In recent decades, South Dakota has become one of the world’s leading tax havens. By the end of last year, the state had managed more than $ 376 billion in trust assets through at least 62 certified trusts.
Trust companies earn a lot of fees. Trustholders hide their assets and avoid billions of dollars in taxes. But what does it include for the state?
No trust owner, be it a corrupt foreign leader or a millionaire in the United States, will set foot there. There are no residence requirements to build trust in South Dakota. And there are few tax incentives for the state, and there is little evidence that trusts create jobs.
Taxes and work
South Dakota has a small tax on financial institutions, but no corporate or personal income tax. The trust company that manages this huge bundle of assets is subject to review, supervision, and charter fees, but in 2019, these levies will be only $ 1.5 million out of the state’s total revenue of $ 2.2 billion. became. The trust company will also pay a portion of the bank franchise fees that brought an additional $ 14 million to the state in 2020.
Some South Dakota officials have suggested that trusts create jobs. However, the number of jobs in state financial services has actually declined slightly over the last decade, from about 30,500 in 2009 to 29,000 in the pre-pandemic year of 2019. The number of state lawyers increased from 1,794 to 1,995 over the same period. .. However, its 11.2 percent rise lags behind the 14.5 percent national growth rate.
Daniel Hemel, a law professor at the University of Chicago, has a great explainer here to explain how South Dakota became a tax haven and how shelters work. In short, in 1983 Parliament resolved to end the trust period limit and ended the practice of returning to the British common law, which aimed to prevent families from trusting wealth forever.
Permanent inheritance tax avoidance
Also, in states without income tax, such as South Dakota, these “dynasty trusts” avoid both state income tax and federal property and gift taxes indefinitely. As Daniel writes, “A carefully designed South Dakota dynasty trust can act as a permanent inheritance tax evasion machine.” The trust is federal for capital gains and dividends received. You have to pay income tax.
Trusts are usually obliged to pay state income tax. However, by creating a trust in a state that does not have such a levy, non-residents can move their assets from the jurisdiction they tax to a jurisdiction that does not. And like Switzerland, South Dakota does not share information about trusts with other state governments.
As expected, other states have copied South Dakota and changed the law to encourage residents to build similar lasting dynasty trust. Other states without income tax, such as Nevada and Alaska, are also participating in the game. Currently, a financial adviser is writing an article “Compare the best states for trusts.”
As in many cases of tax competition, it is difficult to understand what benefits a state can benefit from hanging tax incentives in front of a business, in this case Megarich. But the incentives to build dynasty trust are more twisted than in most cases.
States usually provide tax subsidies to businesses in exchange for new factories and headquarters and work promises. These transactions often fail to meet their goals and are not worth the lost tax revenue. But states can at least create accountability indicators to measure success or failure.
These tax havens generate very little tax revenue and very little employment. However, the state has not suffered a loss of income, so there is no accountability incentive. The only losers are the federal government and its taxpayers. The state is just an ambitious conduit for federal tax avoidance. Everything is perfectly legal, but that’s exactly the problem.
States like South Dakota don’t get anything concrete from tax haven rackets. The problem is that they may have nothing to lose, but the rest of us do.