Many people are beginning to wrap their minds around the House Republicans’ proposed destination-based cash-flow tax and what it means for tax reform. Most people are still looking into the tax’s impacts on trade and how...
- The Tax Policy Blog
- Why Do So Many Businesses Incorporate in Delaware?
Why Do So Many Businesses Incorporate in Delaware?
Today I received a question from a reader: “Delaware is home to some of the biggest incorporated businesses in the US, but the Tax Foundation ranks the state 50th (worst) in the corporate tax component of your State Business Tax Climate Index. How can that be?”
This is a great question. My answer:
Delaware’s attractiveness for incorporation is driven by many things: favorable incorporation regulations, rules limiting corporate liability, and a second-to-none corporate court system (the Court of Chancery) with judges that are corporate law experts.
The state’s general corporate tax code, however, leaves a lot to be desired. The state levies a top corporate rate of 8.7 percent, and there is additionally a gross receipts tax (only five states have these) that businesses pay regardless of profitability. For many businesses though, the pros of the legal and regulatory system in Delaware outweigh the cons of the tax system. This is how Delaware has chosen to compete.
So taxes don’t matter? Not quite. If we look just a little bit further to the other two popular states for incorporation, Nevada and Wyoming, we see that they have chosen to compete on tax policy instead. Those states have no individual income tax, no corporate tax (though that is changing in Nevada this year), and low corporate filing fees. For many businesses, these tax considerations are more important.
Follow Scott on Twitter.
Get Email Updates from the Tax Foundation
Join the Tax Foundation's fight for sound tax policy Go
About the Tax Policy Blog
The Tax Policy Blog is the official blog of the Tax Foundation, a non-partisan, non-profit research organization that has monitored tax policy at the federal, state and local levels since 1937. Our economists welcome your feedback. If you would like to send an e-mail to the author of a blog post, please click on that person's name to locate his or her e-mail address or visit our staff page here.