The American Prospect | by Amelia Pollard
The tiny state has long been a hotbed for corporations. Can mounting public pressure push the state to change its centuries-old ways?
In early July, President Biden issued a groundbreaking executive order designed to promote competition in the U.S. economy. It was seen as the greatest challenge to the dominance of concentrated power in a generation. During the announcement in the White House’s ornate State Dining Room, Biden sought to inoculate himself from criticism that he was bent on tearing down executive suites and ushering in an age of Marxism in America. “Now, look, I’m a proud capitalist,” he told reporters. “I spent most of my career representing the corporate state of Delaware.”
What does that corporate state look like? Not much, from the vantage point of its largest city, Wilmington. Driving along Lancaster Avenue toward downtown, row after row of red-brick buildings subtly shift from low-income townhouses to corporate offices. There’s a waterfront skyline, but it’s modest, making Wilmington look like Philadelphia’s baby sister. (Before the pandemic forced a front-porch campaign, Biden initially chose Philadelphia for his campaign headquarters, instead of his hometown, a few minutes south on I-95.)
Several local headquarters and offices of large financial institutions dot the landscape, like PNC Bank, JPMorgan Chase, HSBC, Wells Fargo, and M&T Bank (formerly Wilmington Trust), located in historic Rodney Square. Student loan giant Navient, top pharmaceutical firm AstraZeneca, and chemical conglomerate DuPont also have offices here.
But though it’s invisible to the naked eye, most of the Fortune 500 call Delaware home. They make their domiciles in post office boxes and on paper gathering dust in the filing cabinets of state offices. According to both critics and proponents, Delaware’s largest industry is a legal and political ecosystem designed to grease the wheels for business dealings, what some call an “incorporation industry.” As of 2020, there were over 1.6 million incorporated companies in Delaware, with a quarter-million new businesses registered in the past year alone. There are more businesses than people here.
This deep-rooted history permeates almost every facet of Delaware’s politics. Bipartisanship is a driving force, and corporations are the glue that holds Democrats and Republicans together. Politicians and corporate lawyers alike bend over backwards to accommodate big business with whatever benefits they desire.
Sometimes, that comes at a cost. “There’s like a code of silence around the problems,” said Chuck Collins, a senior scholar at the Institute for Policy Studies and author of the new book The Wealth Hoarders: How Billionaires Pay Millions to Hide Trillions. “It’s just a lot of reflexive defending the status quo.”
With the incorporation industry making up 25 percent of the state’s budget, Delaware has come to depend on firms flocking to the state. As other states threaten to compete with this corporate friendliness, a darker side to Delaware’s politics has emerged. As jobs have left the state, there has been a spike in so-called “economic development” subsidies, using taxpayer dollars, to attract new businesses. It usually results in large corporations walking away with millions, with little to show for ordinary residents.
A handful of individuals want to put a stop to this, rejecting Delaware’s role as a place with only handouts available to offer the business community, rather than a friendly atmosphere and an educated workforce. But once you become a corporate state, it’s hard to go back.
“THE DELAWARE WAY” IS AN EXPRESSION that floats around the state a lot, usually referring to the unique nature of the First State, a point of pride for its residents. This is a place where, for centuries, winning and losing candidates have ridden together in the “Return Day” parade two days after each election, closing the ceremony in Georgetown, the seat of Sussex County, by literally “burying the hatchet” in a box of sand. Then everybody eats a barbecued ox-roast sandwich.
Depending on whom you ask, the Delaware Way can mean different things. One political organizer told me it’s about having a small group of people who know each other, and who get along, making decisions behind closed doors, in the proverbial smoke-filled room. And from my short stay in Delaware, that seems about right. Everyone does seem to know one another.
Unlike in Washington, however, the connections are not merely professional. The state’s minuscule size means that politicians, corporate lawyers, and progressive activists’ kids go to school together; they work out at the same gyms, and all get coffee at Brew HaHa!, a Delawarean staple with a handful of outposts around Wilmington.
