Delaware officials eye ‘broadening’ tax base as revenues fall

NEW CASTLE — Across the board, most officials agree — Delaware’s state government revenue situation is not strong.

To provide recommendations on possible changes, the Delaware Economic and Financial Advisory Council subcommittee on revenue was formed by the governor several months ago.

The group of legislators, state officials and others has met several times since January, most recently Friday. It is set to gather at Buena Vista at least once more before its report is due to the governor and legislature at the end of the month.

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Thomas Cook

“Our charge is to make our revenue portfolio more elastic and to reduce some of the volatility that exists in it,” Secretary of Finance Thomas Cook, a member of the subcommittee, said in an interview.

Some of those possible solutions include developing a new income tax bracket and altering the weights in the formula that make up the corporate income tax rate.

At this point, little is decided, though most parties agree something needs to be done. Volatility in several of the state’s key revenue sources has led to fluctuating numbers. In fiscal year 2011, the state government took in $3.53 billion, a 9.2 percent increase over the previous year.

But, that dropped 4.9 percent to $3.36 billion one year later before rebounding and then slipping again over the next two fiscal years.

In March, DEFAC lowered its revenue forecast for the fiscal year by $39 million from its December estimate. While the committee meets three times before the end of the fiscal year, the unwelcome projection gave some state government officials even more of a reason to worry.

More than half of Delaware’s revenue sources are inelastic, that is, not tied to the economy. Chiefly, abandoned property, the franchise tax and the lottery — which made up about 37 percent of the state’s revenue last fiscal year — are not growing at a steady rate, unlike many other points of origin.

Delaware’s revenue portfolio looks different from most other states largely due to its reliance on the franchise tax, owing to the First State’s status as a corporate haven.

From fiscal year 2010 to fiscal year 2011, Delaware’s revenue grew about $300 million, yet funds from escheat and the franchise tax dipped.

A report put together to aid committee members notes a significant amount of the state’s revenues have not grown with personal income and the local consumer price index.

“This deficiency has been masked by the extraordinary growth in unclaimed property revenues over that same period,” it states. “Unclaimed property revenues have peaked and, along with the state lottery, face external pressures that will likely prevent either source from returning to past growth trajectories.”

Those sources are unpredictable, subject to larger trends in the marketplace that have little to do with the strength of the economy.

Meanwhile, that revenue has not rebounded with the economy signals “structural, and not cyclical, elements play the dominant role” in Delaware’s economic portfolio, the report stated.

That, officials say, sums up why possible actions are needed.

Possible changes

The report also notes even as the state’s population is growing, its workforce is not. Increasing numbers of retirees, likely drawn to the state by its low property taxes, are helping drive that change. That subset also receives subsidies and tax breaks that limit the amount the government can collect — hence Gov. Jack Markell’s January proposal to halve a property tax subsidy for seniors.Dollar

The idea was not well-received. Legislators have proposed means-testing the subsidy, allowing those who need it to receive the full amount, while more affluent residents are ineligible.

There’s also a more broad idea to means-test larger itemized deductions, Mr. Cook said.

Under that structure, different classifications of adjusted gross income would be created, with taxpayers receiving a portion of the deduction depending on their income level.

Another possibility is to alter the age at which seniors become eligible for certain subsidies. Upping the age while grandfathering in current qualifiers would save the state government several million dollars per year.

The gross receipts tax, which companies pay as a portion of their revenue, could also see a change. Currently, businesses pay the tax based on the classification of their products, so a company that derives revenue from manufacturing and retail pays varying rates. Merging categories would simplify the tax. Another option would be to raise tax rates, either across the board or on select industries.

Though companies in the banking, insurance and agricultural industries are exempt from the tax, Deputy Finance Secretary David Gregor said Friday’s, adding them would produce little additional revenue relative to the overall total.

Creating a new maximum bracket for personal income, something that has been discussed briefly at council meetings, would not by itself solve the problem, acknowledged Rep. Quinton Johnson, D-Middletown, who sits on the DEFAC subcommittee.

While it may bring in more money, the proposal would do little to reduce the state’s dependency on certain areas.

“As those individuals see how they’re being taxed, they then take their investments, put them in different aspects of things that might not be taxed,” he said in an interview. “That type of a bracket can change fairly quickly.”

