Apr 8, 2012 - President Barack Obama signed the bill last week. At a recent meeting of .... Contact Jonathan Starkey at
Wilmington News Journal April 8, 2012 Revenues keep dropping in key state income source Corporation fees falling as businesses decide not to go public Almost three years after the end of the recession, Delaware's corporate cash cow, a lucrative tax on the many massive companies incorporated here, continues to weaken. The state has long relied on the franchise taxes it collects from the likes of Google, Walmart, Pfizer and thousands of America's flagship corporations that make Delaware their legal home for access to friendly governance laws and high-minded corporate courts. But revenues from the tax -- responsible for Delawareans paying no sales tax -- will fall again this year and next, according to the state's budget projections. That continues a worrying trend of the last decade: even two Democratic administration tax hikes on big corporations hasn't been able to prevent franchise tax revenues from sagging. Delaware's elected officials have taken steps to protect the revenue source, most recently pushing a controversial measure through Congress that, for certain companies, sets aside financial disclosure regulations passed after the Enron scandal to encourage corporate growth. President Barack Obama signed the bill last week. At a recent meeting of the Delaware Economic and Financial Advisory Council, which forecasts state revenue, chief deputy Secretary of State Rick Geisenberger told council members that fewer companies are selling their shares publicly, which means lower tax collections for the state. "Where is Delaware getting its revenue from? Corporations," Geisenberger said afterward. "If you don't get your money from corporations, then there are obviously implications on where else do you get the money. That's the concern. I think it's really important." IPOs falling Delaware gets about a third of its $3.5 billion budget from corporations. Most of that corporate taxation is "exported" -- meaning many of the companies subsidizing a large portion of Delaware's budget have little or no physical presence in the First State. Delaware's franchise tax is the state's primary source of that corporate taxation, generating more than $600 million annually. Yet adjusted for inflation, franchise tax collections have fallen 20 percent in the decade since the technology bubble sent a tsunami of tax revenues flowing into Delaware. Franchise tax revenues have risen in absolute dollars, but dipped as a percentage of Delaware's General Fund budget even as tax increases in 2003 and 2009 raised the franchise tax cap from $150,000. (The cap had only been increased twice in the previous half-century -- in 1991 and 1984.) Now the financial council expects revenues from the tax to fall 1 percent in the fiscal year ending this June, and another 1 percent in fiscal 2013. Big-ticket items are causing pressure on the other side of the budget, with spending on Medicaid increasing 37 percent next year after reductions in federal dollars. Spending on state employee benefits also continues to increase, even after a deal last year to curtail benefits to save money. Franchise collections are vulnerable partly because the tax is capped at $180,000, pennies for Fortune 500 giants, and calculated based on the number of shares a company issues. As a result, generating new revenue relies on new companies selling their shares publicly. However, the number of companies filing for initial public offerings, or IPOs, has fallen 75 percent in the last decade, according to consulting firm Grant Thornton. At the end of 2011, there were 4,988 public companies in the U.S., down from 7,069 a decade earlier. Corporate fees up Secretary of State Jeff Bullock points out that growth in other corporate fees has more than made up the difference. Revenue from fees paid when a company registers as a Limited Liability Company, or LLC, has surged from $18.4 million in 2001 to $156.3 million last
year. "Overall, the picture of company formation is a great one," Bullock said. "We continue to see growth. We continue to see very significant revenues coming out of this area. Our goal is to make sure that continues." To that end, Gov. Jack Markell penned a recent column in the Wall Street Journal, lamenting the decline on Wall Street. And Obama signed into law a bill, introduced by Rep. John Carney, D-Del., that will temporarily set aside regulations for companies with less than $1 billion in revenue, theoretically making it easier for those companies to go public and grow. Carney said the bill will promote job growth, while enhancing Delaware's corporate revenue. "I think the point is that we need to be looking at things we can do to enhance the environment for business creation and economic growth and development generally," Carney said. "That will have a big impact on corporate formation and, therefore, corporate tax receipts in Delaware." Under the bill, emerging companies get a 5-year reprieve from financial disclosure rules passed in the wake of the Enron accounting scandal. Venture capitalist Chuck Robel, who was chairman of the security software firm McAfee before the company was acquired by Intel, said the cost of complying with those regulations suffocates growth at many small firms. Companies are often forced to choose between hiring finance teams and lawyers to prepare to go public, or invest that money in research and development, and many choose the latter. Robel and others contend those regulations, passed in 2002, have been the culprit behind the slowing IPO market. That's partly because investors have been less willing to take risks on early-stage companies knowing that it's harder for them to cash out through a public offering of their stock, Robel said. "Those hurdles preclude them from being able to have as much success, and in many cases prevent them from trying," Robel said. "I think the number of companies that go public will absolutely go up." The bill does have opposition. Mary Schapiro, chairman of the U.S. Securities and Exchange Commission, the financial regulator, sought unsuccessfully to lower the $1 billion threshold, saying large firms would avoid reporting requirements. In a statement after the House passed the bill, Ann Yerger, executive director of the Council of Institutional Investors, which represents pension funds and other endowments, said the bill will "create greater risks for investors and ultimately could erode confidence in our capital markets." Shaky revenues? Delaware's franchise tax has been so important to the state budget because of its stability, which makes threats to the revenue even more concerning. Many of Delaware's other important revenue sources -- like stocks -- are far less predictable. For example, personal income taxes, the state's largest source of revenue, bringing in more than $1.1 billion in 2011, fluctuates greatly during downturns in the economy that cause Delawareans to lose jobs and pay less in taxes. Revenues from lottery games, which add more than $250 million annually, and abandoned property, are also unpredictable, officials say. Delaware generates almost $430 million in General Fund revenues -- or more than 12 percent of the budget -- from collecting abandoned savings accounts, unused gift cards and even uncashed expense checks from businesses. Many are concerned, however, about over-reliance on the unstable revenue source. "It worries me," Carney said of becoming more reliant on abandoned property. Geisenberger said slowing franchise tax collections might require further state spending cuts. "This is not the situation where the revenue is dropping 10 percent a year. What we're not seeing is the kind of three to five percent growth rate that we used to see in this revenue source," Geisenberger said. "And I think the immediate implications have more to do with spending than taxation. If you're growing at a very slow rate in some of these key revenue sources, it has implications for spending policy." Contact Jonathan Starkey at 324-2832, on Twitter @jwstarkey or at
[email protected].
