How Delaware Does Money
At the expense of nonresidents and other states
Delaware is one of four states in the country with no sales tax. Like those other states, Delaware offsets the absence of that kind of revenue source with other methods of collection. It has implemented both a high income tax rate as well as a gross receipt tax, which entails taxing store-owners directly on their sales rather than consumers. But the First State also has a few unique means of paying its bills, some of which benefit its residents at the expense of its neighbors.
Here’s how Delaware does money.
With some of the highest toll rates and highest speed trap activity in the country, Delaware is able to shift a portion of its tax burden away from its residents.
Though the state has little to offer itself in the way of attractions other than a couple of waveless beaches, there is certainly a lot to do near Delaware. It sits in line with four major cities: Washington D.C. and Baltimore to the southwest, Philadelphia and New York City to the northeast, just below Jersey’s beaches and just above Maryland’s. Considering this geographic convenience, busy roads like I-95 effectively allow for revenue collection, and largely from nonresidents passing through.
The fact that over half of all public corporations in the United States are incorporated in Delaware is indicative of the state’s “business-friendly” climate. Businesses are attracted to the state for two main reasons: tax exemption and a lack of corporate transparency. Experts have complaints about both.
What are the problems with the former? Well, as understood by a process now known as the “Delaware Loophole,” by incorporating in Delaware, companies are effectively able to lower the taxes that they pay in other states. While a company may have its headquarters in one state, the same state where they may conduct just about all of their business, when they shift royalties to their hold in Delaware, they effectively avoid being taxed on those royalties. According to an article in The New York Times from 2012, this loophole enabled corporations to reduce the taxes that they paid to other states by about $9.5 billion over the last decade.
A report published in the Journal of Financial Economics showed that this sort of domestic tax evasion offered by Delaware is comparable to offshore tax havens such as the Cayman Islands — the difference being that using Delaware for such a purpose is not illegal. Many have suggested, however, in the interest of state governments on the losing side of this process, that it should be.
And what could be evil about corporate transparency? The obvious answer involves the ease in which an individual could launder income from an illegal activity while retaining anonymity. But that same article from The New York Times also lists both American and foreign criminals now facing jail time for charges like corruption, embezzlement, and terrorism, each of whom had easily incorporated in Delaware.
Delaware is among the one-third of states facing a budget deficit crisis as a result of shortfalls in the 2015 fiscal year. State officials throughout the country have pointed at overestimations in income tax revenue as the primary cause for such shortfalls, and have begun revamping spending to offset the deficit. Economists in Delaware speculate that if the state’s spending habits were to go unchanged, in a decade the deficit could grow to $600 million.
One solution that seems obvious has largely been ignored by state officials: raising income tax rates, specifically for the top 1 percent. According to The News Journal, members of the state’s Democratic leadership have never openly supported raising taxes for top earners.
Another obvious solution, taxing the shit out of corporations, also comes with issues. DuPont has already laid off thousands as a result of the same poor economic conditions that actually caused the deficit, and AstraZeneca has actually opted to move some of its local workforce elsewhere. Pressuring these companies with higher tax rates would probably only contribute to the lay-off numbers, which would impede the state’s income tax revenue further.
Losses like these deal serious blows to the state’s economy, which relies primarily on income tax. In 2014, according to the Bureau of Labor Statistics, it comprised 41.5 percent of all collected tax revenue. License taxes, which are also directly reliant on the state’s corporations, comprised another 41%.
Last week lawmakers did approve a $4 billion operating budget for the upcoming fiscal year that included funding cuts in various areas. Investments in after-school programs and pay-raises for teachers were slashed, for instance, and there was a 1% cut to higher education.
Lawmakers also shot down the governor’s initiative to fund police body cameras during the legislative process.
When dealing with a budget deficit, the trend seems to be that education is often one of the first areas to lose funding. There is some logic to this, considering for most states like Delaware, education is the largest expense (24.1 percent of the total budget in 2014), and the alternatives are things like Medicaid, which is usually the second largest expense, infrastructure, pension programs, etc. And to Delaware’s credit, it ranked 5th in terms of spending per student by the state in 2013. But as a student at the University of Delaware, I fear that cuts to higher education lead to increased tuition rates, increased student debt, and ultimately less opportunity for low-income students. And generally every corner of society is impacted by investments in higher education.
The absence of sales tax also makes Delaware an attractive destination for out-of-state shoppers. This means not only an influx of consumers clawing at the windows of local malls and outlets, but it also makes Delaware a hub for exportation of some unexpected goods.
When I visited my college buddy in Trinidad last winter, for instance, I noticed that nearly every boat I saw at this marina proudly sponsored Wilmington, Delaware in a fancy font on the stern. These boats were not traditionally named, no Andrea Gail’s or Jenny’s. They were Delaware’s — each and every one. Sound it out; it’s almost onomatopoeic. De-la-ware: the undulating rock of your tax-exempt yacht. De-la-ware: the cha-ching of a register when it displays a round number. De-la-ware: the moan of a CEO when he realizes he just fucked every other state his company has assets in.
This is quintessential America right here — opportunity, self-interest, being kind of a dick to everyone around — all packed tight into one little state, the First State, damn it. Just as I’m proud to be an American, I’m proud to be a Delawarean.
And by proud what I mean is guilty and self-loathing.
Yoni Blumberg is a senior at the University of Delaware, and an Awl network intern this summer.
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