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Sen. Mike Rounds (R-SD) attends a Senate Foreign Relations Committee hearing, August 3, 2021.
The recently released Pandora Papers have shined a spotlight on the role of South Dakota in a system of illicit global finance. While surprising to some, this is hardly news to anyone who has followed the pro-billionaire policy tilt of the South Dakota congressional delegation.
Over 700 Americans now are billionaires, according to Forbes. But only one, T. Denny Sanford, lives in South Dakota. And he’s not that high on the list. At last count, his wealth stood at $3.4 billion, behind 996 of the world’s other billionaires. In the most recent annual Forbes 400 reporting of America’s wealthiest, neither Sanford nor any other South Dakotan appears.
So why do South Dakota politicians lead the charge when it comes passing billionaire-friendly tax policies, such as abolishing the federal estate tax or defending the income tax loophole commonly known as stepped-up basis?
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The lead sponsor of this year’s version of the “Death Tax Repeal Act” is South Dakota Republican Sen. John Thune. Thune also was one of the four GOP senators leading the charge against reform of stepped-up basis, the tax loophole that allows billionaire heirs to escape income tax on a lifetime of investment gains—and which House Democrats, caving to pressure, took out of the reconciliation package in mid-September.
South Dakota’s other senator, Republican Mike Rounds, also champions the billionaire cause, and fully understands how the wealthy operate. In 2017, Rounds signaled to other estate tax repeal proponents that full repeal of the estate tax wasn’t necessary and that a doubling of the exemption level, to over $11 million per person, was sufficient. Rounds hadn’t suddenly decided that the super-rich needed to pay their fair share of the estate tax. Instead, his reasoning was that billionaires and their ultrarich brethren were “all avoiding it right now legally anyway.”
What began with credit cards has turned into an explosion of financial activity in South Dakota, urged on by the state legislature.
In 2016, only 15 South Dakota estates owed tax, the fewest in the country, according to USA Today. After passage of the Trump tax bill, that number had declined to the point that the IRS didn’t report it, out of concern it might reveal personal information. Yet despite this decline to the point of nonexistence, Rounds has changed his position. He now stands right behind his colleague, Thune, as a co-sponsor of full estate tax repeal.
While serving as the state’s sole House member, current South Dakota Republican governor Kristi Noem constantly claimed that the estate tax was awful and immoral, referring to her own family’s supposed tale of estate tax woe. It turned out that Noem’s reports of her personal estate tax experience fell somewhere between deception and outright lies. Had Noem’s parents updated their estate planning sometime in the 12-plus years between 1981, when the estate tax law changed, and 1994, when her father died, the family would have paid no tax.
So why do South Dakota’s politicos care so much about tax matters that seem to impact residents of other states far more than South Dakotans? Thune, Rounds, and Noem all will say it’s about protecting South Dakota’s farmers, a convenient underdog to elevate. As much as Americans are suspicious of the wealthy, they like farmers. But farmers are largely unaffected by the estate tax, or the proposed tax changes in the Build Back Better Act.
Here’s the more plausible explanation: These South Dakota Republicans want to protect the finance industry.
Let’s go back to Sanford, South Dakota’s only billionaire. He made his money in subprime credit cards, marketed to people with low credit. In 1980, six years before Sanford founded First Premier Bank, South Dakota capitalized on a Supreme Court ruling allowing a race to the bottom in credit card regulations. The state abolished its anti-usury laws and welcomed Citibank’s credit card business (and 400 jobs). With no limits to the interest rates that companies could charge to credit card customers nationwide, companies flocked to South Dakota, and Sanford set up shop too.
What began with credit cards has turned into an explosion of financial activity in South Dakota, urged on by the state legislature. While South Dakota politicians want you to believe their priority is agriculture, the state’s agricultural sector is dwarfed by its finance sector. In 2020, the finance, insurance, real estate, rental, and leasing sector accounted for more than a quarter (27.5 percent) of the state’s GDP. Agriculture, forestry, fishing, and hunting was 6.8 percent.
