Less is more: taxes and debt
One of A Better Delaware’s four pillars is lower taxes for Delawareans and businesses. While we usually focus on just state-level issues, new tax increases are being discussed at both the state and federal level.
Outside of President Biden’s new tax proposal, Delaware has had a few of its own recently, including a new income tax bracket that failed in the house. Despite still recovering from a pandemic and expecting over $2 billion from the federal government, state lawmakers said raising taxes was simply the right thing to do.
Why?
Raising taxes discourages economic development, business growth, and personal spending and saving. When our economy is looking to recover, how could this be the right thing?
Even the Secretary of Finance Rick Geisenberger worried the bill would risk decreasing personal income tax revenue. This is because high-income individuals, including tens of thousands of people who pay nonresident taxes, would simply leave Delaware or work from home in neighboring states to avoid the higher tax. The bill would also mean Delaware has more tax brackets than any other state except Hawaii.
Increasing the income tax would make Delaware less competitive with our neighbors, particularly Pennsylvania, as Delaware’s top marginal rate would be higher than the rates in neighboring states, with the exception of New Jersey.
Outside of this bill, raising any taxes over the next few years would be irresponsible fiscal policy. Delaware is looking at a surplus of over $600 million, plus over $2 billion total from federal stimulus. Any additional revenue grabs would serve no purpose for our residents.
You’ll hear many people tout Delaware’s status as a “tax-free” state, but that simply is not the case. Yes, Delaware does not have the sales tax, but we more than make up for that. Take for example the reason why we are able to avoid having a sales tax: the gross receipts tax. Delaware is one of only seven states with a gross receipts tax. These invisible sales taxes raise prices as these taxes are shifted onto consumers, and tend to impact lower incomes the most.
Delaware’s has the highest per capita revenue from corporate license fees and the fifth-highest per capita corporate income tax revenue. As if that wasn’t enough, Delaware has one of the highest individual income taxes and the highest real estate transfer tax in the nation.
Since 2016, Governor Carney approved large tax increases, but he did not work alone. The taxes started as bills heard and voted on in Dover that were approved for his final vote. Delaware’s tax increases over the last two General Assemblies (2016-2018, 2018-2020) were the 6th highest in the nation.
These tax increases were estimated to raise more than $200 million annually, the exact amount the state claimed was a “surplus” before COVID.
Instead of hurting residents, businesses, and the overall economy, we should avoid adding new spending programs that would require any tax increase, and focus on funding our $1.9 billion in unfunded pension benefits that have been largely ignored for years. This total is massive: for perspective, our pension debt is more than a quarter of the state’s annual budget.
Delaware’s fiscal condition is ranked 44th in the nation, in part due to its unfunded pension deficit, and is why Truth in Accounting’s audit of Delaware’s financial situation resulted in an F grade.
Delaware will eventually be obligated to pay its pensions, and lawmakers should turn their attention from what they believe is the right thing to do, to what is actually best for their constituents.