The Local Cost of Tax Havens

States embrace financial secrecy at the expense of democracy.

This is Boondoggle, the newsletter about corporations ripping off our states and cities. If you’re not currently a subscriber, please click the green button below to sign up. Thanks!

The International Consortium of Investigative Journalists recently worked with news outlets in several countries to release the “Pandora Papers,” which are leaked documents showing how wealthy individuals around the world — many of whom are in positions of power — are hiding their money in low- or no-tax jurisdictions, taking advantage of the international financial system to amass wealth and then shield it from both tax and law enforcement authorities. It’s the largest-ever leak of such documents.

Dozens of news outlets are publishing stories about what’s in the papers, with implications for their own local governments. I want to focus on one in particular: This piece from The Washington Post about how South Dakota built and embraced its role as a place for wealthy folks to stash their cash in what are known as trusts, exceedingly few questions asked.

Along with Delaware, Alaska, Nevada, and New Hampshire, South Dakota built an industry out of becoming a tax haven, embracing an explosion of trusts and passing other financial secrecy laws making it easy to shield assets. It’s the justification for doing so that concerns what I usually cover in this newsletter.


Here are a few excerpts from the Post’s piece. Notice anything?:

“We were having an economically hard time in Alaska,” former state representative Al Vezey, a Republican who sponsored the bill, said in an interview. “A barrel of oil was worth less than one red salmon. As a legislature, we were scratching our heads about how to give our state a boost.” […]

In New Hampshire, business leader Paul Montrone successfully helped advocate for landmark trust legislation in 2006. A year earlier, a newly formed limited liability company managed by his son had commissioned a study that found the industry could add as many as 2,100 jobs and produce as much as $3.7 million in annual revenue for the state. […] “The modernization of New Hampshire’s trust laws has had a meaningful, positive impact on our state’s economy, bringing new job opportunities at above-average wages and the economic activity they generate,” he said. […]

In South Dakota, attorney Pierce H. McDowell III in 2002 co-founded the South Dakota Trust Co., located in a Sioux Falls office building near an ax-throwing social club.

McDowell was a founding member of a working group known as the Governor’s Task Force on Trust Administration Review and Reform, which routinely proposed laws to advance the state’s trust industry.

McDowell declined to comment on his role, referring to a company statement that noted, “South Dakota has worked very hard to build a robust financial sector that includes the state’s bank and trust companies … an industry that provides many benefits (jobs, general tax revenue, supervision fees, and philanthropy).

The argument is perhaps even clearer in a Q&A some Post reporters did about their work on the papers. Here’s something investigative reporter Debbie Cenziper said:

One of the most interesting interviews I did was with a South Dakota lawmaker who said the trust industry helps "keep our sons and daughters home" by bringing good, clean jobs to the state. That's what the industry promised in places like South Dakota, New Hampshire and Alaska. Of course, some jobs were created. Did the economic impact outweigh the risks of allowing tainted money to breach the U.S. financial system? That depends on who you talk to.

So welcoming in potentially sketchy money from wealthy individuals looking to avoid taxes was at least justified, if not actually motivated by, the desire to create a particular kind of job: White-collar, well-paid, respectable in elite circles. While the article above focuses on trusts, states have encouraged all sorts of financial secrecy measures — such as making it easier to hide corporate ownership or to avoid laws on credit card usury — in the name of job creation.

Share Boondoggle

There’s been quite a bit of work done on whether being a tax haven is “worth it” from an economic perspective: There’s the obvious negatives of draining tax revenue from other places, but that’s a collective problem, and there’s some argument that being a haven increases revenue from the previous baseline because someone has to manage all that paperwork.

Indeed, to the argument made above, some jobs are certainly created by becoming a financial asset haven, which is why it’s so tempting. While the numbers are pretty underwhelming in, say, New Hampshire, which sold its soul for a few hundred trust-related jobs, Delaware undeniably has benefitted, in this narrow sense, by being notoriously welcoming to the financial industry. (I covered that history here.) One-quarter of Delaware’s budget and one-tenth of its workforce are directly linked to financial services and its very permissive financial secrecy regime.

But there are severe downsides too, some of which show up on a ledger but many others of which don’t. These, I would argue, outweigh any incremental gain in jobs or revenue.

For example, as this piece in the American Prospect argues, allowing the financial services industry to run so rampant makes it more likely that the state will dole out subsidies to keep it there when it threatens to move its very-mobile business elsewhere. That’s what occurred in Delaware with Barclays — and in general, with other corporations, thanks to the sense that keeping them in-state is key to everything Delaware does.

“Delaware’s business-friendly ways have started to cross a line. The state, given to think of itself as tiny and inferior, cannot imagine any other way to survive than passing out money to corporations. Even if it hurts its own residents,” State Rep. John Kowalko told the Prospect. This is the company town problem: Becoming dependent on a particular industry gives that industry leverage to demand new rounds of concessions to which local lawmakers think they must accede.

Leave a comment

More pernicious, perhaps, is that financial secrecy laws begat financial secrecy laws, which begat a coziness between industry and lawmakers that leads to all sorts of shady dealings. South Dakota’s embrace of the trust industry dates to the late mid-1980s and 1990s, as the Post explained. But before that it became a haven for credit card corporations, due to its elimination of the cap on interest rates. First Citibank and then other big banks flocked in; then financial sector interests pushed laws for trust secrecy in the legislature — as one state legislator put it, laws “nobody understands” except the lobbyists writing them — leading to the abuses outlined in the Pandora Papers reporting.

South Dakota’s democracy itself became a tool of financial interests. And its general secrecy ethos spread, allowing too-cozy arrangements between government officials and corporate interests to occur every day.

There are steps that can be taken, both by the federal government and by states that are getting ripped off, to rein in some of the abuses states like South Dakota and Delaware encourage. I’d also argue that the promotion of public banking and reversing consolidation in the banking sector would help, as part of what’s encouraging ever more bank secrecy is states chasing after the business of a few mega-banks.

It’s obviously enticing, though, for state lawmakers to do what South Dakota, Delaware, and the others have done, buying a short-term boost on paper, even though the cost is long-term erosion of their democracy. The harm of tax havens has become better publicized in recent years — and even led to a recent international agreement to ensure that corporations face a minimum tax — but I think it’ll take a lot more before states in the U.S. start to tack the other way.


ONE MORE THING: This is a great piece by New York State Senators Julia Salazar and James Skoufis on how to reform New York’s economic development system, which is a wretched hive of corruption and incompetence. I particularly like the call to form an interstate compact with other Northeastern states to stop poaching companies across state lines. Give it a read here.

Thanks for reading this edition of Boondoggle. If you liked it, please take a moment to click the little heart under the headline or below. And forward it to friends, family, or neighbors using the green buttons. Every click and share really helps.


If you don’t subscribe already and you’d like to sign up, just click below.

Finally, if you’d like to pick up a copy of my book, The Billionaire Boondoggle: How Our Politicians Let Corporations and Bigwigs Steal Our Money and Jobs, go here.

Thanks again!

— Pat Garofalo