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Blogs and Articles

Taxes and Spending: The Real Economic Impact

DEFAC estimates show Delaware’s revenues for FY 2020 down by $416M and FY 2021 revenues down by $273.3M, creating a deficit of about $748.7M. Governor Carney expects as much as $500M to $1B in lost revenues.

In 2017, Delaware increased spending and raised taxes to answer a $400M deficit.

Increasing spending with such a high deficit is irresponsible. As for taxes, asking businesses and workers to fork over money when businesses have been forced to exact layoffs, limit operations, or even close seems incomprehensible, but Delaware leaders are considering doing just that.

On Monday, Delaware Department of Labor Secretary Cerron Cade said higher unemployment taxes (paid by businesses) could be implemented to refresh funding for unemployment benefits. According to Secretary Cade, the total for these benefits could be $850M over the next three months alone.

Looming tax hikes aren’t our only concern as we push forward. If we look at how the current leadership has handled deficits in the past, Delawareans can expect to see spending for projects that could have been delayed until the state was stable again. Some argue this is how we jumpstart economic growth.

According to an article in Forbes:

“More government spending has been widely-touted as a cure for unemployment, but support for that view seems to be eroding…there isn’t any net gain from government spending since it’s offset by the taxes needed to pay for it, taxes that reduce private sector spending.”

For example, massive spending hikes in the 1930s, 1960s, and 1970s all failed to spawn economic growth, but in the 1980s and 1990s—when federal government spending shrank—the U.S. economy enjoyed one of its greatest expansions.

Some government spending is beneficial, but only if government spending does not crowd out similar private spending, and only is spent wisely, such as education, job training, physical infrastructure, and research and development. In general, government expenditures can weaken the private sector by unproductively allocating resources and thus slowing income growth.

Government spending is entwined with taxes, and high tax rates reduce incentives to work, save, and invest. This leads to a less motivated workforce and less business investment in new capital and technology. Few government expenditures boost productivity enough to offset that lost due to taxes.

So why do our leaders insist on additional spending?

It boils down to politics. New spending programs seem to benefit those who implement them more than those who pay for them.

In a ploy to avoid cutting spending, the state has requested federal funds. Delaware leaders jointly sent a letter to Delaware’s congressional delegation asking for flexibility with how the state can spend more than $1B in stimulus funds.

The National Governor’s Association (NGA) also submitted a formal request to Congress for federal aid to offset state deficits. This request has been denied for now, with leaders arguing that if states face budget woes, it is due to decades of fiscal mismanagement.

Instead of returning time and time again with more taxes coupled with new spending, the state government can be responsible and allocate surpluses to reserves or implement reviews to assess the need and efficiency of certain programs.

If this had been the response in 2017, we may have been more prepared to weather this storm.

Delaware has been shut down for 38 days with no real end in sight, and the President has recommended an incremental reopening strategy. Seventeen percent of small businesses said that they would have to close down or sell if they experienced two-month loss in revenue, according to the latest Small Business Credit Survey.

They need help, not taxes or spending programs.

Unfortunately, we cannot turn back time. All we can do is move forward in a way that is financially sound in the short- and long-term, and in a manner that does not add undue burden to taxpayers and businesses.

Will Delaware raise taxes by $200M again?

The Delaware Economic and Financial Advisory Council (DEFAC) released the updated revenue forecast for fiscal year 2020 this week, and the outlook is dim. DEFAC estimates show Delaware’s revenues for FY 2020 down by $416M and FY 2021 revenues down by $273.3M, creating a deficit of about $748.7M, but that may not be the final impact.

The sentiment was clear in Monday’s DEFAC meeting: there are many factors in play impacting financial futures. The shape of the recovery curve, process of reopening, unemployment numbers, business closures, use of federal funds, and endless more items can impact the ability to recover from COVID-19. Governor Carney expects as much as $500M to $1B in lost revenues.

For Delaware, the worries don’t stop there. A Federal Reserve Bank of Philadelphia index report predicted Delaware to be one of 9 states with an economy predicted to shrink in the first half of 2020. Delaware also ranks 45thin the nation for short-term fiscal stability, which is bad news for budgeting legislators and struggling businesses and residents.

