account havens. Of all the ways we could emulate a tropical paradise, why, why, must this be the only one?
South Dakota doesn't even get that much out of the deal. The trustholders draw their cash and spend it in the real Bermuda and other fancier places. We rent a few storefronts, hire a few lawyers and bankers, and draw about $1.2 million extra in bank franchise tax. But Governor Dennis Daugaard gladly bows and scrapes to these tax-dodgers, in unsubstantiated hopes that maybe they'll throw us a bigger bone:
“If you’ve got several hundred well-paying jobs, it’s worth it to us,” said Governor Dennis Daugaard, a Republican who used to travel to Minneapolis pitching tax-saving trusts when he worked at a bank in Sioux Falls. “It also gives us the opportunity to develop relationships with people who have the ability to encourage business here of other sorts. Now, I can’t point to a single case where that’s occurred yet, but I think it’s possible.”
When he’s away on state business in New York or Chicago, Daugaard said, he sometimes takes time to meet with wealthy clients of the South Dakota trust industry. He said he thanks them for doing business in his state [Midler, 2013.12.26].
He probably sends them Christmas cards, too... from the Netherlands.
When Governor Daugaard hands a French cheese factory a state check for $5 million, he can at least argue that he's investing in 400 new South Dakota jobs and an enormously expanded market for the local dairy industry. But when we rejigger our laws to help a few rich people dodge taxes (Midler links to this table on the estate tax and says that fewer than 1 in 700 Americans pay estate tax), we get little in return besides a reputation as easily exploitable rubes.
Update 13:00 CST: Among the barristers whose business we boost with our Bermudan bamboozling is Jeffrey T. Sveen, a founder and director of First Lawyers Trust Company, which appears to have most of its staff out of state but which declares its main business address as 400 Capitol Building, 415 South Main Street, Aberdeen, South Dakota, the location of Sveen's Siegel Barnett & Schutz law firm. FLTC emphasizes that it is not a bank, which suggests they do not pay bank franchise tax on the money they make from their wealthy clients. Sveen... not a bank... now why does that sound so familiar?