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Delaware Hits the Tax Jackpot

1 min readBy: Josh Barro

Congratulations to Delaware, which this week received an unexpected $63.3 million corporate income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. payment. The payment, equivalent to about 1.5% of Delaware’s $4.2 billion FY 2008 budget, was so surprising that state tax officials at first thought the wire transfer was intended for New York or California and mistakenly sent to Delaware. Instead, it was apparently the tax due for a gain on sale by a private entity liquidating its interest in a Delaware partnership. Now, Delaware’s top budget policymakers (the “Big Heads,” as they are awesomely called) are scrambling to revise the nearly-complete FY 2009 budget, so it will consume the newfound wealth.

Delaware is strongly reliant on its corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. , taking in more per capita than any state except Alaska (which has outsized oil-related tax revenues) and New Hampshire (which has neither a sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. nor a personal income tax). Indeed, it’s one of only five states to derive more than 10% of its budget from corporate income tax. While the arrival of such a windfall right before the closing of the budget process is unusual, wild swings in Delaware’s corporate tax revenues aren’t. In 5 of the last 20 years, Delaware’s corporate income tax revenues have fallen more than 10% from the previous year.

Source: US Census Bureau

So, Big Heads, enjoy your windfall, but try not to spend it all in one place: you might need it next year if the Corporate Tax Gods stop smiling on you.