Before the pandemic, Delaware saw unemployment rise for six months straight and above the national average and was 34thfor employment. Now, more than 71,000 Delawareans have filed for unemployment since the pandemic began, as businesses shut down or laid off workers.

Unfortunately, instead of meeting to make difficult decisions to cut current spending or tap into reserves, our leaders decided to wait for a Hail Mary from federal funding. These funds cannot be used to offset lost revenue, and Delaware’s leaders are scrambling.

Lawmakers faced a similar struggle in 2017, when Delaware’s deficit was close to $400M. Later, in 2018, Governor Carney said:

“We are presenting a balanced, long-term solution to Delaware’s structural budget challenges that will keep Delaware economically competitive. This proposal requires shared sacrifice – and that starts with a commitment by state government to operate more efficiently and spend taxpayer dollars wisely…”

Despite this claim, spending cuts and sacrifices were temporary. The real sacrifice came from Delawareans who saw new and higher taxes totaling $200M in new annual revenue.

When Delaware recovered, the taxes remained and the new “surplus” became an excuse to continue spending.

Now that Delaware faces a deficit that is double what we saw in 2017, Office of Management and Budget Director Mike Jackson says that postponing planned capital projects and accessing reserves may be part of the answer, however, “All options are going to be on the table.”

This signals that the response may resemble 2017, and Delawareans could foot the bill through higher taxes.

In 2017, it was only the state government in crisis. Now, it is every Delawarean.

Taxes should not have been the answer in 2017, and cannot be the answer in 2020. We cannot ask more from those who have already been forced to close their businesses, who have been laid off work, and who cannot afford to answer for the consequences of poor financial planning and action from state officials.

Cutting the $233M in recently proposed one-time capital expenditures, utilizing the $252.4M in Rainy Day Funds and $126.3M in Budget Stabilization Funds, reallocating the tens of millions in the Strategic Fund, freezing agency budgets, suspending budget increases, and a critical look at our spending habits are the key to our recovery.

We have the ability to afford this pandemic without increasing taxes.

The question is: will we?

First State Last in Federal Assistance

This past week, Delaware entered a multi-state task force to develop a plan to reopen schools and businesses in the region, including Pennsylvania, Connecticut, New Jersey, New York, and Rhode Island.

While this seems to be a definitive move in the right direction, we must consider what good this task force can provide after businesses have been shut down or have suffered greatly for a month with little help. Businesses across the state continue to reduce capacity, lay off workers, and shut down after crumbling under the weight of this pandemic.

After all this time without action, this new effort seems to be too little, too late.

For those businesses who grasped for the few lifelines they saw available in the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) loans, it really is too late. The $349 billion dollar fund was fully exhausted in two weeks’ time, with Delaware receiving fewer loans and less money than any other state, even states less populated.

With Congress torn on whether to authorize more funding for the PPP, where does that leave Delaware businesses?

For many, these SBA loans were the only hope to pay bills, keep employees, or even remain in business. If a Delaware business does not qualify for the state’s Hospitality Emergency Loan Program (HELP), then they truly are left without help.

Delaware issued a stay at home order on March 22 (in effect on March 24), effectively closing non-essential businesses. Twenty days later, and after offering little help to the businesses forced to shutter, we have joined a regional task force that still offers no help to struggling and failing businesses at this time.

Michigan, a state with over ten times Delaware’s population, established their task force on “general economic impact on the workforce, business activity and supply chains” on March 3, twenty days before issuing a stay at home order.

Other larger states like Ohio, Utah, and Colorado have formed their own task forces to address business needs, economic impact and recovery, and reopening their operations.

Their leaders recognized that saving livelihoods went hand-in-hand with saving lives.

Delaware’s reserves, such as the Rainy Day Fund, Strategic Fund, and money from budget smoothing have yet to be released to help ease the economic impact. Hundreds of millions of dollars in these reserves has been set aside for use in times just like this—especially the Rainy Day Fund which currently totals over $250M.

It isn’t just raining right now—it’s pouring.

