Delaware ranks top 3 in tax climate study

WILMINGTON – Delaware officials once lamented the First State’s middle-of-pack reputation for business taxation and costs as a reason why employers were difficult to attract, but a new study blows up that narrative. 

The “Location Matters” study by Washington, D.C. nonprofit think tank The Tax Foundation and international accounting and consultant giant KPMG is completed about every five years. In 2015, Delaware never ranked better than 21st for any of the study’s seven hypothetical projects.

In the 2021 study, Delaware ranks in the Top 3 overall across eight hypothetical projects, including finishing first or second in all manufacturing projects.

For the state’s economic development agency, the Delaware Prosperity Partnership (DPP), the study largely reaffirmed what officials already believed: Delaware is ready to compete.

John Taylor | PHOTO COURTESY OF DPP

“I think there’s often a tendency, whether it’s among companies or site selectors, to zero in on one particular tax,” said John Taylor, director of research at DPP. “The value-add of this report is really taking that comprehensive look.”

The quinquennial Location Matters study is among the most important in the economic development world. While many reports may rank states by corporate tax rates or economic incentives, few are as comprehensive in their approach as Location Matters, which creates hypothetical projects to run through tax and incentive calculations for every state to determine the burden on a company. It also examines the cost of building a new project in every state versus the cost to a “mature” business, defined as one operating in a given state for at least 10 years.

Among the reasons why Delaware scored so much better in the new study was the 2016 Delaware Competes Act, which changed the state’s corporate income tax formula to be based solely on in-state sales, cutting out employees and property from the equation as many other states had already done. The bill was largely credited with preventing Chemours from moving its operations from Delaware.

Another reason was the 2016 Delaware Commitment to Innovation Act, which removed a $5 million cap on the tax break for investing in research and development here and made it refundable, increasing the value of the incentive. The bill was credited with helping retain DuPont operations as it underwent a split of the company.

Kurt Foreman | PHOTO COURTESY OF DPP

Kurt Foreman, president and CEO of DPP, also noted that Delaware benefits from its lack of a state sales tax and comparatively lower property taxes.

“For most of the model firms that they’ve looked at, property tax accounts for north of 50% of the overall tax burden,” Taylor added. “So, for a state like Delaware that is particularly competitive on property taxes, that’s kind of a built-in competitive advantage for us.”

One of the most eyebrow-raising findings of the study was Delaware’s first or second place rankings for new or mature manufacturing projects. Foreman admitted that he was surprised that the First State topped those lists, but property and sales taxes are among the most important to such projects, and Delaware does not tax machinery and equipment like other states do.

With recent manufacturing project wins, including the $80 million Delmarva Corrugated Packaging plant in Dover, Delaware could be poised to land additional projects by touting the ranking. Within the Mid-Atlantic region, only Maryland ranked inside the Top 10 in the manufacturing studies.

Foreman noted that DPP has already begun touting the results of the study to media and site selectors to spread awareness. While manufacturers also have to consider other project factors, like distribution routes and workforce, taxes are “obviously one that gets a lot of people’s attention,” Foreman said.

With a history of corporate headquarters located in the Wilmington area, it may surprise some that Delaware fell outside of the top 10 in rankings for such projects today, although Foreman noted that ranking in the top 20 was still a good position.

In a first time ranking for technology and data centers, Delaware fell toward the middle of the pack for matured projects, although it scored better for new projects due to available incentives. It ranked fourth for new data center project tax costs, despite Delaware’s lower profile for such projects.

The study will be fodder for state officials to review and think about how changes to the state’s tax structure may make it more competitive. Foreman noted that DPP officials had already met with Delaware Finance Secretary Rick Geisenberger to discuss its findings.