More than $3 trillion in bank assets are located in South Dakota, largely due to the presence of Citibank and Wells Fargo. South Dakota has the highest concentration of loan officers in the country and the third-highest concentration of accountants and auditors. Aspiring trust officers can earn a graduate certificate in trust and financial advising from Northern State University in Aberdeen, South Dakota.
Thune and his colleagues aren’t pushing estate tax repeal and opposing stepped-up basis reform to help the underdog.
South Dakota prides itself on being “the premier trust jurisdiction in the United States,” according to its Division of Banking. After all, South Dakota is home to a task force of estate and trust professionals appointed by the governor to ensure that it remains the most “competitive” place in the nation to establish a dynasty trust, with low taxes and fees and few regulations.
There are more than $500 billion in trust assets in South Dakota, managed by 105 state trust companies. That’s up $133 billion, or 36 percent, since 2019. That substantial increase may be due to a rising stock market, but it’s also because wealthy people were planning their estates in case of a 2020 Biden victory. “With the election and the historic exemptions that were provided for in federal tax law, we had clients who wanted to get ahead of the potential for tax laws to change and those exemptions to shrink substantially, by getting planning done in 2020,” tax and estate lawyer Pat Goetzinger told the outlet SiouxFalls.Business in April. Goetzinger also serves on the state’s trust task force.
Those billions stashed in South Dakota are the impetus for Thune’s posturing. “How are we going to pay for it?” asked Thune of the infrastructure package, speaking to reporters at the South Dakota Stockgrowers Association convention in early September. “What they’re talking about in terms of paying for it are tax increases that would punish farmers and ranchers and small business owners.”
Thune and his colleagues aren’t pushing estate tax repeal and opposing stepped-up basis reform to help the underdog, though family farms do function as a convenient excuse. Instead, they want to make sure that the finance industry stays strong, especially in the face of competitors like Delaware, which have also loosened their state laws to usher in the trust activity of multimillionaires and billionaires. (Delaware also has a long history of catering to the finance industry. Like South Dakota’s 1980 deal with Citibank, the state changed its own credit card laws the following year, attracting J.P. Morgan and Chase Bank.) Thune regularly receives twice as many individual and PAC campaign contributions from the finance, insurance, and real estate sector than from any other industry.
The tell here, however, isn’t Thune—it’s Rounds. When Rounds said in 2017 that it would be sufficient to double the estate and gift tax exemption rather than repeal the estate tax entirely, he knew, as the former governor of South Dakota and thus former convener of the state’s trust task force, that the trust industry would still benefit. The higher exemption meant additional millions that the wealthy would need to put into trusts in states like South Dakota—which they quickly did, acting in case Democrats later reversed course. When Rounds announced that he would accept something less than full estate tax repeal, his Senate colleagues knew the trust industry would accept that as well. Put another way, Rounds green-lighted the change on behalf of South Dakota’s trust industry.
Of course, the appeal of the trust industry is also partly about jobs, as at least 400 people work directly for trust companies and bank trust departments in the state. (It’s certainly not about the revenue the state gets from trust companies: $1.5 million, peanuts compared to billions in trust assets.) With a state as small as South Dakota, hundreds of well-paid jobs are a lot of well-paid jobs. After all, it was 400 jobs that Citibank brought to South Dakota when the state first opened the floodgates to the finance industry.
So, what’s the takeaway here? When small-state politicians are banging the drum for laws that benefit the ultra-rich and, more importantly, their courtiers in the wealth defense industry, we should pay attention. There’s a reason why the race to the bottom in the trust and banking industries is being waged primarily by low-population states. Consider the trade-off between a few hundred well-paid jobs and the cost of absurdly lax regulation and taxation to the population at large. In states with smaller populations, that trade-off works in favor of those seeking to escape regulation and taxation.
When politicians from South Dakota, Wyoming, and Alaska are doing the bidding of billionaires in New York and California, we should be deeply suspicious.
