The True Price of Delaware’s Tax Policies: Impact on Residents and Businesses
By: Jane Brady, Chair, A Better Delaware
This is the next in a series of articles that will take a look at how the policy principles and legislative priorities of A Better Delaware fared in the last legislative session, which ended on June 30. We have written over several years now about our perspective on healthcare, education, energy, the economy and workforce in Delaware, as well as the need for more accountability and better transparency in the way government works in Delaware.
In this series, we will look at how the action the legislature took promotes or inhibits achievement of those policy objectives we feel are important to make Delaware a better place for families, workers, businesses and the community at large.
Fiscal and Tax Policy
Many Delawareans are feeling the pinch in their pocketbook. “Luxuries”, like dining out, are falling by the wayside as people struggle to find the money to buy necessities. Many of you might blame inflation, and that is certainly a significant reason, but in Delaware, it is also our taxes, and the burden our state’s tax policy puts on individuals and businesses.
The American Legislative and Exchange Council (ALRC) conducted a review to evaluate the tax burden on individuals and businesses in all 50 states. Delaware ranked #1, of course, when it came to sales taxes, because we don’t have one. And we did fairly well with regard to the property tax burden (we will have to wait to see how we fare after assessment, which is now occurring pursuant to court order). Our top personal income tax and corporate income tax rates were ranked at 47, so, high as compared to other states. But the real kicker? We ranked 50th, yes, last (worst) for “remaining tax burden”. What is “remaining tax burden”? Mostly state and Local taxes. That could mean the tax you pay to transfer title to your car, boat or mobile home, property transfer taxes, gross receipts taxes, and the many other hidden taxes you pay to do business with the state or local government.
Many states have acted to relieve their citizens of tax burdens. Since the pandemic, more than 30 states have enacted reductions in their individual income tax rates, six of them just this year. Others have reduced their franchise taxes or capped property taxes. We have argued that Delaware needs to reduce or eliminate property transfer taxes, gross receipts taxes and personal and corporate income taxes – taxes that take real money from hardworking moms, pops and students in our state. Sadly, Delaware’s General Assembly and Governor have failed to act, and despite our reputation as a tax-free state, we are anything but. These reforms remain among our priorities.
Why should the high corporate tax rates or the gross receipts tax matter to you, an individual taxpayer in Delaware? Well, the gross receipts tax makes everything cost more – nearly everything you buy. It is a tax on the total the owner of the business takes in, and then, when they make money after expenses, the amount they take home from their business is taxed again. So, it is, literally, a sales tax by another name.
As for the corporate tax rates, the market is much more competitive today than it used to be, to attract businesses to incorporate and do business in a state. Tax rates are a significant consideration in making that decision. Delaware receives more than $1 billion each year from businesses that choose to incorporate here, reflecting filing fees, formation fees and franchise taxes. The loss of that income would present a difficult challenge to those managing our state budget. We are ranked just three states from the bottom on this metric. The legislature and Governor should act to reduce these taxes.
But taxes aren’t the only factor that can discourage companies from locating in Delaware. The legal climate can be a factor as well. In this regard, the legislature enacted two bills that will affect corporate decision making.
The first established a government appointed panel that will oversee the finances and decision making of private and non-profit businesses. The immediate focus was on hospitals and the intent was to reduce the amount the state pays for healthcare for its employees and retirees. Based on comments from legislators, that is only the first category of businesses and non-profits to be targeted. We have previously opined that this step could further reduce the desirability of incorporating in Delaware and jeopardize our revenue stream. An update on that legislation: although the hospitals negotiated some changes and stood back as the bill passed, Christiana Care has now filed to have the bill invalidated. We will keep our readers informed as that case progresses.
The second is a bill that changes the extent to which restrictions may be placed on the decision-making of a corporate board of directors by a shareholder without a vote of the other shareholders. The bill was in response to a decision of the Court of Chancery upholding a challenge by a minority shareholder to specific veto and approval authority a shareholder/founder wanted to retain and reverses the Court’s ruling. While the impact remains to be seen, that is precisely the issue. Our legal climate, always held to be the best in providing certainty for business ventures, is now being challenged by an activist General Assembly. That, coupled with the response by at least one high profile business (think Elon Musk) to relocate from Delaware, also in response to a court decision, could lead to hesitancy by other businesses to incorporate here. Again, we will monitor the legal landscape and bring updates as appropriate to our readers.
You may be aware that the Unemployment Insurance Fund recently reported that significant funds were embezzled and that the systems used in processing claims were so corrupted that a proper audit of the agency’s handling of funds could not be completed. This session, the legislature did two things to help begin improvements at that agency. First, they approved a change in the “benefits wage ratio methodology” that will ease determinations of benefits. Second, they authorized a recurring and ongoing review of criminal arrests by staff with both the state and federal law enforcement databases. Previously a criminal background check was done only at hiring. Such a system would have alerted the agency that the staff member allegedly involved in the embezzlement was arrested for theft outside of work while employed there. Remarkably, the legislation does not apply to all state agencies. It should. A previous situation involving Delaware State University’s police department revealed that several members had adverse law enforcement contact while employed there. While that situation was resolved internally and by policy, every state agency should ensure all staff are in compliance with criminal laws.
In sum, the actions by the General Assembly have an impact on our economy. They should consider the big picture, enact laws that ensure continued dominance in the corporate world, create economic incentives for businesses to locate here and implement tax structures for them to thrive here. They should relieve our citizens of their tax burden. And they should always remember whose money it is that they are spending – yours and mine!
Jane Brady serves as Chair of A Better Delaware. She previously served as Attorney General of Delaware and as a Judge of the Delaware Superior Court.