The First State May be the First to have a Statewide Soda Tax

Delaware may be eyeing a sugar tax in the near future, as the Delaware Department of Health and Social Services begins exploring the possible effects of a statewide soda tax.

While no state has a state-wide soda tax at this time, all 7 U.S. cities that have enacted one have a tax structure that places the burden of the tax on the distributor. This increases the cost to companies like Coca-Cola and Pepsi to sell their product and passes off some of the burden in a cost increase to the consumer.

Businesses in these areas are already feeling the strain from the soda tax as exampled by Jeff Brown, owner of a now-closed ShopRite in Philly. Brown cites the Philly soda tax as the reason behind closing the doors of one of his stores, and says revenue has dipped by 20 percent.

“So the customers have a lot of choices outside the city where they can avoid this tax,” Brown said. “They voted with their feet.”

Delaware would likely witness a similar scenario, where consumers would make the short trip across state lines to purchase cheaper products. Moving profits out-of-state will harm businesses and the communities they serve– just like in Philadelphia.

These initiatives also place a disproportionate burden on lower income families, who consume more sugary drinks on average. Low income individuals also staff the jobs that are at risk of being impacted by these initiatives, proving the measure to be dually burdensome to this population.

According to the Tax Policy Center, this method of taxation is most beneficial if the goal is to increase tax revenue, but not to encourage healthy behavior.  So why are Delaware legislators considering a soda tax?

Good question.

Chicago and Santa Fe have already repealed their soda taxes after opposition from constituents, business owners, and companies distributing in these areas. In Philadelphia, the tax has fallen short of revenue projections and has dropped beverage sales by 51%.

If this measure has been less than successful in the cities it has been tested in, our legislators should avoid testing it across our entire state—at the detriment of Delaware families, communities, and businesses.

Certificate-of-Need Laws and Delaware Health Services

Why does Delaware still allow a virtual monopoly in health care that drives up everyone medical bills?

Delaware has certificate-of-need (CON) laws, which require that health care providers show a need in the community for new devices, certain technologies, or expand or establish a practice.

Instead, research finds that CON laws are associated with higher health care spending per capita and higher physician spending per capita. In Delaware, CON laws create a barrier to entry into the market, inhibit expansion, and fail to provide adequate health care services in some areas.

Delaware has seen these consequences of CON laws in health care. The First State has the highest average monthly insurance premium and one of the lowest percentages of medical residents retained.

Additionally, Delaware spends more per-capita on healthcare than every nearby state excluding New York, and ranks 7^thoverall for state health spending. For health care spending for patients over 65, Delaware ranks 5^thhighest, 6^thhighest for state government spending.

This isn’t the only negative impact these laws have had on our state. The presence of a CON program tends to be associated with fewer rural hospitals. We recently saw a battle in Sussex County regarding an expansion of services, since currently only three hospitals service 1,196 square miles of the rural county. The request to expand was denied.

Proponents of CON laws argue that they help to reduce health care costs and increase access. Contrary to typical supply and demand, they also argue that a shorter supply of health care services in the market results in a reduction of average prices.

A report by the Mercatus Center estimates a savings of $270 on total healthcare per capita without CON law, and an increase in access to hospitals and ambulatory surgical centers. They also estimate an increase in local services without these restrictions, helping residents access healthcare and keeping spending local.

Delaware has utilized the CON process since 1978. Forty-one years later, we may need to re-evaluate and better serve our residents.

Could Delaware’s “Keystone Growth Industry” Also be Hurting the State Economy?

Healthcare typically is a necessity, not a want, and therefore remains a constant driver of our state and national economy.

While Delaware’s businesses earnings increased 8.4% from 2006-2016, health care earnings surged by 64.2% in the same period. Delaware’s health care industry earnings for 2016 were $4.3 billion—almost equivalent to Governor Carney’s 2020 budget.

The numbers look promising, but a staggering 95% of those earnings are from government provided health care insurance, making Medicare and Medicaid the top players. Medicaid, both a federal and state program to assist with medical costs and cover lapses in Medicare, is the single largest line item in the state budget.

Instead of being an economic driver, this turns health care into a major concern for future state spending. If this market continues to boom, so will the costs that Delaware burdens from it. The potential for another budget shortfall becomes immense and many routes to combat this are a detriment to Delaware businesses and families, such as increased taxes and fees or cuts in other critical areas.

Over the past decade, Medicaid spending in Delaware rose at twice the rate of the General Fund revenue. Eventually this bubble will burst, and the same people who sank us will be tasked with raising us up once again.

We can hope that they do better this time, or the next, but insanity is repeating the same thing, or electing the same people, and expecting different results each time.

Good Intent Doesn’t Guarantee Good Outcomes

Companies in Delaware may soon reach a breaking point. Recent legislation from Dover has made the First State less favorable for business, through various taxes, regulations, and other “bad business” bills.

These actions have been in the pursuit of a better standard of living for Delawareans, but could they be the ones at risk?

Delaware’s franchise tax, corporation income tax, and taxes on limited liability companies, limited partnerships, and general partnerships can add up to a big problem for businesses, who may owe more than one of these to the state. Add in a minimum wage increase and bottom lines come into question.

Unfortunately, the answer to this has been to replace workers with robots. McDonald’s has order stations, grocery stores feature self-checkouts, and a few Walmart stores in Delaware have brought in autonomous floor cleaners, or “Auto-C’s.” Technology has begun to replace what has become an expensive workforce.

Businesses are not in the wrong to take these actions—in fact, they are doing what is best for business, and therefore best for the employees they are able to retain, as well as the communities they serve. However, it does result in minimum and low-wage workers facing layoffs as companies seek to protect their own operations against the assault from our legislators.

At the end of the day, the decisions from Dover have hurt the people they were intended to help.

Business Haven or Business Has Been?

Delaware has long maintained a reputation as a business haven but that may soon change.

A new study from WalletHub ranked Delaware as the 7^th worst state to start a business and in the bottom ten for business climate. This is nothing new.

According to the Federal Reserve Bank of Philadelphia, Delaware’s business conditions recovered from the Great Recession at a noticeably slower pace than the rest of the nation, taking three more years to stabilize than the average. During that recovery period, the state’s real GDP (the change in real GDP from 2009 to 2013) was approximately -2%, while the national average was closer to +8%.

Delaware’s recovery still leaves something to be desired by many. At a Delaware Business Roundtable (DBT) panel in June, former Delaware Economic Director Alan Levin expressed his concern, stating, “I want to get to the point where…people are knocking on our door saying, ‘I want to come to Delaware because we see things are happening here.’ That’s not really happening…Until legislators and the administrators… realize that their most important thing is to serve the people as opposed to getting re-elected…things are not going to change.”

It is time to create this change. At this point, we stand at a critical juncture for our economy. It is time to make decisions with the future in mind instead of putting elections above Delawareans.

As we prepare for the second half of the 150^thGeneral Assembly, it is time to demand better practices and legislation in Dover that promote a better business climate and strengthen our economy, such as Governor Carney’s “Rainy Day Fund” included in the FY 2019 and FY 2020 budget appropriations.

Delaware has the industries, bond ratings, and location needed to be business-friendly again and have a robust economy, if legislation from Dover allows it.

The First State can be a leader in business again if we take the right steps forward.