Delaware Budget Deal Hurts Business and Taxpayers

Over the holiday weekend, Delaware Governor John Carney signed a budget which includes numerous tax increases to plug a budget shortfall of nearly $400 million. Even with one of the highest corporate tax rates in the U.S., the government supported additional roadblocks for businesses. The plan, which will raise the corporate maximum tax payment for incorporated Delaware companies from $180,000 to $200,000, will impact 1,900 companies. In addition, companies in the second-highest bracket will be subject to a slight tax increase and incorporation fees for all businesses will be raised. These measures are projected to bring in an additional $116 million annually.

Proponents of raising “sin taxes” on items the government considers harmful, aim to take in upwards of $18 million annually in additional revenue. This means the tax on cigarettes will increase by 50 cents, to $2.10 tax-per-pack; the tax on a six-pack of beer will about double to 21 cents; the tax on wine would more than double to 34 cents; and the tax on hard liquor would increase sixfold to 89 cents per 750ml. Not only will these taxes be passed onto the consumer through higher prices, it will also slow Delaware’s budding brewing, winemaking, and distilling industry expansion and subdue job creation. The industry and small businesses across the state assert that these measures will have an immediate short-term impact on revenue, and could possibly have long-term implications on future growth.

Thankfully, the Assembly withdrew personal income tax increases which had previously passed the Revenue and Finance Committee two weeks ago. The original tax plan would have been detrimental to homeowners and taxpayers. First, lawmakers planned to eliminate state tax deductions like the mortgage interest, property tax, and charitable giving deductions. While it often makes sense to streamline the tax code by eliminating tax provisions in the context of comprehensive reform, the removal of these deductions without commensurate rate reductions is equivalent to a tax increase. Specifically, elimination of the mortgage interest deduction would make housing less affordable for moderate-income earners, resulting in lower housing demand which is still recovering from the recession. Second, it would have risen the income tax rate on all tax brackets by .15 to .40 percent. While it may not appear to be significant, it is important to note that all brackets will see a tax increase, meaning that even the working poor, who can ill-afford it, will be paying more. Finally, it would have created a new top income tax bracket for those making over $150,000 which will be taxed at 7 percent. These measures were projected to raise over $200 million. While it is important that these taxes did not make it into the final budget, it is possible that these taxes will make their way back into the future budget conversations.

While this tax proposal is unpalatable for taxpayers and businesses in Delaware, there are two provisions which are pro-taxpayer. First, there is the repeal of Delaware’s estate tax on families and businesses. Second, there is an increase in the standard deduction for singles and married taxpayers. Politicians working to improve Delaware’s fiscal health must understand that the state does not suffer from a lack of revenue; it suffers from excess government spending.