blank.gif (51 bytes) January/February 2001

Delaware of the West?

Plans are afoot to make Nevada a friendlier tax sanctuary for American business

by John H. O. La Gatta

ost Nevadans aren’t aware of it, but the Nevada Legislature is well down the road with a strategy that promises to not only resolve projected state revenue problems but also to bring important new investment and economic diversification to the Silver State.

Perhaps best of all, this plan is entirely consistent with Nevada’s long tradition of small government and business freedom. It would also make any new business-repelling income tax entirely uncalled-for.

The short-hand name this idea has picked up is “Delaware of the West.” Let me explain.

Soon after moving to Nevada in early 1996, I began having thoughts that Nevada could be a natural location for headquarters and deal-making companies—especially those in the modern and growing part of the financial sector.1

It also struck me that Nevada could enhance its reputation as the place to form business entities, such as corporations, limited liability companies, business trusts, etc.

Nevada offers two very powerful attractions to such companies—a great lifestyle and no personal or corporate income tax. Whether it’s the north or south of the state, each climate has its own special attractions. For high-income individuals whose jobs do not require them to live in less-agreeable places, this combination is very appealing.

Moreover, this combination places Nevada in an enviable position in the national competition to attract many of these clean and highly sought-after financial-sector industries. The Silver State can offer what even Delaware—the location of most large incorporations—cannot. That’s because Delaware’s high taxes discourage companies from locating their actual operations within that state’s borders2.

Discussing this subject with Nevadans in business, government and academia, I was encouraged to put it in writing. So, with the help of many such people, I drafted a white paper entitled “Nevada Economic Diversification.” In October 1998 it was sent to constitutional officers, legislators and others. A second mailing—to newly elected officials and legislators—went out that November.

The paper received an overwhelmingly favorable and bipartisan response, and culminated in the passage by the 1999 Legislature of Senate Concurrent Resolution 19. SCR-19 directed the Legislative Commission, which acts in behalf of the legislature between sessions, to form a committee to study ways to encourage corporations and other business entities to organize and conduct business in Nevada.

In the paper, I had argued that Nevada state government cannot depend forever on gaming for its revenues, and that the Silver State therefore should seek as rapidly as possible to:

Become the “Delaware of the West,” profiting by an expanded incorporation business and annual franchise fees3 on certain very large companies which would have an incentive to relocate here,

Become a “specialized financial center” for such financial vehicles as mortgage pools and other securitizations, as well as investment management, and

Become a center for other intangible business activities such as managing intellectual property, royalties and licensing.

Economic diversification for Nevada under these terms will be environmentally, financially and socially clean. It will also bring into the Nevada economy large numbers of prospective investors in the further development of the state, in the form of high-salaried bankers, lawyers, trustees and managers of the new firms.

SCR-19 spelled out several areas for study during the break before the next Legislature. First on the list was a request for comprehensive assessment of Nevada’s existing law on business entities.

An initial form of that assessment—along with recommendations—has now been submitted to the interim SCR-19 committee by the executive committee of the Nevada Business Bar. Chaired by John Fowler and assisted pro bono by law firms throughout the state, the review effort recommended a list of changes to state business law, bringing it into conformity with modern business law in some other states, including Delaware. The interim committee, chaired by state Sen. Mark James, has asked the bar group to prepare and submit a more final and fuller draft of its recommendations.

The state senate’s continuing resolution also asked for a close look at the administrative fees Nevada charges to business entities that either organize or conduct business in this state.

This is an area where Nevada state government could collect a good deal more revenue—while giving large new out-of-state businesses a very good deal and an excellent reason to locate their subsidiaries in the Silver State.

Consider Delaware’s franchise fees. Currently, that state charges large corporations, based upon their assets and shares outstanding, a substantial annual franchise fee. Those annual fees alone produce more than $400 million in revenue for the State of Delaware.

Nevada, on the other hand, has a nearly nominal annual franchise fee, while its initial incorporation fee is actually somewhat higher than Delaware’s.

Currently, I understand, the offices of the secretary of state and the governor are analyzing different ways to revise the fee schedules. The governor himself has indicated interest in higher fees for faster, or expedited incorporation services. Recommendations were expected to be made by the last meeting of the SCR-19 interim committee, in late June.

Third on the list of topics SCR-19 asked to be studied was “[t]he need for expanded use of technology, including, without limitation, electronic filing of documents, to assist the Office of the Secretary of State in maintaining a high level of service for business entities.”

And the secretary of state’s office is studying its need for both personnel and state-of-the-art computer and website facilities, in order to provide a world-class, user-friendly service for an ever-expanding business clientele.

Fourth on the SCR-19 list was the question of whether or not the hours of operation of the secretary of state’s office should be extended, and testimony on that subject has been and will be given.

One of the most significant ways Delaware encourages companies to incorporate in the state is its business court system (also called a “chancery” court). Accordingly, therefore the Senate continuing resolution asked that the interim committee inquire “[w]hether a court of limited jurisdiction should be established to resolve litigation and contractual disputes relating to business entities…” Other relevant questions had to do with the possible organization and jurisdiction of such a court, including how judges would be selected and what their qualifications should be.

Testimony on these subjects was presented to the committee by Nevada Supreme Court Justices Robert Rose and William Maupin, by faculty members of the UNLV William S. Boyd School of Law, and others, including myself. With the concurrence of the SCR-19 committee, Chief Justice Rose formed a task force chaired by judges James Hardesty and Gene Porter, both of whom subsequently delivered a paper on the subject before the annual conference of state judges held at Lake Tahoe in May. The judges at the conference collectively indicated favor for the concept of a business court. Tentative plans for the limited jurisdiction of these courts are being drafted by judges in Clark and Washoe County and will be submitted to the state supreme court.

There are already indications that the interim committee, after its final meeting, will begin seeking to draft legislation to be submitted to the 2001 Legislature.  If nothing happens to change that, the legal infrastructure to allow Nevada to become the “Delaware of the West” and a specialized financial center could be in place by the middle of next year.

The many benefits from these changes could be large indeed, not merely providing important new revenue for state government, but boosting Nevada’s economy and generating desirable economic diversification as well.

There is only one real cloud on the horizon for this better future for Nevada—the teacher union initiative, which seeks to impose an income tax on business. It would demolish Nevada’s chance for all of the above.

The choice between an income tax and sound economic growth is clear.  NJ

1 Mortgage pools, aircraft and business equipment leasing companies come first to mind. Back

2 An exception is credit card operations, to which Delaware gives a tax exemption. Back

3 Perhaps measured by the size of the operations, and with a livable maximum cap that assures the firm of no additional fee beyond the minimum. Back

John La Gatta has had a 35-year career as an investment banker with offices in New York and San Francisco. He now resides in Reno.


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