Are South Dakotans Cheaters, Free Riders, or Just Smart Economists?

On October 3, the International Consortium of Investigative Journalists (ICIJ) began releasing a trove of documents collectively known as the Pandora Papers. The ICIJ describes their findings as exposing "a shadow financial system that benefits the world’s most rich and powerful." A surprisingly large player in this story is South Dakota, the 5th smallest state in the US by population. Of the US-based trusts exposed by the Papers, 81 were located in South Dakota, easily surpassing Florida's 37 and Delaware's 35. One such trust highlighted by the Washington Post held millions of dollars from a Dominican sugar company linked to a former president and accused of mistreating its workers. Dozens of other US-based trusts hold assets "linked to people or companies accused of fraud, bribery or human rights abuses." So why does South Dakota allow such activity? They, along with legislators elsewhere in the US, are seeking an economic boost derived from the increased investment in their respective states.

Is South Dakota a cheater? In encouraging admittedly shady investment, South Dakota is not breaking any laws or otherwise cheating or reneging on any agreement. US federal law is very lax in regards to the use of states as tax havens for foreign funds. In fact, the Financial Secrecy Index ranked the US as the second most secretive jurisdiction of the 133 it ranked. It is clear that South Dakota is not failing to abide by any agreements here. What about being a free rider? The state is also not receiving any free rider benefits; other states are not paying any price that South Dakota is not paying, the other states are simply not gaining the benefits that South Dakota is gaining. Perhaps the best argument one could make is that South Dakota is free riding on the strong financial reputation of the US, but this is tenuous at best. Thus we can see that the state is neither a cheater nor a free rider, leaving only one possibility: South Dakota is behaving as a smart, albeit immoral, economist would. The secret trust system operates under standard market dynamics, and by offering the lowest price (in this case zero capital gains and income tax) South Dakota has seen a surge in demand. Unless and until it is determined that prohibiting shady enterprises from storing money in the US is in the public interest, and said determination is codified in state or federal law, there is no rational reason for South Dakota (or any other tax haven for that matter) to change their modus operandi.