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From Governing’s
Delaware can thank Woodrow Wilson for this enviable status. More than a century ago, the state adopted virtually the same incorporation laws being used by neighboring New Jersey, then the location of choice for businesses seeking a friendly legal system. But as governor, Wilson rewrote New Jersey’s laws to make them stricter, and businesses simply migrated across the border. The incorporation trade has been a fiscal bonanza ever since.
A little more than a decade ago, Delaware launched another revenue-raising effort, attracting banks and other financial companies by removing its usury limits on interest, in addition to having exempted holding companies from the corporate income tax. “The banks mentioned they might be interested in coming someplace,” recalls Bill Remington, the state’s director of revenue. “And we picked up the ball.” As a result, says Remington, “Wilmington is booming, construction is booming, even though one of our big employers, DuPont, has been downsizing everywhere.” Given all this, it’s inevitable that Delaware is sometimes portrayed as a buccaneer on the high seas of state finance. But while the state is unquestionably opportunistic in approach, its real attraction for corporations is its predictability. “We have 70-plus years of judicial decisions here,” says Frank Balotti, co-author of the authoritative text about Delaware’s business laws. “Companies can judge what judicial reaction to certain kinds of transactions is likely to be. Other states simply don’t have that large a body of judicial decisions and also don’t have judges with the expertise we have. Nor do they have as efficient a court system.” It’s undeniable that Delaware’s laws help firms evade taxation in other states, especially through the exemption of income from holding company subsidiaries. The state’s leaders don’t apologize for that. “Sure it’s a tax haven,” says one close observer. “But every state has it in their power to write their tax laws in a manner that prevents corporations from taking advantage of Delaware holding company planning opportunities. They don’t have the political courage to fix the system. So, it’s a lot easier to blame Delaware.” The bulk of Delaware’s incorporation-related revenue comes from fees — capping out at $150,000 — based on the number of shares of stock a company issues. In the past, this has been a stable source of income, but it’s been somewhat less predictable in the last couple of years, largely due to the dot-com bust. Ordinarily, even in hard times, companies retain their incorporation status so they can continue to do business as they go through bankruptcy. But in the current downturn, says Steve Kubico, the state’s deputy controller general, “a lot of these companies just fell off the face of the earth and didn’t pay.” Even so, Delaware has managed to ride the storm relatively well thus far. It got lucky when some of its non-corporate revenue streams came in higher than anticipated. Unlike most states, it was able to get through last year without touching its rainy day fund. The strain is continuing now, though, and there’s a looming problem for the 7 percent of revenues the state derives from slot machines (officially described as video lotteries, because slot machines are unconstitutional in Delaware). “We’ve added new machines every year because the demand is high,” says state Representative Deborah Hudson. “Now, we’re worried about other states putting video lotteries in. We could be losing revenues — to Maryland, in particular — if they make them legal.” Unlike many other states, which already have exhausted the easy fixes, Delaware still has some low-hanging fruit available to buttress its budget. Its cigarette tax is very mild at 24 cents a pack, while surrounding states charge over a dollar. The state could also pick up some reasonably easy money by increasing its video lottery share. Whatever happens to revenues, Delaware’s government will be better positioned than most to know about it in advance. It has one of the country’s best revenue-estimating systems, using academics and other private citizens along with legislators to make accurate guesses about the fiscal future. The nonpartisan estimating group meets six times a year, far more frequently than most of its counterparts elsewhere. The state also works hard to deal fairly with its individual taxpayers, who bring in about a third of the state revenues through the personal income tax. “They don’t tolerate people who try to avoid the system,” says Jordon Rosen, who serves on the tax committee of the Delaware Chamber of Commerce. “But their goal really is to work with people.” In addition, the state has been a leader in offering various forms of electronic filing. Per capita, it boasts more payments by Internet than any other state. All in all, this is a carefully managed fiscal enterprise. From a distance, Delaware may look like it’s wearing a pirate’s hat, but from the inside, the headgear bears a closer resemblance to a green eyeshade. Copyright © 2003, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
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bout a third of Delaware’s revenue derives from its staunchly protected role as the nation’s so-called “incorporation state.” Thousands of publicly held companies choose to file their corporate paperwork there, even if they don’t have a single office within Delaware’s borders. The money they contribute to the treasury has allowed the state to maintain a relatively low income tax, no general sales tax, and a gross receipts tax that’s under 1 percent.