Blame Delaware?
Is Delaware to blame for Tennessee tax revenue not growing as fast as the politicians want? As a kid growing up in southeastern Pennsylvania, I was well aware that Delaware, just a few miles away, had no sales tax, and that some people would cross the state line to save a few dollars on large-ticket items. But Delaware is also a low-tax state for corporations.

Today’s Wall Street Journal has an interesting article on how some corporations are using Delaware’s business-friendly tax code to reduce their taxes. However, those who favor higher taxes are complaining that other states are losing “billions of dollars” in revenue.

If you’re a WSJ.com subscriber you can read the story by clicking here.

Here is an excerpt:

Wilmington, Del. - Limited Brands Inc. takes in tens of millions of dollars each year from its thousands of retail stores in 48 states. But when it comes to paying state taxes, the Columbus, Ohio, retailer prefers to deal with Delaware, which collects no income taxes on out-of-state holding companies and investment firms.

Limited bases seven subsidiaries in a drab office building in the heart of this city's downtown. The subsidiaries, which don't produce anything tangible and don't employ anyone from Limited, are big money-makers. Their primary function is to hold the trademarks for famous Limited chains such as Bath & Body Works and Victoria's Secret, and charge their retail siblings huge fees for use of the brand names. The arrangement transfers hundreds of millions of dollars each year away from Limited's retail outlets in high-tax states and into the Delaware subsidiaries, which don't pay a penny of state tax.

In the view of many state tax authorities, it's just one of the more striking examples of an increasingly alarming manipulation of the tax system. At a time when offshore tax havens are drawing intense heat on Capitol Hill for their role in siphoning off federal revenue, state officials complain that domestic tax havens such as Delaware and Nevada are going unchecked.

Some tax experts contend that the strategy is inflicting billions of dollars in revenue losses on states. Corporate tax receipts have plummeted over the past decade as a share of states' total tax revenue, according to several studies, and many states have begun to see major revenue shortfalls.

The average effective state tax rate for corporations -- what companies really pay, as opposed to what the tax schedules say they should pay -- has declined from 9.6% in 1980 to about 5.2% today, says Dan Bucks of the Multistate Tax Commission, which represents state revenue agencies.

"It's a matter of fairness," says Norris Tolson, North Carolina's Secretary of Revenue. "It's not fair to the corporations that do properly report their income or to the millions of working people who pay their taxes without trying to avoid them."

Companies that use the maneuver say they aren't breaking any laws, and in fact the rules are very murky. Decisions by state courts have been mixed, and many legal experts believe it would take a Supreme Court decision to settle the issue. Many companies also argue their duty to shareholders demands that they seek any legal way to lower their tax burden.

For its part, Limited says it isn't using Delaware to dodge taxes at all, and that it has other good business reasons for its holding-company structure. "We currently pay income taxes as well as sales and use taxes on all retail transactions completed by every Limited Brands retail business in every state in which we operate," Limited spokesman Anthony Hebron says.