Karl Stomberg, an organizer with the state’s Working Families Party, told me he regularly sees U.S. Sen. Tom Carper, who has represented the state in one office or another since 1976, at the gym. And while talking over coffee with the former head of the Chancery Court, Leo Strine, we ran into someone he had previously worked with on the bench. Both Stomberg and Strine said this wasn’t unusual: Bumping into major politicians and former colleagues happens all the time.
To critics, the Delaware Way is something much more nefarious. Rep. John Kowalko, a state representative seen as a political pariah for his progressive politics, called it “an excuse for politicians to band together with corporations to create a guise of prosperity when those who are prospering the least are the residents of Delaware.”
Kowalko is often a stand-alone vote against bills that weaken the state’s corporate tax laws. For 35 years before running for office, he worked a union job at a refinery. “My entire philosophy has been as a former labor official coming from a working-family background,” he said. “My instincts were that the people and the people’s ability to be comfortable economically should come before all else. And most governments are not ensuring that.”
Whatever the interpretation, the Delaware Way got its start early. As a small state without much agricultural opportunity on its marshy peninsula, Delaware was historically forced to think outside the box. It looked no further than its neighbor to the north. In an article from the American Law Review published in the late 1800s, Delaware is depicted as New Jersey’s fitful little sibling, “gangreen with envy” of its neighbor’s business of granting franchises. Both states had similar job opportunities—primarily “truck-farmers and clam-diggers”—but New Jersey was getting “all the money in the country into her coffers” while Delaware received nothing. The state was “determined to get her little tiny, sweet, round, baby hand into the grab-bag of sweet things before it is too late.”
And so it did. In 1899, Delaware rewrote its corporate law. At the time, New Jersey’s incorporation law didn’t even require a business to officially headquarter there—all it had to do was file the proper paperwork to establish the company inside the state borders. Delaware wrote the same basic statute, but made its incorporation taxes a bit lower than New Jersey’s across the board.
The race to the bottom had begun.
THERE ARE A FEW REASONS companies are drawn to Delaware. First off, the state makes incorporation really simple. A limited liability company (LLC), the state’s most popular offering, is a business structure where money is held in a way that exempts its owner from legal responsibility. The annual fee for LLCs in the state is a flat $300, whether the entity has assets of $10 or $10 billion. And all revenue from an LLC is taxed as a partnership at the individual tax rate, rather than as a corporation.
It takes almost no time or effort to set up an LLC: In 2016, a Fusion TV correspondent created an LLC for their cat within five minutes. The person setting up the LLC doesn’t have to ever set foot in Delaware; they can register the company over the phone, online, or via email. Delaware is crawling with registered agents willing and happy to handle the relatively painless paperwork for virtually anyone.
Most important, for decades, the LLC client never had to reveal the beneficial owner of the corporation. Most states have included this feature in their own incorporation laws. But combined with all of Delaware’s other attributes, it served as a license for anyone to create shell companies that can be used to hide or launder money, evade taxes, or keep secret any kind of financial transaction.
As a result, a litany of bad actors have made headlines in the last decade for funneling cash through Delaware. Backpage, a site purportedly used for child sex trafficking, registered its LLC in the state. So did Trump’s former campaign chairman Paul Manafort, who used nine Delaware LLCs, along with another campaign official, Rick Gates, to hide millions of dollars coming in from Ukraine. International drug kingpin El Chapo has even made a cameo: He also supposedly had a Delaware shell company before being arrested in 2016.
Despite this facilitation of secrecy and even crime, as a business model for Delaware, it’s attractive. In 2020, revenue from LLCs alone yielded $345 million, a princely sum for a small state. The incorporation fees the state collects make up a quarter of the state budget, allowing it to curb other taxes for Delawareans; there is no sales tax and very low income taxes, with the state’s tax brackets maxing out at the $60,000+ level. Delaware also keeps incorporation fees low, as the millions of companies taking advantage of the rules allow the state to make up the difference through volume.
Through his press secretary, Delaware Secretary of State Jeffrey Bullock declined to speak for this story, citing that he has received 10 to 15 phone calls in the last decade from journalists looking to write stories about Delaware’s “corporate friendliness.” And they always end the same way: charging Delaware as an onshore tax haven.
