DOVER — A council tasked with decreasing the volatility of the state’s revenue sources has called for lowering income tax rates, eliminating itemized deductions and erasing the estate tax.
Delaware has been good at exporting its tax burdens, meaning many of the services the government provides are paid for not by state residents but by companies and out-of-state visitors. But while the national economy has improved in recent years, Delaware has faced a curious dilemma, owing to the nature of its economy.
The state’s revenue portfolio, to use the official term, relies on sources like abandoned property, the corporate franchise tax and the lottery. That sets it apart from most other states and owes to a variety of factors: Delaware’s small size, lack of a sales tax, early adoption of casinos and history as a corporate haven.
But while those areas have brought in billions, they’re inelastic, meaning they don’t grow with the economy. That presents a problem: stagnation.
To remedy that, a January executive order formed the Delaware Economic and Financial Advisory Council’s special subcommittee on revenue. The group met several times to provide a set of recommendations for officials should they choose to attempt to modify the state’s revenue streams. Whether or not decision makers adopt any of the recommendations is up to them, but the ideas have been put out there.
“The goal is to wean yourself off those revenue sources but put more eggs in the basket,” said Secretary of Finance Thomas Cook, a member of the group.
A total of 56 percent of the state’s revenue comes from inelastic sources, he said. In particular, Delaware derives hundreds of millions from abandoned property, which can swing greatly from year to year. Only so much enforcement can be done by the state, and while escheat money has helped cover up deficiencies in other areas, it’s not a safe bet for the long haul.
“The council notes both the lack of elasticity and high volatility of this source of revenue,” the report reads. “The council also views the historic growth of this revenue source as an aberration and projects that such growth will level off over time.”
The report, which will be provided to the governor and the General Assembly, focuses on a long-term fix. The 12 members of the committee — lawmakers from all four caucuses, as well as state officials and DEFAC representatives — examined a variety of areas over several months to formulate the best suggestions for what can be done to enhance Delaware’s revenue.
Three main criteria were kept in mind.
“The first one is their elasticity, or their ability to grow with the economy,” Mr. Cook said. “The next one is the volatility in the revenue source.
“Take, for example, the estate tax. That’s all dependent on certain individuals passing away, and depending on their planning you could have high numbers or low numbers. And the third one is competitiveness with the surrounding states.”
Several recommendations with varying levels of impact were crafted.
One part calls for eliminating itemized deductions and cutting the tax rate by either 9 or 12.4 percent. Delaware’s top marginal rate of 6.6 percent, which applies to individuals making more than $60,000 per year, would be knocked down to about 6 percent, which is the national media.
Delaware’s taxable income base “is narrowed by the allowance of itemized deductions,” according to the report. By allowing residents to gain exemptions for areas like mortgages and charitable donations, less available income can be taxed. Cutting the itemized deductions broadens the base — one of the council’s main goals.
The standard deduction of $3,250 for an individual filing as single and $6,500 for a married man or woman will still be available, as will the federal itemized deductions.
Rates were slashed so as to keep with the committee’s decision to make the changes initially revenue-neutral.
“It’s not to say how to raise revenue but how to recalibrate the revenue portfolio so that it grows as the economy grows,” Mr. Cook said, stressing the recommendations should be looked at a lasting change rather than a quick boost.
Tax breaks for seniors would also be changed, with the state bumping the age at which they go into effect up from 60 to 65 over a five-year period. Means-testing the elderly preferences would also bring in additional funds.
While the committee could have opted to create a new bracket for high-income citizens, doing so would only shift the state’s reliance. With the goal being to broaden the base, that was not seen as a palatable option, and so members favored putting focus on a more stable and broad field.
Under the purview of the suggested alterations, the estate tax would also be eliminated. Republicans have pushed for that very step, proposing a bill that would repeal the tax, which was instituted in 2009. They’ve argued the tax drives wealthy citizens away.
Cutting the tax would result in a loss of a projected $4 million per year. The tax is volatile, with the money going to the state subject to large variations from one year to the next, Mr. Cook said.
The recommendations do not only affect individuals. They would also result in changes to the corporate income and gross receipts taxes. The former relates to profit, while the latter concerns sales.
According to the report, Delaware’s corporate income tax is the ninth-highest in the country, driving some companies away. Reducing it from 8.7 to 7.7 percent while increasing the gross receipts tax from .4 to .45 percent would help reduce volatility.
The report also calls for continuing to promote the corporate franchise tax and allowing the secretary of State to monitor and adjust the rate as needed.
Although the council looked at abandoned property and the lottery, it opted not to provide any recommendations. It did issue caution that lottery revenue will likely continue to decline due to competition from nearby states, a trend started nearly a decade ago.
One quick way to raise money was never seriously considered, Mr. Cook said. Instituting a sales tax would surely provide a quick infusion of cash, but doing so would also eliminate one of the things that makes Delaware unique — and more importantly, draws out-of-state shoppers.
As a result, committee members had little desire to add a sales tax.
A statewide property tax would also bring in funds, and the below-average rate of existing local property taxes means the state could still be competitive across the region. A broad tax would generally be stable, according to the report. However, developing a state tax would require several years’ worth of surveying land, making it somewhat beyond the scope of the changes put forth by the panel.
“The council thought it was something that would be looked at by policymakers in the future,” Mr. Cook noted.
Unlike most states, Delaware covers the vast majority of services at the state, rather than county or local, level. That puts additional strain on the government at times.
For now, though, major changes are somewhat limited.
“As Delaware has long eschewed any retail sales tax, the current lack of a statewide property tax leaves few meaningful bases for Delaware to tax outside of personal income,” the report reads.
The report also touts Delaware’s prudence in budgeting, noting the state does not spend more than 98 percent of projected revenue and has a never-touched fund for natural disasters.
Designating some legal settlement money as “extraordinary revenues” would be one way to set aside additional funds, as would controlling surplus funds for potential future expenses.
Because the goal is to be revenue-neutral so as to avoid getting ensnared in discussions about spending, projections for the immediate future have the state breaking even. Starting in fiscal year 2017, Delaware could begin bringing in additional funds should the advice become law within the next weeks.
The recommendations, or a portion of them, may be introduced as legislation soon. With only 13 legislative days left, the pressure is on, but there’s still time enough for the proposals to pass the General Assembly.
Even if lawmakers don’t pick up the suggestions this year, the report will remain out there should officials wish to re-visit it at some point.
“I think that people need to just keep in mind that the recommendations are in effect a way or a roadmap to make sure the revenue portfolio stays healthy,” Mr. Cook said. “I think someday, whether it’s in this legislative session or in future ones, some adjustment is going to have to be made.”