The past 11 months have been tough on all of us. Between political strife, the ominous lurking threat of COVID-19, the mental taxation and impact of social isolation and the financial struggles of job loss, Delawareans have had every aspect of their lives tested from every possible angle.
Thousands of Delawareans have been without work for months. Many have exhausted their unemployment benefits and have little left in their rainy day funds. The state’s labor participation rate continues to stagnate near all-time lows, and new unemployment claims are on the rise. With the new legislative session comes the hope that our legislature will find a way to help their constituents wade through these difficult times.
With all the financial woes that families are facing, with so many of us unsure whether we will have the ability to pay our bills next month, the very idea of an increase in the personal income tax rate seems absurd. Yet it is on the table and shows how disconnected some of our legislators are. In fact, it is flat-out disrespectful.
There were over 100,000 unemployment claims filed in Delaware last year. That’s 100,000 people who lost their income and maybe a little bit of their self-esteem. The proposal put forth by Rep. John Kowalko, D-Newark, is not only tone-deaf, but it is also irresponsible. Rep. Kowalko seems to believe that those making over $125,000 a year do not have concerns about the future or face the possibility of having to support other family members during these trying times. No, he thinks they should pay more in taxes, even though the state expects a $500 million surplus going into 2021. It is government greed and dispassion at its worst.
The proposal would create three additional tiers that would increase the personal income tax burden between 7.5% and 30%, depending upon the earner’s income. Let us be clear: We are not talking about a tax on billionaires.
These taxes will impact doctors, lawyers, shop supervisors, independent tradespeople, plumbers and electricians who are often sole proprietors and pay income tax on every dollar that comes into their business. These are the people shopping at the local grocery store, ordering takeout at the local restaurant and probably enrolling children in the same Little League as you are.
What is worse is that our neighboring states have lower personal income tax rates. I assure you, that will be a draw, further reducing Delaware’s growth and prosperity. Even more, families will flock to Pennsylvania for their 3.1% tax rate and high-quality public schools or even to Maryland, where the maximum income tax rate is 5.75%. We have seen the impact of taxation on other states. On any given day, you can turn on the news and find companies and families fleeing California and New York for the income tax-friendly environments of Texas and Florida. When they leave, they are taking with them jobs, opportunity and wealth.
Econometric analysis has shown time and again that raising income taxes results in a long-term decrease, not an increase in state revenue. Econometric modeling has indicated that just a 10% increase in the maximum rate will result in a $50 million decrease in state revenue. Reductions to the personal income tax rate have proven to provide net revenue gains in both expansionary and recessionary periods. This seems counterintuitive, but it makes a lot of sense.
As money is taken out of the free market and allocated to the government via taxes, it is not available to be saved, invested or used for free-market purchases. A dollar in the free market has a velocity factor or multiplying effect on the economy. That velocity factor is about 1.8. In other words, it is creating a value of 1.8 times its worth due to it being actively used. Money placed into savings accounts is used by banks to make loans, many of which are for the purchase of homes, cars and credit given to businesses for acquiring assets, starting new branches and hiring staff. When the government has this dollar, it cannot be used as described.
As the government spends, it also crowds out private investment — private-asset purchases and loans are replaced with government grants and projects. With those grants come the overhead, bureaucracy and delays of the government. The net effect is a total reduction in the economic output, which reduces how much money there is in the market to tax to begin with. This effect is even more pronounced when there are large government budget deficits — like the one we have now. When you couple this effect with people moving to lower-tax states, we find that the lower-tax states grow and prosper, while the higher-tax states struggle.
Any one of our legislators who votes to increase the personal income tax during a normal year should be educated. Any legislator who supports it during a health and economic crisis should be ashamed.
Matt Lenzini is board chair of the Caesar Rodney Institute.