But Delaware is clearly more than that. After all, over two-thirds of the Fortune 500 is incorporated here. Even Nick Wasileski, the president of the Delaware Coalition for Open Government, a nonprofit organization that has advocated for greater transparency, told me that he would opt for a Delaware LLC if he ever opened a business.
One major lure for corporations to Delaware is the Chancery Court, which even Delaware’s greatest critics described to me as “world-renowned.” Dating back to 1792, the court, modeled on the now-defunct High Court of Chancery in Great Britain, serves as a full-service judicial structure for corporations, almost entirely devoted to business disputes. There’s no appellate court as a go-between, meaning that if a firm appeals a decision, it gets bumped straight to the state Supreme Court. “Being able to take an appeal right to the Supreme Court takes out a whole year,” said Strine, the court’s former chancellor.
This streamlined certainty is important for businesses. But they also like the makeup of the court itself. According to professor Lawrence Hamermesh, the executive director for the Institute for Law & Economics at the University of Pennsylvania Carey Law School, the court’s seven judges (with no more than four of the state’s majority party) are experts on business law. “[The judges] see the stuff regularly that businesses care about, and business advisers know that when they go into the Court of Chancery they’re going to have a judge that already knows what’s going on,” he told me over the phone.
Like its Chancery Court, Delaware’s government isn’t shy about its corporate ways. The state’s Division of Corporations, the state agency through which all fees and taxes flow, boasts just how welcoming it is on its website. The site describes Delaware as having “flexible corporate laws” and a “business-friendly government.”
That carries over beyond incorporation. For example, in 1978 the U.S. Supreme Court ruled in Marquette National Bank v. First of Omaha Corp. that banks could operate across state lines without permission, and would only have to honor the interest rates and regulations of their home state. Delaware took advantage of this in 1981, passing the Financial Center Development Act on a bipartisan basis.
The law allowed out-of-state banks the right to do business in Delaware as long as they employed a minimum of 100 state residents. In return, the state offered almost nonexistent rules on credit cards: no cap on interest rates, several legalized fees (as long as there was disclosure), and changes to terms at any time. This combined with Delaware’s existing business-friendly incorporation laws and a handful of tax breaks to provide a powerful incentive to get banks in the door.
Within three years, 11 major banks opened subsidiaries in Delaware, which was close enough to New York City to make the location convenient. To this day, half of the nation’s credit cards originate in Delaware, and about 46,600 state residents are employed in the financial services industry, roughly one-tenth of the entire employed workforce.
While serving as Delaware’s senior senator in 2005, Joe Biden led the effort to change the nation’s bankruptcy laws, in part on behalf of this homegrown credit card industry. But a more consequential element of that law prevented student loan borrowers from using bankruptcy to discharge their debt. This was extremely beneficial to what was at the time the largest student loan provider in America, Sallie Mae. In 2011, the company moved its headquarters to Delaware.
IN INTERVIEWS WITH LONGTIME Delaware residents and political experts, corporate friendliness is referred to repeatedly as the “third rail” of state politics. Lawmakers seldom suggest that anything about the situation should be changed. Instead, the majority-Democratic legislature focuses on other issues: its long history of economic inequality, racism, faltering public education, and public-housing system. (There have been notable successes there; this July, Delaware passed an increase of the minimum wage to $15 an hour by 2025.)
National and even international tax advocates have been far less quiet. A few years ago, in 2017, a delegation of representatives from the European Union flew to Delaware with the sole purpose of advocating for the state to adopt stronger tax policies. In the wake of the Panama Papers, a damning investigation that revealed an international tax evasion scheme, the EU established the PANA Committee. The group focused on curbing tax evasion, corruption, and money laundering globally. Delaware was on the committee’s radar.
