Commentary: Does that recent tax proposal make you want to stay or go?

Pending House Bill 64 (HB 64) proposes graduated increases in the top personal income tax rate, starting with 7.1% at household income of $125,000 and topping out at a rate of 8.6% at an income of $500,000 or more.

We provide five reasons why this is an ill-timed, unnecessary and bad idea:

• Delaware’s economy delivered no growth in the past 10 years and is in a recession now. No time to raise taxes.

• The state is awash in cash ($700 million in November and forecast $425 million at the end of June 2021). That’s before another snowdrift of new cash from Washington will arrive in the from Joe Biden’s $1.9 trillion COVID-19 bill. No need for additional income tax revenue.

• The First State has consistently lost middle-class and upper-class families who work in Delaware but move to neighboring states (Pennsylvania, in particular) due to the high personal tax rates here. Our research shows $1.9 billion in lost revenues from emigres from New Castle over the past 25 years. No time to raise taxes.

• Over the past 40 years, data shows that each time Delaware raised personal income taxes, total revenues went down. Each time we lowered taxes, the total revenues went up. No time to raise taxes.

• Gov. John Carney’s $4.7 billion state budget for fiscal year 2022 begins June 2021. The budget balanced with no tax increases.

Currently, Delaware’s top personal income rate is 6.6%, and it is applied to all households with an adjusted gross income of $60,000 or more. Since Delaware’s 2019 median household income was $70,176, almost two-thirds of Delaware households pay the top (6.6%) rate.

The table attached compares Delaware’s proposed HB 64 rates to the relevant rates in surrounding states (states within commuting distance). An obvious disadvantage to Delaware is Pennsylvania’s flat rate of 3.07%. For example, by moving your residence and your job from Delaware to Pennsylvania, a household with an income of $250,000 can cut its tax rate from 7.55% to 3.07% and get better public schools. However, if you move your residence and still work in Delaware, you’ll still have to pay the Delaware tax rate for your wages in Delaware. Still, the upside to this is you will have the benefit of better public schools and Pennsylvania’s lower tax rate on interest income, dividend income and capital gains (from “Money Walks”).

All higher-income Delaware households would save income tax payments by moving to Maryland and New Jersey, except households with income of $500,000 or more moving to New Jersey. In 2018-19, New Jersey had the fourth-highest net domestic out-migration rate in the nation, and over the last 25 years, New Jersey has had net out-migration of over $41 billion of adjusted gross income.

With the high likelihood of a large cash infusion shortly, maybe it’s time to lower the personal income tax rate.

A 17% rate cut brings down the top 6.6% rate to 5.5% and suggests a revenue shortfall of $270 million. But history shows that revenues will increase.

Dr. John Stapleford is Caesar Rodney Institute policy director for the Center for Economic Policy & Analysis. You can find more information at the institute’s website.