Dr. Richard F. Bieker of Dover is a retired economist. He has taught and/or conducted research at a number of institutions, including Delaware State University, the University of Delaware, Purdue University and Central Michigan University. He has also served as a Fulbright Scholar at Slovak University of Agriculture and the American University of Armenia, and his research has been published in a variety of journals.
After reading the Opinion by Sen. Nicole Poore and Speaker of the House Melissa Minor-Brown, both D-New Castle, I surmise that their main concern is the loss of tax revenue generated by the franchise tax if a large number of corporations choose to become incorporated in other states, such as Texas and Nevada, rather than remain incorporated in Delaware (“State’s corporate structure plays big role”). While they note a number of other concerns, they don’t offer any specific proposals regarding what might be done to prevent corporations from leaving Delaware and incorporating in other states.
I did find one of the statements in their article to be particularly puzzling. The authors note that “(t)he next few months will be critical for the future of our state, as the future of the corporate franchise could be decided not in Dover but in Washington, D.C.” I am confused by this statement since incorporation laws are made by individual states and not the federal government. So, for example, Texas has different incorporation laws than Delaware.
One of the many benefits of our federalist system is that it encourages economic competition between the states. So, for example, in the early 20th century, New Jersey’s incorporation laws made it the dominant state for incorporations. But then, Woodrow Wilson, the governor of New Jersey at the time, persuaded the New Jersey Legislature to enact progressive reforms that many corporations considered to be antibusiness. At about the same time, Delaware was enacting more business-friendly laws with respect to incorporations. So, many corporations chose to become incorporated in Delaware rather than New Jersey, and Delaware replaced New Jersey as the leading state for incorporations.
More recently, states such as Texas and Nevada have developed laws that are designed to entice corporations to incorporate in their states. And, in 2024, Tesla shareholders approved the Tesla board’s proposal to incorporate in Texas rather than remain incorporated in Delaware, primarily because of a decision rendered by Chancellor Kathaleen McCormick of the Delaware Court of Chancery. In her 2024 decision, Chancellor McCormick denied a $56 billion pay package for Elon Musk, which was previously approved by Tesla’s shareholders. She held that the shareholders who approved the package were not sufficiently informed about how that package was arrived at when they voted to approve it. Since the exodus of Tesla, a number of other prominent corporations, including Meta, are considering reincorporating in Texas or Nevada.
The question is: How will Delaware respond? That will be determined primarily by the governor and legislature of Delaware and not by the folks in Washington, D.C.
While the governor and legislature are looking for ways to maintain Delaware’s status as the leading state for incorporations, they may also want to take a look at how Delaware’s corporate income and gross receipts taxes affect new business formations and economic growth in the state. According to the Tax Foundation, Delaware has the most unfavorable tax environment for corporations of all 50 states. Delaware’s corporate income tax rate is 8.7%, and it is one of only two states that has both a corporate income tax and a gross receipts tax. Such a tax regime discourages firms from locating and doing business in the state. This, in turn, leads to slow or no economic growth, fewer job opportunities and a lower tax base. And, without a large and growing tax base, the state will not be able to generate the revenue necessary to fund the proposals that were put forward by Poore and Minor-Brown in their article.
Reader reactions, pro or con, are welcomed at civiltalk@iniusa.org.
