Most Americans know two things about the US state of Delaware. It is President Joe Biden’s home and the state has something to do with how businesses are run.
But as Hal Weitzman points out in his entertaining exploration of its history, What’s the Matter with Delaware?, those living outside America’s First State (to ratify the Constitution) probably believe its laws have nothing to do with them. Reading this book will disabuse them. The state — a tax-sheltered, legal home to more than a million companies — matters not just in the US, but to enterprises worldwide keen to draw a veil around their workings.
Weitzman, a former Financial Times journalist, takes up a dry topic and breathes life into it. Early on, he reveals the frustrations of former US Treasury and Secret Service official John Cassara. For years he struggled to explain to foreign law enforcement counterparts why he could access so little information about Delaware registered corporations. After all, in 1986 the US was the first country to criminalise money laundering.
Not that Delaware has done anything illegal. It has the backing of the US Constitution, which left the power to charter corporations in states’ hands. Others such as Nevada and Texas also compete in this arena, but Delaware had first-mover advantage using a low-fee, high-volume business model.
Of the more than 2,000 books that Amazon lists on Delaware history, this one must make unpleasant reading for its state leaders. Weitzman does devote a fair portion to the history of the state, maybe a bit too much.
Two background chapters mid-book offer context on its co-operative form of governance, mostly between business and state government, known as the Delaware Way. They also include disturbing reports about race riots and lynchings. But neighbouring Civil War Union states with unpleasant pasts, such as Maryland, will have similar stories. Instead, see this book as a business case study of the “Delaware Loophole”, whereby companies have been legally enabled to pay very low taxes in this tiny state, while reducing taxable income in their home states.
State corporate tax as a share of total revenue has dwindled since 1980, down by roughly half to 2.5 per cent. Delaware itself earned only $245mn of corporate income tax in 2020. What pays the bills really is the Franchise tax, a flat fee (usually $300) to register a corporation there. That fee brought in $1.6bn that year.
Experts in the tax field will know all about Delaware. Maybe less well understood are the other ways Delaware raises money. A section about unclaimed property may surprise readers. One example, any retailer which has incorporated its gift card business in Delaware will have unspent balances on these cards. If the card has an expiration date, Delaware has the right to claim that cash, creating a nice little state earner.
Escheatment, as it’s known, generated Delaware’s third largest source of funds, $444mn, in 2020. Understandably this, as well as losing out on tax revenues to Delaware, rankles with some companies and states.
The state is mindful that if too many of its customers grow unhappy they can eventually register elsewhere. Having usurped New Jersey, the early leader in corporate registrations back in 1913, Delaware fought off new entrants over the years. An efficient, low-cost registration system has developed.
Delaware’s efficiency on registrations follows from the fact that it requires little or no identification to incorporate any enterprise or partnership — less than to retrieve a parcel from the UK’s Royal Mail.
An important ancillary income stream for Delaware’s capital, Wilmington, is via its legal system. Bankruptcies round out the life cycle of Delaware companies, after registrations and mergers. The state leads the way on bankruptcy law, ensuring plenty of out-of-town lawyers and journalists bring in money to the capital’s hotels and restaurants, not to mention Delaware’s lawyers.
Weitzman ties all this together in an easy-going style with good anecdotes that leaven the narrative. And he pulls no punches about Biden’s long links to the Delaware corporate machine, asking uncomfortable questions of a liberal leader of the Democratic party loathed by America’s right wing.
What’s the Matter with Delaware? How the First State Has Favored the Rich, Powerful and Criminal — and How It Costs Us All by Hal Weitzman Princeton, $27.95/£22, 296 pages
Alan Livsey is the FT’s Lex research editor.