Delaware’s Unique Role in the Upcoming Tax Debate

BY NEIL BRADLEY

DELAWARE IS THE INCORPORATED HOME of 68% of Fortune 500 companies. In 2023, 80% of America’s businesses going through an initial public offering chose Delaware as their corporate home. Entity and franchise taxes generate around $2 billion in revenue for the state each year, representing one of the state government’s largest revenue sources. All of which makes the tax debate that is about to unfold in Washington, D.C., of utmost importance to Delaware.

Companies overwhelmingly choose Delaware because the state prioritizes maintaining an updated body of corporate law that reflects how businesses operate today. Delaware also has a Court of Chancery where judges with expertise in corporate operations resolve disputes in an equitable manner.

Just as companies have a choice to incorporate in Delaware, companies that operate globally have a choice about whether to incorporate in the United States or in another country. For decades, this was a no-brainer. America’s legal system, capital markets, protection of property rights, and competitive tax code meant that companies wanted to call America home. That began to change in 1994 when a steady stream of companies began trading their U.S. headquarters for an overseas address. Known as a corporate inversion, over 50 major U.S. companies reorganized from being American to being foreign between 1994 and 2015. In addition, when a U.S. company and a foreign company merged, they increasingly located the newly merged company in the foreign country.

Corporate inversions were driven by one thing: America’s uncompetitive tax code. From 2003 to 2017, the U.S. had one of the three highest corporate tax rates in the industrialized world—and for several years, we had the highest. While other industrialized nations dropped their average corporate tax rate from 32.3% in 2000 to 24.2% in 2017, the U.S. rate was a constant 39%. To make matters worse, unlike almost every other industrialized economy, the U.S. taxed its companies on the income they earned worldwide, not just the income earned in the home country.

In short, the U.S. tax code punished companies for being American.

That all changed in 2017, when, after years of debate, Congress passed the most comprehensive tax reform legislation since 1986. Among other things, Congress lowered the federal corporate tax rate from 35% to 21%, introduced full expensing for certain capital investments, and substantially reformed the U.S. international tax system. It was like someone flipped a switch, and since the 2017 reforms, there has not been one single tax-induced corporate inversion.

That has been good news for America, but also for Delaware, America’s corporate hometown.

Unfortunately, many of the reforms enacted in 2017 will expire at the end of 2025, and some elected officials are pushing to raise the corporate tax rate to 28%, moving America from having a tax rate in the middle of the pack of industrialized nations back to having one of the highest. The collective impact of these changes is entirely predictable: a return to chasing companies out of the United States.

Even though over 55 million Americans work for corporations and higher taxes for corporations mean higher prices for consumers and lower wages for workers, corporate taxes don’t get much attention on the campaign trail. Corporate taxes, like corporate law, are complicated. This is why Delaware and its congressional delegation have a unique role to play in the upcoming congressional debate, for as much as there is at stake for America, there is even more at stake for Delaware, America’s Corporate Capital.

Neil Bradley is the executive vice president and chief policy officer at the U.S. Chamber of Commerce.