A one-story building at 1209 North Orange Street in Wilmington, Delaware, is famous for being an address of more than 285,000 businesses. There are no employees, though, as all of the companies do not employ anyone, produce nothing and their sole purpose is to reduce their owners' domestic tax bills, thanks to the lower corporate income tax rules of the state of Delaware.
According to the investigation by Brendan O'Connor, it turns out that both Hillary Clinton's ZFS Holdings LLC and at least some of as much as 378 entities owned by Donald Trump in Delaware are registered at this address.
While Hillary Clinton called offshore tax loopholes a "perversion" this March and also promised to crack down on "outrageous tax havens and loopholes that super-rich people across the world are exploiting in Panama and elsewhere," the Delaware corporate structures are completely legal under US law.
But what's so special about having a company in Delaware?
"Here's how the scheme works," writes Eric Epstein of Rock the Capital, "Under the corporate fiction of the Delaware tax loophole, local outlets of large national chain stores pay royalties to sister companies in other states, claiming the payments as business expenses, and then deduct them from their Pennsylvania state income taxes." In other words, companies shift their income from other states to Delaware and pay revenues there where state corporate income taxes are lower.
This tax scheme only affects US taxes at the state level, no company can use any scheme to exempt federal taxes. Different states such as Delaware have a lower corporate income tax than other states such as Pennsylvania. Delaware corporate income tax is set at a flat 8.7% and the state's personal income tax rate varies from 2.2% to 6.75%. Conversely, across state lines in Pennsylvania, the corporate income tax rate is 9.99% and the personal rate is 3.07%.
Delaware collected roughly $860 million in taxes and fees from its absentee corporate residents in 2011. That money accounted for a quarter of the state's total budget. According to the New York Times estimation, this resulted in $9.5 billion in lost tax revenue for other states over the course of the preceding decade.
In contrast to Hillary Clinton, Donald Trump widely used Delaware companies to pay as little tax as possible as allowed under US state laws and has several hundred of companies registered in Delaware. In his own words, "We have 378 entities registered in the state of Delaware, meaning I pay you a lot of money, folks. I don't feel at all guilty, OK?"