For many years, I’ve written about the coming assault on Delaware’s corporate hegemony, and the devastating hole it will leave in our state budget. And now, the assault has begun.
“…a quietly advancing offensive is gearing up against Delaware’s position as the nation’s premier venue for big corporate bankruptcy cases, putting at risk the millions of dollars that flow into Wilmington and the state’s still-unsteady economy.
Its name is the Chapter 11 Bankruptcy Venue Reform Act of 2011, and its impact could be devastating to Delaware, insiders say. Under the act, companies that historically have been allowed to file bankruptcy in their state of incorporation — Delaware, in many cases — would be required to file in the state hosting their “principal place of business.”
In most all instances, that would mean somewhere far from federal Bankruptcy Court on Market Street.”
Let’s lay out the stakes here. It’s tough to nail down an exact figure, but corporate taxes, franchise taxes, personal income taxes and escheat (abandoned property) from the corporate/legal economy in Delaware contribute somewhere between $500 million and $1 billion to the Delaware state budget annually. (That’s outside of the City of Wilmington and New Castle County budgets.) It is for this reason that the average Delawarean simply does not pay for his or her government. It’s why we have one of the lowest tax burdens per capita but one of the highest budgets per capita. It’s the grand dichotomy that explains a lot of why we are how we are.
And all of that could come tumbling down in the next 10-15 years with changes like this bankruptcy law and the overall federalization of corporate law. If you don’t want to take my word for it, how about Charles Elson from the University of Delaware, who told TSD in June:
“The state’s prospects are not good, because ultimately the federal government has taken over a good part of what we do in our regulation of corporations. Regulation of corporate boards, which was traditionally state-oriented, is now, because of Dodd-Frank and Sarbanes-Oxley, in several respects federally-oriented, and the federal regulation of it doesn’t mean necessarily that people will flee the state, but it means when you incorporate, the state of Delaware is no longer as relevant as it once was to an incorporation. Historically, you incorporated here because you wanted to take advantage of our laws and our courts, but if a good part of what we regulate is now federally regulated, there’s no real point to incorporating here. You incorporate where you happen to do business, and that’s the challenge.”
Now that the stakes have been laid out, what is it that we can do?
First, we need to operate as a state with the idea that we will have less revenue over the next 25 years than we do now. That is not a defeatist position. We can still hope for the best and strive for greatness. But we need to budget realistically. For instance, when we see unexpected revenue, we need to hold onto it and adjust the baseline downward.
Second, we need to prioritize our investments. It’s important that we not cut to the bone simply for austerity’s sake. We need to continue to invest in the future. But we can’t simply pick winners and institute a hidden, backdoor, regressive tax to pay for them. And we can’t continue to pay artificially inflated wages to people who build our roads and schools through the so-called ‘prevailing wage’ system. I’d love for all people to have elevated levels of compensation, but we need the roads and the schools a little bit more at this point in time.
Also, our ongoing investment in our young people through the Delaware school system is about to go through some gut-wrenching years as the funds from the misguided Race To The Top program die off, leaving behind the programs, but not the money to pay for them. There are allegedly tens of millions of dollars in shortfalls to the school system that already exist for FY 2012. Investment in education is critical to ensure an expansion of opportunity for every Delaware student, but we need massive deregulation inside the system that promotes building-level primary control and allows teachers to just teach instead of pushing paperwork and teaching to the test. (I’ll believe in standardized testing when you show me what standardized kids look like.)
Finally, we need healthcare innovation that moves far beyond anything we’ve seen so far. Caring for society through a combination of public and private solutions while simultaneously driving down the cost of that care is the biggest fiscal challenge of the next decade.
And it looks like we’ll have to tackle those challenges here in Delaware with fewer resources than we’d like as a result of changes to our legal economy. There can be no doubt that trying times lie ahead. But it’s the trying times that allow us to look inside ourselves and create new institutions and a better future. Let’s hope that our leaders prove capable of rising to that challenge.