Over the past four weeks, nearly 62,000 unemployment claims were filed, almost twice the amount for all of 2019. New businesses are shutting down weekly, with no hope for the future. State revenues are shrinking just as fast as money from the gross receipts tax, realty transfer tax, income tax, and more are not being generated.

Instead of utilizing hundreds of millions of existing taxpayer dollars to help ease the impact of this crisis, leadership has let businesses fail and our economy suffer.

When small businesses started failing and asked for help, they were denied. When entire industries came and begged to be saved, leadership denied them as well. When they come to you, the taxpayer, at the end of this for help with a budget deficit, it will not be a request. It will be higher taxes imposed on a population that is struggling to recover their own finances.

Delaware’s COVID-19 Capabilities

Delaware’s State Treasurer recently shared commentary regarding our state’s ability to handle the economic hardship resulting from the coronavirus (COVID-19) pandemic.

Treasurer Davis believes that “Delaware is well positioned to weather this storm for a number of reasons,” but most of the examples fall short of being able to help thousands of small businesses and tens of thousands of laid off or furloughed workers in the state.

The Treasurer boasted Delaware’s Rainy Day Fund, a reserve of 5% of state revenues, as one of our protections. However, according to a PEW Research Center analysis, Delaware could run only on Rainy Day Funds for 20 days if necessary, 7.9 days less than the national average.

Other “positives” listed for our economic recovery include “consistently funding our pension,” despite Delaware having total unfunded pension liabilities (guaranteed to be paid) that are 30% of the state’s personal income, or $13.75 billion.

To effectively assess the impact of this crisis and accurately model revenues, it is important to acknowledge Delaware’s true fiscal standing.

The First State ranks 44thin the nation for fiscal health, according to a Mercatus study. Our long-term liabilities are higher than the national average per capita, and is in the bottom in the nation for solvency (ability to pay debts and financial obligations).

However, if our Treasurer is correct and Delaware can help its small businesses in this time, why hasn’t it?

Alabama and seven other states have postponed various tax payments for small businesses. Iowa, Vermont, and Mississippi have suspended interest and penalties for late payments on various business taxes.

Delaware has not provided tax relief to affected businesses.

Maryland has released $50 million from its rainy day fund to help with the response, Washington $200 million, Wyoming up to $150 million, and Ohio has granted access to their fund when needed.

Delaware has not released rainy day funds for response.

Minnesota has already publicly projected that their budget surplus and rainy day fund will both disappear over the next two years while responding to and recovering from COVID-19. Idaho’s Governor has required one-percent budget cuts for all state agencies not directly involved in coronavirus response efforts, and Ohio has called for cuts up to 20%. California’s

Department of Finance has notified legislators that there should be no expectation of ability to fund new or existing policy proposals, and that revenue predictions must be revisited. New Jersey has frozen $900 million in spending in preparation for emergency financial strain, and New Mexico has denied millions for spending projects due to the outbreak.

Delaware has not addressed revenues or spending in the wake of coronavirus.

Montana took the initiative to prepare for disaster in good times, and now has $115 million in its Budget Stabilization Fund, a general fund surplus of $300 million, and $360 million in Unemployment Insurance Fund reserves.

Imagine the help Delaware could offer if our spending and saving habits had been more like Montana.

Delaware will have to play catch-up more than usual now that COVID-19 is closing businesses and crippling private and state revenues. Without growth, we cannot build new schools, provide clean water, or help our residents.

“In these deeply uncertain times, it is imperative that we lead effectively by managing the challenges of today, while preparing for the next issue over the horizon,” Delaware’s Treasurer said in her commentary. We couldn’t agree more.

Unfortunately, we may be too late. The time to prepare and exercise mindful spending is not in the midst of a pandemic, but as President John F. Kennedy said, “The time to repair the roof is when the sun is shining.”

The First State Falls Behind in Pandemic Action

In the wake of coronavirus, Delaware businesses are struggling, shutting down, and asking for help. Unfortunately, many are not receiving the assistance they desperately need.

The Hospitality Emergency Loan Program (HELP)—offering no-interest loans up to $10,000 per business per month—has recently been expanded from the hospitality industry to include relief for personal care services businesses such as hair and nail salons and barbershops.

