The Washington PostDemocracy Dies in Darkness

Opinion States must stop letting the ultrawealthy dodge taxes — and the law

The Internal Revenue Service building in Washington, D.C., in March 2013. (Susan Walsh/AP)

The so-called Pandora Papers leak of almost 12 million documents and files exposes the secret offshore accounts of world leaders, celebrities and billionaires. Yet for many, offshore doesn’t mean the Cayman Islands or Switzerland. It means right here in the United States.

For too long, too little scrutiny has been focused on states’ efforts to turn themselves into tax havens for the ultrawealthy. Local legislatures have for decades been devising rules to permit trusts that can be passed down from generation to generation in perpetuity, with scarcely anything paid in taxes along the way. Worse, powerful secrecy shields make it easy to store even ill-gotten gains with impunity. South Dakota, which also levies no income or capital gains tax, is an especially egregious case — or an enticing one, if you ask those behind at least $360 billion in anonymous, untraceable assets tucked away there. That state started a national trend that has spread to Delaware, Alaska, Nevada and New Hampshire, among others.

The situation has been a boon mostly for money managers and those whose money they manage; it has been a burden for the federal government and other states deprived of a tax base. And it hasn’t even really been a windfall for the trust-sheltering states, which aren’t getting much in the way of taxes themselves and don’t seem to be reeling in more residents or good-paying jobs at any great scale. Indeed, part of the appeal to individuals parking their dollars in South Dakota and the rest is that usually they don’t even have to set foot there.

This state-sponsored tax-dodging would be distressing enough on its own. Throw privacy and other shielding provisions on top of it, and it’s a scandal. Though management companies claim they do due diligence on clients, the Pandora Papers make clear that’s not the case. The Post’s investigation identified 206 U.S.-based trusts linked to 41 countries, nearly 30 of which held assets connected to people or companies accused of fraud, bribery or human rights abuses — from a sugar mogul criticized for mistreating workers in the Dominican Republican to the president of Ecuador only months after that country prohibited politicians from using tax havens. South Dakota and Delaware permit “asset protection trusts” that insulate wealth from claims by creditors; the mechanism lets clients dodge not only taxes but also lawful debts.

State attempts to audit these activities are either nonexistent or ineffective. That’s unlikely to change. The federal rules restraining corporate corruption are similarly full of holes — but here at least there’s some hope. The Enablers Act recently introduced in the House of Representatives is a start. The bill would require trusts and several other currently uncovered entities to vet clients for criminal activity. Expanding the Corporate Transparency Act passed in January to include trusts so that they, too, must report to a centralized registry would also help.

The United States should be one of many countries standing firm against kleptocracy, not one of those inviting kleptocracy to live there free of charge.