The Case Against Delaware
posted by Frank Pasquale
The state of Delaware has just won a major dispute with New Jersey in the Supreme Court, over a vigorous dissent by Justice Scalia. The dispute concerned New Jersey’s plan to build a “huge gas-processing plant on the Jersey side of the Delaware River.” As the NYT reports,
New Jersey has threatened to pull state pension funds from Delaware banks. Delaware officials, meanwhile, talked about calling up its National Guard to guard its border. . . . [A] New Jersey legislator wondered aloud about recommissioning the battleship New Jersey, now a museum on the Camden waterfront, just in case.
The majority agreed . . . that New Jersey could not authorize activities “beyond the exercise of ordinary and usual riparian rights in the face of contrary regulation by Delaware.” Justice Antonin Scalia . . . professed to be flabbergasted by the majority’s reasoning. What was so “extraordinary” about a wharf to unload liquefied natural gas, he asked. “Would a pink wharf, or a zig-zagged wharf qualify? How about one for the transfer of “tofu and bean sprouts”?
It all reminds me of a classic 2002 article by Jon Chait charging Delaware with persistent disregard for other states’ interests. . . .
The practice of charging road tolls is an archaic holdover blighting much of the Northeast. But Delaware has taken it to a grotesque extreme. Whereas the I-95 tolls amount to less than five cents per mile in New Jersey and four cents per mile in Maryland, in Delaware they cost an exorbitant 18 cents per mile. Which isn’t surprising because, in a deeper sense, Delaware’s tolls epitomize the state’s entire ethos. The organizing principle of Delaware government is to subsidize its people at the rest of the country’s expense.
[But not] all the instruments of Delaware’s rapacity take the form of meddlesome, high-handed government exacting inflated costs on out-of-state visitors. When need be, the state’s avarice can also be fed by the exact opposite. An example of this latter technique is Delaware’s enticement of much of the banking industry to relocate within its borders. It did so in 1981 not only by offering special tax breaks–the standard formula that states and localities use to woo industry–but by eviscerating its usury laws, which limit the interest a bank can charge for loans or credit cards.
[S]till, perhaps the prime example of what Louis D. Brandeis called the regulatory “race to the bottom” is Delaware’s biggest scam: incorporation fees. It so happens that in excess of 300,000 corporations–including half of the Fortune 500– incorporate in wee Delaware. . . . Delaware propaganda suggests it is primarily a function of the state’s efficient bureaucracy and legal system, which includes a chancery court (a chamber specializing in business disputes). This is partly true, but it ignores the overriding factor:. . . its laws are specifically crafted to appeal to the interests of corporate executives.
All of this is deliberate state policy. A hundred years ago, in fact, the great trusts preferred to incorporate in New Jersey, not Delaware. It was only when New Jersey, under the progressive-era governorship of Woodrow Wilson, altered its laws to take account of interests (other than management) that corporations began to flee across the Delaware River.
Jon Chait’s laments will be no surprise to those who run the “race to the bottom” blog. (As Tim Glynn notes, “Delaware’s jurists are willing to go beyond the traditional norms of judicial behavior to advance Delaware’s interests.”) Nevertheless, I may just end up on Delaware’s side in this particular dispute. New Jersey’s proposal doesn’t exactly sound enviro-friendly–and as one who commutes through the chemical tanks of Kearny, NJ on a daily basis, I’m not exactly confident in the state’s environmental record.