While this expansion is good news for some, other businesses are still being left behind.

This week, the languishing hotel industry asked Delaware lawmakers for tax deferments and to help their laid-off workers, but were told  this was not a priority and to wait. With over 10,000 Delawareans filing for unemployment in one week, helping businesses and laid-off workers are  just priorities they are deferring to address.

Delaware, who consistently ranks in the bottom in the nation relating to business, should take note from what some of the most business-friendly states are doing to compliment the federal coronavirus relief.

North Carolina, a top ranked state for business, is keeping its businesses and workers in mind while addressing the health crisis. The state has offered help for businesses through:

  • Expanding unemployment eligibility without placing the cost of benefits related to the coronavirus on businesses.
  • Business Edge: layoff aversion strategies and activities to help employers prevent or minimize job losses, by assessing needs and options for “at-risk” firms and addressing those needs.
  • The North Carolina Small Business and Technology Development Center (SBTDC) is offering free assistance to small businesses to assess financial impacts of the pandemic, evaluate credit options, and apply for SBA disaster loans.

Georgia has delayed registration and registration fees for its corporations; Utah has combined health actions with economic responses in the “Utah Leads Together” program, and the Utah Governor’s Office of Management and Budget will oversee the project management to ensure the state’s economy can recover quickly from the pandemic.

A Better Delaware recommends our lawmakers enact similar policies to those listed above, as well as implementing the following recommendations from the U.S. Small Business Chamber’s “Resources to Help Your Small Business Survive the Coronavirus:”

  • Waiving fees for businesses with low margins
  • Offering no-interest loans for businesses
  • Cancelling or deferring payment of payroll taxes

Delaware leaders can help our businesses recover now. To do this, the Delaware Prosperity Partnership (DPP) can reallocate their funds used to attract new businesses to helping businesses in the state that have been impacted by the coronavirus pandemic.

The Governor and the legislature have a chance to minimize the impact of this health crisis on Delaware’s businesses, workers, and economy, and boost the First State’s standing nationally again. Policy decisions at this time must be made with caution, as the opportunity to further burden our businesses and economy is great.

Delaware’s senior most politicians admitted their focus is not on helping businesses at this time. Other states with more favorable business climates have already recognized the importance of this assistance and has taken steps early on to mitigate the problem.

Express the urgency of a dedicated response for businesses by contacting your legislator or reaching out to the Governor’s office.

Coronavirus and Delaware’s Future

The COVID-19 (coronavirus) epidemic has changed the day to day for many across the globe. Grocery stores struggle to keep essentials stocked, employers are mandating work-from-home policies, and health care systems are feeling a strain from testing and treatment.

Over the past week, many businesses in Delaware and nationwide have been forced to reduce service or even close their doors. Workers are concerned about lost wages, and business owners are facing massive revenue shortfalls.

Both are concerned about their ability to pay bills.

New cases are cropping up every day in the First State, and things will only get worse. Businesses will need help that comes from both the community and the state, and that help should not come at the expense of others struggling at this time: taxpayers.

The U.S. Chamber of Commerce has released “Resources to Help Your Small Business Survive the Coronavirus,” including some temporary measures lawmakers can take to help business survive the impact such as:

  • Waiving fees for businesses with low margins
  • Offering no-interest loans for businesses
  • Cancelling or deferring payment of payroll taxes

Governor Carney has already taken some steps to help businesses with programs like the Hospitality Emergency Loan Program (HELP). Under HELP, businesses are eligible to receive state support to pay rent, utilities, and other major overhead costs.

The state has also formally requested loans from the U.S. Small business Administration’s Economic Injury Disaster Declaration to help support over 25,000 small businesses in Delaware. Small businesses and non-profits would be eligible for up to $2 million each in low-interest loans.

As for the worker, unemployment must be revisited in a manner that expands eligibility and benefits without adding a burden onto already struggling or inoperable businesses.

There is still no such thing as a free lunch, and as our state’s government works to protect small businesses and workers, the total cost must be monitored closely. Increasing taxes to cover these programs will hurt Delawareans, and so will cutting essential programs to cover loss of revenue.

