The Pandora Papers — the trove of more than 11.9 million confidential documents shared with The Washington Post and partner news organizations — shine a light on South Dakota’s role as an offshore financial center. For the most part, the revelations relate to the Mount Rushmore State’s status as a magnet for foreign wealth, including money derived from international drug smuggling and exploitative labor practices. But it’s not just foreigners who are moving assets to the “little tax haven on the prairie”: High-net-worth Americans also are shifting billions to South Dakota and a handful of other domestic havens, shortchanging federal and home-state tax collectors in the process.
The rise of domestic tax havens marks a troubling new chapter in the history of American federalism. Supreme Court Justice Louis Brandeis hailed states as “laboratories of democracy,” but increasingly U.S. states are becoming laboratories of sophisticated tax avoidance. So far, Congress and the states whose tax bases are being cannibalized by the domestic havens have done little to fight back. Hopefully, the Pandora Papers will catalyze a reaction that’s long overdue.
Congress, for example, could close the loopholes in federal tax law that domestic havens exploit. And the states that lose out from cross-border tax wars could bolster their own legal defenses. Of course, lawmakers in the domestic tax havens also could halt their efforts to emulate overseas havens such as Luxembourg and Switzerland.
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