The US State of Delaware is much like a Domestic Cayman Islands tax haven for the avoidance of state income taxes. 63% of Fortune 500 companies are incorporated in the state of Delaware. And there are 6,500 empty shell companies on North Orange Street in Wilmington, DE.
Delaware has no income tax on corporations operating outside the state. Also, there is no income tax on royalties received.
And by setting up corporations in Delaware, companies are able to avoid income taxes in other states. Particularly in these hard economic times, states want to make sure that income that’s earned in their state is actually taxed in their state. That seems only reasonable.
There are all kinds of creative ways that companies can minimize their total state income tax by using the Delaware tax shelter vehicle.
One common way is for parent companies to establish Delaware holding companies as subsidiaries. Then, these parent companies transfer to these subsidiaries ownership of things like trademarks, patents and investments. Delaware does not tax holding companies set up to own and collect income from such lucrative intangible assets.
The parent companies of these shell Delaware holding companies usually pay royalties to the Delaware subsidiaries for using those assets. By doing so, they can claim income tax deductions in states where they actually do business. The shells also funnel profit, tax free, back to their parents, in the form of dividends and loans.
So what does this have to do with US taxes raised to at least somewhat close this clearly rampant, abusive US State Tax Loophole?
Well, as one easy way to at least somewhat limit the Delaware tax loophole, I recommend that the US government should apply a 2% additional federal tax annually on all consolidated US taxable income for all US and foreign companies that are incorporated in Delaware.
And then, I would have the US transfer 50% of this federal income tax received back to all US states in some fair, reasonable manner, for the Feds to decide, such as relative revenues generated by these companies in each state.
And the US would retain the other 50%, which is to be used to reduce the US Deficit.