Dr. Richard F. Bieker of Dover is a retired economist. He has taught and/or conducted research at a number of institutions, including Delaware State University, the University of Delaware, Purdue University and Central Michigan University. He has also served as a Fulbright Scholar at Slovak University of Agriculture and the American University of Armenia, and his research has been published in a variety of journals.
After successfully leading efforts to revise Delaware’s incorporation laws to prevent the loss of tax revenue because of corporations leaving Delaware to incorporate in other states, Gov. Matt Meyer has submitted his proposed fiscal year 2026 budget. It includes a significant revision to the personal income tax system, aimed at increasing the tax rates for top income earners. This proposed change contrasts sharply with trends in other states. Most states that have recently amended these systems have reduced their income tax rates.
Currently, individuals and small businesses filing individual returns are taxed at a rate of 6.6% on taxable income exceeding $60,000, a level that has remained unchanged since at least 2014, despite a 36% increase in prices, as measured by the consumer price index. Gov. Meyer’s proposal does not adjust the tax brackets for inflation, diverging from the practices of the federal government and other states with progressive income tax systems that do so annually. As is discussed in this Mises Institute article, the failure to adjust brackets for inflation results in taxpayers having to pay more in taxes without the state having to increase rates. This is because inflation pushes taxpayers into higher existing brackets. This is referred to as taxation by “bracket creep.”
Under Gov. Meyer’s proposed changes, the 6.6% rate would apply only to income between $60,001 and $125,000. Income between $125,001 and $250,000 would be taxed at a higher rate of 6.75%, while income between $250,001 and $500,000 would be taxed at 6.95%. The rate for income above $500,000 has not yet been determined but is expected to exceed 6.95%.
While higher-income individuals and small businesses filing individual returns would face higher rates, lower-income households would not receive any tax relief because the tax brackets for incomes below $125,000 would remain unchanged. And these lower-income households will continue to see higher taxes because of bracket creep. Additionally, the governor’s proposal includes some regressive measures, such as a 50-cent-per-pack increase in cigarette taxes, higher state park fees and increased road tolls, which have a disproportionately adverse impact on lower-income families.
The stated goal of the higher income tax rates is to boost the revenue derived from personal income taxes. Delaware’s budget director Brian Maxwell estimates that the rate increases could generate an additional $16.5 million in 2026 and $35.2 million in 2027. However, economic forecasting is inherently uncertain, and the proposed rate increases could potentially lead to reduced revenue due to tax avoidance, migration to lower-tax states or diminished economic activity. In this regard, it is important to note that, even before Gov. Meyer’s proposed tax increases, Delaware had been experiencing significant outmigration of high-income earners. The fintech firm SmartAsset, using IRS data for 2022, found that Delaware led the nation in the percentage of outmigration of young (ages 26-35), affluent households (i.e., those making $200,000 or more a year). Delaware had a net loss of 6.4% of these households in 2022.
Gov. Meyer’s income tax proposal contrasts sharply with trends in other states that have recently revised their personal income tax systems. Except for California, which raised rates, most — including Arkansas, Connecticut, North Dakota, Massachusetts, Georgia, Kansas, Indiana, Iowa, Missouri, Mississippi, Nebraska, New Mexico, North Carolina, South Carolina, West Virginia and Louisiana — have recently lowered their rates. New Hampshire has gone as far as to eliminate its income tax entirely. These states anticipate that lower income tax rates will attract businesses, stimulate economic growth and expand their tax bases.
Before approving the governor’s proposed tax increases, Delaware legislators would benefit from examining the approaches taken by other states. Aligning with the prevailing trend of lowering personal income tax rates could prove advantageous for Delaware’s economic growth and competitiveness. And our state’s economy is certainly in need of a boost. According to data from the U.S. Bureau of Economic Analysis, the average annual growth rate of Delaware’s economy between 2010-23, as measured by the growth in real gross domestic product, was an anemic 1.03%, compared to 2.34% for the U.S. as a whole. Without a robust and growing economy, it is unlikely that any of the governor’s goals with respect to education, affordable housing, health care and other issues will be achievable.
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