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Friday, Jul 10, 2009
U.S. corporations swarm to tax-free Delaware like flies to honey. But with a huge budget deficit looming, the state's chief justice is suggesting big business lend a hand.
Apr 24, 2002 | Times are hard in Delaware. The state is suffering from a budget crisis so severe that the court system is postponing murder trials. The governor and the Legislature are claiming everyone will have to tighten their belts, so in January the chief justice convened an emergency commission to come up with alternative funding for the courts. One of his suggestions: corporate donations.
The idea of partially privatizing the court system has come under some fire, but Delaware would actually be a perfect state to experiment with corporate subsidization of judge and jury. Delaware already bends over backward to make itself the most welcoming home for corporations of any state in the United States. More than half the Fortune 500 are technically incorporated in Delaware, including such far-flung companies as Amazon, Dow Chemical, Yahoo and Hewlett-Packard. (Salon is also incorporated in Delaware.) The Chancery Court, the division of the court system that handles corporate cases, is even a profit generator for Delaware.
The Chancery Court was rated No. 1 in all categories last year by the U.S. Chamber of Commerce, which based its decision on the court's handling of such issues as class action suits, punitive damage awarded and timeliness of decisions on summary judgments and motions to dismiss. These are all categories that are dear to the heart of corporate interests, as they reduce the power of shareholders, consumers and those claiming injury by corporate behavior to seek legal redress.
As Delawarecorp LLC, a law firm in Delaware specializing in corporate law, puts it in promotional literature targeted at companies looking to incorporate, "No one likes to be sued, but if you are, Delaware is the place to be."
Given Delaware's notorious friendliness to all things corporate, the state's budgetary woes bring with them no small load of irony. Ever since the 1950s, Delaware has attracted the Fortune 500 horde by marketing itself as a tax-free paradise for corporations anxious to dodge state taxes on their profits. Today, Delaware serves as a kind of domestic Bermuda or Cayman Islands.
In the wake of the Enron debacle, Washington politicians have been getting all worked up about American corporations that avoid paying millions of dollars in federal taxes by "moving" to Bermuda or the Caymans. But domestically, states such as Michigan, Nevada and especially Delaware have long been serving as domestic tax havens either by forgoing corporate taxes altogether or, in Delaware's case, by setting up schemes that encourage out-of-state companies to set up subsidiaries in-state to which they can shift their profits legally.
So now Delaware can't pay its bills. It's unlikely that the rest of the country is going to shed any tears, after years of watching revenue that should be paying for social services disappear into thin air. If Delaware really wants to solve its problem, maybe it's time for it to rethink its tax policy.