While a health crisis may be an extreme scenario, it is the perfect example of why our government must watch its spending habits in better times. Luckily, Delaware has a Rainy Day Fund that could be utilized to offset some of the financial burden associated with the critical programs coming from the Governor’s office, but requires a super majority vote from the General Assembly to spend. Additional coverage could come from the reserved monies from budgeting 98% of revenues, or Budget Smoothing. This $100M+ can be spent at the Governor’s discretion. However, our savings account is only so big, taxpayer pockets so deep, and business revenues so sustainable.

As the situation improves, it is imperative that our state leaders move forward with caution in any new spending or programs while revenues recover. Earlier in 2020, a $200 million “surplus” was attempted to be spent on various new spending projects. Now, that $200 million likely does not exist, digging the state into a worse position to help Delaware businesses and workers, and to recover from the impact of the coronavirus.

That revenue was from increasing taxes on Delawareans in recent years. The same can happen again if the state raises taxes to cover spending from the coronavirus, or to fund new, long-term programs deemed necessary because of it.

There won’t be tax cuts or a return of your money—so what will the new “surplus” be used for in five years?

Irresponsible fiscal policy now will likely hurt Delaware residents and businesses in a way that cannot be ignored or excused.

A sound recovery from Coronavirus will be tough job for our state leaders in the coming months, who must consider how to not worsen our already struggling business climate and interstate economic competitiveness in the aftermath.

Let’s have the foresight to implement recovery policies that encourage economic and job growth, a better place for businesses to grow and thrive, and an economy that lifts up Delawareans as a whole.

The danger of allowing tacked-on changes to the Delaware state budget

The Delaware state budget plays a significant role in citizens’ lives, but the process can be hard for anyone to follow – especially if there’s a lack of transparency. Groups like A Better Delaware, founded by Chris Kenny, are tracking budgeting, spending and taxes to help voters make heads or tails of how taxpayer dollars are being used. One area that may be tricky for taxpayers to follow is “epilogue language” – revisions to original bills – that they say is sometimes harmful.

How epilogue language is used

The state prepares three types of budgets: A general operating budget, capital budget and grant-in-aid budget. The Joint Finance Committee (JFC) holds a series of hearings on each, which involves rounds of tweaks and until final approval. During this process, the JFC can insert epilogue language — additional funding and/or policy changes inserted at the end of the three budget bills — which may include updates or general guidelines on how the funds should be used.

Despite being difficult to navigate, epilogue language can often be harmless and smooth the budgeting process from year to year. Sometimes, however, epilogue language isn’t good for Delawareans. When it is used to change policy, it can be an intentional play by lawmakers to pass legislation that otherwise wouldn’t stand on its own.

The Charter School Transportation Slush Fund shows how epilogue language can be abused

In 2019, and for nine years prior, epilogue language in the budget established what has been called the “Charter School Transportation Slush Fund.” This addition allowed charter schools to keep unused transportation funds, despite Delaware law mandating all schools return these funds to the taxpayer. According to one legislator, the additional funds kept by charter schools from 2016 through 2018 totaled over $3.5 million.

In 2018, the JFC wrote the Slush Fund into an official bill, Senate Bill 235. However, instead of letting it go to a vote, the JFC inserted the bill into the epilogue language of the FY 2019 budget bill, essentially guaranteeing its passage instead of allowing it to be up for a vote on its own merits.

This tacked-on spending is voted on by either the Bond or Joint Finance Committee, respectively, before the bond or budget bill makes it upstairs for a full vote, meaning that anything put in there has been heard and considered. Nothing in the epilogue of our budget bills is an accident or oversight.

Now is the time to change things

New people and ideas are the best way to change things for the better. With a sizable slate of freshman legislators this session, A Better Delaware sees an opportunity for reform and more transparency, so that epilogue language is only used for the good of Delawareans, not the good of legislators’ agendas.

As regular legislative session reconvenes, continue to be an active participant in the process. Your elected officials are here to work for you.

Keep up with important action regarding your taxes, the Delaware economy and more on A Better Delaware’s Facebook and Twitter.

Get involved by signing up for the ABD newsletter, or contact your legislator about important bills here.

