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South Dakota’s wealth is in finance. South Dakotans still think it’s in farming.

More people may work in agriculture — but the Pandora Papers revealed that the state has become an international financial haven

- October 14, 2021

With the publication of the Pandora Papers, South Dakota’s reputation as a financial and tax haven has hit the national and international news. A recent Washington Post article revealed that South Dakota trusts manage more than $360 billion in assets — roughly the size of Denmark’s annual gross domestic product, and six times South Dakota’s.

The money in these trusts quadrupled in the past decade. Wealthy people from all over the world, some with problematic pasts, use South Dakota as a tax haven.

How did a small, rural state’s economy transform so dramatically? The answer, in part, is that most South Dakotans didn’t really understand what was going on. Our data from the SDSU (South Dakota State University) Poll suggests that the voting public still believes that agriculture, not finance, dominates the state’s economy. That has helped the trust industry quietly transform the regulatory environment, making South Dakota a premier destination for establishing trusts free of most regulation and oversight.

South Dakota is the Switzerland of the Great Plains

Few people realize that South Dakota is now a banking powerhouse, something that happened because of a 1978 Supreme Court decision. In Marquette National Bank v. First of Omaha Service Corp., the court ruled that credit card companies would have to abide by the laws of the state that the bank was based in, not the state in which the customer resided. This gave states like South Dakota and Delaware an opportunity to race to the bottom, scrapping usury laws to draw credit card operations from New York.

Although others had floated similar ideas, in 1981, South Dakota Gov. Bill Janklow (R) successfully spearheaded the state’s efforts to draw Citibank to Sioux Falls. Citi was the first of several banks to either move credit card operations to South Dakota or charter there, taking advantage of easy regulations. A couple of years later, Janklow started to revise trust law, starting with abolishing the rules against perpetuities, which insulated families from inheritance taxes. His successors continued that effort, with change accelerating in the 1990s. By the early 2000s, these changes had drawn billions in assets to the state from around the world.

After the 2008 economic crisis, traditional tax havens like Luxembourg, Lichtenstein and others tightened their laws, making them less attractive. However, South Dakota continued to liberalize trust regulation, most innovatively with regulations allowing people to declare themselves beneficiaries of trusts, and trusts being virtually secret. The result: $360 billion in South Dakota trusts.

Few opposed these legal changes. The laws are complex, and state legislators had little of the expertise necessary to mount an effective opposition. Hearings were quick, and passage almost a foregone conclusion. Speaking on the overhaul efforts, former state senator Gene Abdallah (R), who chaired the Senate Judiciary Committee, noted that “nobody understands any of them.” Session after session, the trust industry largely had its way.

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Citizens don’t recognize what has happened

To find out whether the voting public understands this transformation, in October 2020, we surveyed a statewide sample of 485 registered voters about their impressions of life in South Dakota. We drew a random sample of 10,000 registered voters from South Dakota’s voter data and invited them to participate in an online poll. We weighted the sample to match the state’s population in gender, age, region and party registration.

We asked respondents to list five sectors of the economy in order of importance to the state. Overwhelmingly, they ranked agriculture first, health care second, tourism third, manufacturing fourth — and financial services fifth. Just over 77 percent of our respondents placed agriculture on top. Conversely, only 2 percent placed the finance sector first.

We also asked respondents to estimate the total proportion of agricultural goods and services in South Dakota’s economic activity. The median answer was 66 percent; not a single respondent offered a figure below 10 percent.

These results are pretty well the opposite of the U.S. Bureau of Economic Analysis rankings. In fact, finance and insurance rank first, with just under 21 percent of the state’s 2019 GDP; agriculture comes in fourth, with 6.8 percent of GDP.

Why don’t South Dakota voters grasp the scale and economic scope of this economic sector?

One likely reason is that the benefits of agriculture are more widely diffused than those of the financial sector, even though the latter matters much more to GDP. According to federal and state data, approximately 29,600 farm and ranch operations remain in the state; only 18,500 people work in finance. While there’s been a sharp decline in the number of farming and ranching families over the past 50 years, agriculture still employs a lot of the state.

Furthermore, our data shows that many South Dakotans can trace their family history to farming or ranching; 42 percent told us they are either in agriculture themselves or had a parent who was. In other words, South Dakotans are still emotionally tied to their rural roots, shaping the state’s identity and their own perceptions of economic reality.

Finally, agriculture is visible. It literally dominates the landscape, with farm and ranch lands everywhere that South Dakotans look.

The financial industry, in contrast, has a minimal footprint; trusts are sprinkled around Sioux Falls in nondescript office suites and buildings. To the average citizen, the finance industry is nearly invisible.

Why that perception matters

The story of how a small rural state became the center of global finance is complex, but the public’s perception of state economy probably plays an important role. Despite South Dakota’s vast economic changes and the ever-increasing dominance of the finance industry, citizens see the economy in the same general terms that their parents and grandparents did. When the electorate has a misleading map of the economic landscape, it was that much easier for the trust lobby to wield its influence.

Broadly speaking, there has been little interest or political pressure for more oversight or restructuring of South Dakota’s financial sector. Voters aren’t demanding that policymakers regulate or deregulate trusts.

Unless South Dakotans change their perception of their state’s economy and see some clear negative consequences from their emerging status as a global tax haven, South Dakota is likely to remain the Switzerland of the Great Plains.

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David Wiltse (@davewiltse) is an associate professor of political science and director of The SDSU Poll at South Dakota State University.

Filip Viskupic (@prof_filip) is an assistant professor of political science and research associate at The SDSU Poll at South Dakota State University.