In a review of the Panama Papers and the addresses used by corporations to secretly move money, Delaware is mentioned 67 times. That’s not a lot in comparison to other countries. (Bermuda, for instance, is mentioned 332 times.) As Leo Strine, the former chancellor of the Chancery Court, emphatically told me over coffee, there’s a reason it’s called the Panama Papers and not the Delaware Papers.
Nonetheless, the PANA Committee came to Delaware to appeal to state senators. Madinah Wilson-Anton was in the room. At the time, Wilson-Anton was a legislative aide, working for the Senate after recently graduating from the University of Delaware. But last year, she was elected to the state’s General Assembly, representing the state’s 26th District, where she grew up. In a phone call, she told me that watching the EU delegation appeal to local politicians stuck with her.
“To be honest, I was pretty embarrassed by our legislature’s responses to the EU delegates,” she told me.
Now, in the legislative off-season, Wilson-Anton says she’s taking the opportunity to study up on how corporate taxes—and loopholes—work in Delaware. She says that at times, it feels like the system is designed for only a rarefied group of people to understand. Those within the Chancery Court, and the state’s bastion of corporate lawyers, are the chosen few.
The Delaware Bar and its fleet of lawyers wield a lot of influence in the state, starting with their sway over the legislature. Nick Wasileski says that state representatives will often just defer to corporate lawyers testifying as expert witnesses. These guardians of the state’s business laws can point to what they’ve done for the state. As Wasileski told me, “success builds on success.” Delaware’s role as a hot spot for incorporating is in part propelled by inertia.
In 2017, Rep. Kowalko, the state representative who has tried to curb corporations’ overreach in the state, introduced a bill that seemed like a no-brainer. The proposed legislation would bar corporations from setting up LLCs in Delaware if their owners had been identified by federal agencies as a threat to the United States. It was all about criminality—preventing money laundering, sex trafficking, narcotics. It was by no means targeting the Fortune 500.
But even that couldn’t pass. Two corporate attorneys spoke out against the bill while it was still in committee, with one of them calling it “flawed.” Another said it didn’t go through the standard procedure of having the proposed legislation reviewed by the Delaware State Bar Association, which of course strengthens the power of corporate attorneys in the state.
Wasileski, whose nonprofit supported the bill, told me there’s one foolproof way of blocking legislation that might alter the state’s corporate law: write “keep Delaware competitive” in the bill’s synopsis. “Who cares what’s in the bill,” he told me over the phone. “It’s all to keep Delaware competitive.”
The fear of rocking the boat is so great that no one will vote for a bill that might threaten Delaware’s competitive edge. Except Kowalko.
IN THE LAST DECADE, Kowalko has become concerned about other aspects of Delaware’s corporate friendliness. Like many other states, Delaware has bent to major corporations’ demands for lavish tax subsidies and grants to set up production in the state.
These have grown as the rest of the nation recognizes that they can use their laws to attract businesses, too. Delaware state representatives and corporate lawyers are keenly aware that other states, like Wyoming, Nevada, and South Dakota, have also tried to get in on the “grab-bag of sweet things” that incorporation regimes have to offer. In 2008, Nevada even launched a subcommittee to investigate the benefits of forming a chancery court. (Instead, it opted to strengthen its existing district courts.)
Meanwhile, Delaware has discovered that even its never-ending largesse isn’t always enough to influence corporate decision-making. For example, DuPont used to dominate the state workforce. Stomberg, the organizer for the Delaware Working Families Party, whose clipped beard gives him a lumberjack look, says that “so many people here are DuPont families.” And for decades, DuPont built trust with the community not only through good-paying jobs, but by funding local attractions, like the DuPont Environmental Education Center (the irony of one of the country’s greatest polluters funding a nature preserve did not escape me).
“We knew what it meant to this community when [DuPont’s] leadership actually cared about the community,” Strine said. “I gotta tell you, in Delaware, they walk the talk. How they treat their employees, the investments they make in the community—that’s what you want from a company.”
But in 2015, DuPont merged with Dow Chemical Co., which changed everything. Though the merged company still incorporates in Delaware, the vast majority of those high-paying jobs migrated to Michigan, and 1,700 workers were laid off, despite the fact that DuPont’s CEO at the time, Ellen Kullman, was born and raised in Wilmington. “That was gutting,” Strine told me. This was after Delaware had given DuPont multimillion-dollar grants to keep jobs in the state.