Why pro-business is not anti-worker

Supporting the economy isn’t a partisan issue—so why has it become one?

In Delaware, “pro-business” is frequently tied to “anti-worker,” but the opposite is true.

Who employs these workers that we want to support? Businesses!

By hurting these employers, workers and their families suffer lower incomes, less hours, and even layoffs.

Think of it this way: if the government passed a restrictive regulation on public housing, there would be an uproar about its impact on the recipients of that program and their access to housing. The move would be seen as one that hurts the people, or an “attack” on lower-income families.

The same is true with a restrictive regulation on business. In this instance, the providers are the companies, stores, and small businesses, while the good are the jobs they supply. Legislation that is anti-business is blatantly anti-worker and anti-jobs, and should be seen as a move that hurts the people as well.

It’s odd that a policy position that offers more jobs, better job security, higher pay, and higher government revenues divides Democrats and Republicans from the local level up through the Presidency. These benefits support groups that fall on both sides, including low-income families, middle-class families, communities, minority groups, children, schools, churches, and more.

In a better informed government, lawmakers would work across the aisle to support legislation that actually promotes job growth, supports businesses, and strengthens the economy, in an effort to work for the people, instead of duping them.

If our elected officials could agree on better fiscal policy, both sides would have the capability to help their respective communities, and the public would finally win in this political game, not to mention that more money would naturally go into the budget to support programs for education, health care, infrastructure, housing, and more.

So why is it so divisive? The answer is the same thing that causes most strife in governance: politics.

What is truly best for the people can make for bad headlines in the short-term and impact re-election or donor support.

“New Policy Erases Student Loan Debt for Millions Nationwide” is a far better headline for student loan forgiveness than what the headline for the true, long-term outcome would be: “Erasing Students Loans Cripples Economy as Trillions of Dollars go Unpaid.”

The next time you hear a lawmaker denounce a pro-business policy for being anti-worker or for putting business over the people, consider how a business can support its workers when their operations take a hit, and why both sides can’t align on this issue.

Thoughtful Spending—A Novel Idea

Evidence-based policymaking sounds like a non-negotiable, but is championed as a new approach to the legislative process.

Minnesota and New Mexico are trailblazing a path to better government spending through a partnership with Results First, an initiative that helps state and local policymakers use taxpayer dollars in a way that produces the best results at the lowest cost.

Business owners know this is the best way to operate in order to achieve success, and some legislators are finally catching up.

Through Results First, policymakers look at the effectiveness and return on investment of programs to determine where to allocate taxpayers dollars. In Minnesota, agencies were asked to provide evidence of desired outcomes along with their budget request for each program.

Imagine if Delaware took these steps.

Instead of above average spending for education and below average performance, our children could receive the education that taxpayers are actually paying for.

Instead of our per capita healthcare spending among the top in the nation, and being ranked 31st in health, Delawareans could receive better care and be a healthier state.

While we continue to watch our spending habits personally, maybe it is time for our legislators to do the same with our money.

Delaware Lawmakers Seek 169% Increase in Tip Wage

A proposed measure in Delaware would increase base wages for tipped workers (servers, bartenders, etc.) by 169.5% at the start, and as high as 573% if minimum wage reaches $15.

In reality, this is just another market manipulation tool and an example of state government micromanaging businesses.

Servers are averaging $25 an hour in areas like Sussex County, and are already guaranteed to earn at least the minimum wage. In fact, 69% of tipped workers said that they would favor keeping their tips over a “substantial increase” in their hourly wage.

This could push establishments to replace tipping with a mandatory service charge, actually putting less money in servers’ pockets at the end of the day, and resulting in less profit for restaurants that are not steadily popular.

When D.C. introduced similar legislation last year, over 100 local bar and restaurant owners spoke out against it, citing added labor costs, increased menu prices, and reduced employee hours as just a few of the associated consequences.

As if this wasn’t enough to deter such action, jobs are also at stake. A report from the University of Washington revealed a loss of over $100 per month for low waged workers and 5,000 fewer jobs from a similar bill.

Less pay, less profit, fewer jobs, and higher prices sound like more of an issue than the one Delaware lawmakers are trying to fix.

Why is this on the menu?