Mr. Cook stressed the importance of “broadening” the tax base — increasing revenue totals not by making taxes more costly but by applying them to more residents. The Department of Finance developed several scenarios to illustrate the impact of different changes for the committee, Mr. Cook said, drawing an analogy to pulling various policy levers and watching the outcome.

State Treasurer Kenneth Simpler agreed Friday, stressing the importance of diversifying revenue sources.

Comparing the state to the championship-winning Chicago Bulls of the mid-1990s, he said the portfolio needs to derive more income from other sources, much like the Bulls receiving on-court contributions not just from their stars but from role players.

With the report set to be finalized in the next three weeks, the committee used its Friday meeting to discuss various alternatives. A draft conclusion containing possible solutions will be developed in the ensuing days.

More discussion

However, recommendations from the council could face opposition from the Republican caucuses. While some members have been willing to discuss the revenue issues, others are quick to reject the notion that Delaware’s problems stem from less money coming in.

They point to the finger to the money flowing out.

At one of the committee’s initial meetings, affiliates did discuss the possibility of looking at expenditures. While some think the problem can at least partially be traced to there, members concluded the group was formed solely to analyze income — and they have differing opinions on expenditures anyway.

Sen. Gregory Lavelle, R-Sharpley, represents the Senate minority caucus on the committee. He opposes a tax increase and believes any such proposal would fall flat on its face in the General Assembly.

The report is a worthwhile endeavor, he said, but only part of the picture.

“Where’s the mirrored committee that looks at expenses?” he said in an interview.

He’s a co-sponsor of a recent proposal from Sen. Colin Bonini, R-Dover, that would create a DEFAC council on spending.

Introduced earlier this month, Senate Concurrent Resolution 13 notes officials have not analyzed spending. It’s also the extremely rare resolution that figures to be controversial.

Sen. Bonini has been an outspoken critic of what he sees as a wasteful and bloated government costing individual taxpayers hundreds or even thousands of dollars.

“Delaware has a spending problem, not a revenue problem,” he said, echoing a theme adopted by several Republicans.

While most proposals establishing task forces receive little objection, at least outwardly, it’s a safe bet, however, the Republican-backed bill will be opposed.

Top officials, including the governor, have rejected the premise adopted by Sen. Bonini and others. Gov. Markell, a Democrat, claimed in his budget presentation in January that adjusted for inflation and population, the budget has actually shrunk .8 percent during his tenure.

Even the sponsor conceded the resolution will likely fail in the Democratic-dominated legislature. Despite that, Sen. Bonini hopes it can draw attention to what he sees as the real issue.

“Delaware needs to have a very honest discussion about how expensive our state government is,” he said.

Last month, the nine Senate Republicans sent a letter to the governor recommending a 5-percent reduction in every agency’s budget. Decrying a possible tax increase, they called for lower spending.

“With Delaware’s revenue sources failing to keep pace with budget demands, a budget crisis is a real possibility,”

Majority Leader Sen. Gary Simpson, R-Milford, said in the caucus’ weekly message. “Something needs to be done. And it needs to be done immediately.”

In a letter issued in response, Gov. Markell argued a 5 percent cut, which amounts to $195 million, is the equivalent of eliminating the budget for the Department of Safety and Homeland Security, Department of Natural Resources and Environmental Control, Department of Labor and General Assembly.

While acknowledging that efficiency is important, Mr. Cook, the secretary of finance, rejected the notion that the state’s problem lies on the expenditure side.

Any possible tax increase requires a three-fifths supermajority — problematic for Democrats since after November’s election they do not hold that number in Senate. That means a united Republican caucus can block any tax rate hike.

Though the state government still needs to close gaps for the fiscal year 2016 budget — $12.6 million from the proposed halving of the property tax subsidy, $60.1 million from higher state health care costs — and though DEFAC numbers may seem ominous, additional funds could appear.

The final budget will not be produced until June. That leaves time for money to be “found,” as many observers and even lawmakers sometimes say, often derisively.

The months leading up to the end of the fiscal year are spent “fine-tuning” the numbers, Mr. Cook said. As the state government receives money from various sources, it might get more money than expected, leading to a sudden appearance of additional millions.

The fiscal year ends in 80 days, but even when the budget for the next year is finalized, officials may still be searching for long-term solutions.

 

Staff writer Matt Bittle can be reached at 741-8250 or mbittle@newszap.com. Follow @MatthewCBittle on Twitter.

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