The DuPont debacle hasn’t stopped the flow of money to corporations making big promises. Last year, Amazon courted Delaware for a $4.5 million taxpayer-funded grant to open up a fulfillment warehouse in Wilmington. And the retail giant succeeded.
Kowalko has tried to pass legislation to curb these direct handouts to big businesses, which he calls “corporate welfare.” When he was first starting out in politics, Kowalko said the state’s corporate friendliness made him uneasy, but he felt it was a trade-off. The Chancery Court legitimately attracted corporations through its illustrious status, and residents benefited by having the state’s budget buoyed by incorporating fees. But these cash payments aren’t designed to improve the business climate or balance the budget.
“It’s corporate extortion and we respond by giving away taxpayer money to these corporate welfare cases,” he ardently told me over the phone. “It’s not justified in any way, shape, or form.” In this sense, Delaware’s business-friendly ways have started to cross a line. The state, given to think of itself as tiny and inferior, cannot imagine any other way to survive than passing out money to corporations. Even if it hurts its own residents.
WILL DELAWARE CHANGE its propensity for nestling up to big business? As of now, there isn’t a critical mass of state representatives who are willing to “kill the goose that lays the golden egg,” as John Flaherty, a director for the Delaware Coalition for Open Government, put it to me. Despite mounting public pressure for the United States to shore up tax loopholes, and an international bid to raise the corporate tax rate, it’s unclear whether change will come anytime soon.
The Working Families Party (WFP) is a fledgling force in the state. Its start dates back to Eugene Young’s Wilmington mayoral bid in 2016; he lost the Democratic primary by only 234 votes. Young’s supporters then migrated to backing Kerri Harris, a progressive challenger to Sen. Tom Carper, in 2018.
Though unsuccessful, “that race brought a lot of new people in,” said Stomberg. The WFP backed several campaigns in 2020, four of which were successful, including Madinah Wilson-Anton’s and one in the state Senate. Those progressive winners now continue to work with the WFP on policy issues.
As those new members reflect on their first legislative session, curbing corporate handouts has become a larger part of the conversation. Wilson-Anton says that understanding the numerous ways Delaware attracts businesses is “pretty complicated.” But that’s not stopping her or her colleagues from pushing back against giveaways. “I will say there’s an appetite in the legislature that’s been growing,” she told me. “I know that quite a few of our newer members are supportive of it.”
In the last few years, there has been some movement. Weeks before President Trump left office, on New Year’s Day 2021, one major piece of federal legislation slipped into the National Defense Authorization Act: the Corporate Transparency Act. Under the act, all companies will have to disclose their true owners to the federal government. Although all states keep beneficial owners of their incorporated companies secret, Delaware has driven the largest PR campaign.
Gary Kalman, the former executive director of the FACT Coalition, which played a large role in advocating for the Corporate Transparency Act, says that for years, the United States was the best place in the world to hide money. The Corporate Transparency Act should curb most nefarious actors from incorporating in Delaware or anywhere else in the U.S. However, Kalman wasn’t optimistic that this would lead to an overall difference in the state. “My belief on this is that there are other reasons why Delaware has advantages for businesses being based there that have nothing to do with corporate secrecy,” he said.
One thing reformers have going for them is that the national winds are shifting away from Delaware-style governance. The benefits of business-friendly policies are waning. Corporations aren’t staying loyal despite the state’s perks, and handouts are being doled out at residents’ expense. Nationally, the public has expressed a strong desire for corporations to pay their fair share. Both parties are growing more skeptical of big business. Has the corporate state become an anachronism?
Defenders would argue that Delaware’s puny stature demands a business-friendly environment. But what if that becomes the very feature that forces them to try something new? “We are a very small state,” said Kowalko. “So no matter how much we decide to ante up, we’re going to be at the short end of any active bidding structure. We don’t have the resources to compete.”