Charlie Copeland is the director of the Center for Economic & Fiscal Policy at the Caesar Rodney Institute.
Delaware doesn’t have a revenue problem; it has a spending problem. The state’s largest source of revenue, its corporate franchise, has stopped growing, while government spending continues to climb. Rather than confronting that reality, lawmakers have turned to higher business taxes and fees to close the gap. Delaware’s own financial data tells the story and serves as a warning.
The state of Delaware’s role as the nation’s incorporation capital has been its biggest moneymaker. Taxes and fees paid by companies that register here make up about 30% of the state’s general fund. That engine has now stalled. According to the revenue forecast issued by the Delaware Economic and Financial Advisory Council, franchise tax collections are projected to remain flat through 2028. The only increase comes from House Bill 400, signed into law by Gov. Matt Meyer on May 21, which raised the annual tax on limited liability companies and limited partnerships. Remove that hike, and the underlying revenue isn’t just flat; after inflation, it is shrinking — even as state spending keeps climbing more than 5% a year.
What’s worrying is that Delaware isn’t losing companies; it’s gaining them. Delaware Division of Corporations statistics show a 25.4% increase in total business entities since 2021, while franchise tax revenues are about 6% lower. Per business entity, Delaware’s revenue is down to about $807, from a 2023 peak of $904. Delaware is signing up more customers, while collecting less from each one.
DEFAC forecast shows corporate franchise tax revenue flattening
The state’s own forecast tells the story. For decades, the corporate franchise tax has been the state’s dependable workhorse. It has stopped climbing. It slipped from just under $1.4 billion in 2023 to roughly $1.32 billion in 2024, and the state’s own forecasters at DEFAC expect it to remain nearly flat — near $1.34 billion — every year through 2028. A flat line can sound stable, but after inflation, it is really a slow bleed: a real decline of close to 10%.
The LP/LLC small-entity annual tax is the sole reason the combined franchise number shows any growth, and it points directly to HB 400.
A fiscal 2026 jump in the LP/LLC tax wasn’t a wave of new companies or a booming economy. It was a price increase. HB 400 raised the annual tax on LLCs, LPs and general partnerships from $300 to $400. That change aligns with the $137.6 million DEFAC added to its 2027 forecast.
Lawmakers were candid about why they raised the tax. Rep. Kerri Evelyn Harris, D-Dover, cited “a budget deficit,” and the Joint Finance Committee chair, Sen. Trey Paradee, D-Dover, called the hike “a responsible way to raise the revenue we need to balance our budget.”
The Caesar Rodney Institute sees it differently. Back in September 2024, we noted that nearly all of Delaware’s major revenue sources had already flatlined in chained dollars. The corporate franchise was the last to outpace inflation. We warned then that it, too, would stall. It has. What the state is really doing is leaning harder on its incorporation business to plug a spending gap — raising prices just as competition is heating up. Charging more for a product that other states are racing to copy isn’t a “responsible” long-term plan. It’s a short one.
Spending gap compounds, as revenue stalls
Even with the HB 400 rate hike, general fund revenue still trails spending. DEFAC projects revenue to grow 4.1%, then 3.6%, then 2%, while corporation income tax receipts fall by 24% through fiscal 2028. Only personal income tax is forecast to grow 5% annually for the next three years, but against 5%-plus appropriations growth that the revenue/spending gap compounds. Strip out the additional revenue from HB 400, and the revenue/spending gap is even larger.
The solution: Respond to growing competition
Delaware’s real problem is spending, not revenue. Its biggest moneymaker hasn’t collapsed; it has stopped growing. Trying to fix a spending problem by raising prices gets the diagnosis backward. And the companies being asked to pay more can simply move to states where it is more attractive.
What does “attractive” look like? Texas has spent 20 years answering that question. It charges no personal income tax, keeps its business tax low, uses a business-oriented regulatory and litigation environment, and lets a fast-growing private economy widen the tax base instead of taxing a fixed base more heavily. To meet its budget needs, Texas uses a 6.25% sales tax instead of an income tax. Delaware’s existing top income tax rate of 6.99% is comparable in level to the Texas sales tax.
The verdict is in the numbers: Texas was just named the best state for business and leads the nation in corporate relocations. And more worrisome for Delaware, Texas is now coming for the franchise itself — it has opened a business court to rival the Court of Chancery and launched a Texas Stock Exchange, plus companies from Exxon to SpaceX to Dell have moved their legal homes there. While Delaware raises prices, Texas is building the courthouse, the exchange and the tax climate to welcome that same customer.
Delaware needs to attract customers, not send them to Texas.
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