DOVER — Two new Democratic-sponsored bills would create new tax brackets for Delawareans earning six figures in annual income.
Filed by Rep. John Kowalko, D-Newark, on Tuesday after circulating for several days, the bills are presented as a way for the state government to address its looming budget gap.
“We’re sitting on a precipice of being unable to afford to provide services,” Rep. Kowalko said. “Even if they’re bare-bones services, we can’t afford that.”
But the legislation is facing stiff opposition that combines with other factors to make passage unlikely.
Minority Leader Rep. Danny Short, R-Seaford, said the proposal is a non-starter. It would “stifle” growth, he said, as business owners in the new top bracket would have to pay out more in taxes and have less to invest in the growth of their businesses.
That would mean fewer new jobs will be created, he said. “Minimum wage reversed."
State legislators must eliminate a gap of about $28 million before the end of the month, when the budget bill is due.
For fiscal year 2017, which starts on July 1, 2016, the state government is already facing a $204 million shortfall.
House Bill 181 would institute new tax brackets of 7.1 percent at $125,000 and 7.85 percent at $250,000. Currently, the top personal income tax bracket is for those making at least $60,000. Anyone making at least that pays a 6.6 percent tax rate.
Under the purview of the bill, an individual with an adjusted gross income of $125,000 would pay an extra $625 per year, while someone earning $250,000 would pay an extra $2,500 annually, Rep. Kowalko said.
House Bill 196 would lower the tax rate by .05 percent for every bracket, ranging from what is currently 2.2 percent for those making between $2,000 and $5,000 to the new top rate of 7.8 percent for $250,000.
The bill would also add a 7.05 percent for adjusted gross income between $125,000 and $250,000.
But where House Bill 181 stops with income tax, the alternative goes further.
Following May recommendations from a state finance committee to eliminate itemized deductions, House Bill 196 would also reduce the deductions available to top earners.
Delawareans making between $125,000 and $160,000 would have their deductions reduced by 20 percent.
Subsequently, each income step of $30,000 would carry with it another 20 percent cut in available itemized deduction up to $250,000, where anyone making more would not be able to take any deductions.
Multiple bills have been filed to present options for legislators.
According to numbers from the Office of Management and Budget provided by Rep. Kowalko, the first proposal would raise $26.5 million in fiscal year 2016, which starts July 1, and $70.9 million in fiscal year 2017. House Bill 196 would increase revenue by $18.8 million next year and $100.6 million in fiscal year 2017, according to Department of Finance estimates provided by Rep. Kowalko.
At the federal level, the top tax bracket is $413,201, with a rate of 39.6 percent.
The state’s budget hole is chiefly due to declining revenue sources that have not grown as the economy has slowly rebounded in recent years. Those sources — abandoned property, the lottery and the franchise tax — have created problems for state officials.
Rep. Kowalko said he believes the new tax rates would not only provide some additional revenue, they would result in greater stability.
“I feel very comfortable saying I expect my caucus to support this bill,” he said.
But garnering enough votes for passage is a different story. Tax bills need a three-fifths supermajority, and since Democrats do not have the requisite numbers in the Senate, Republicans could stop any tax increase.
With only six legislative days left until the General Assembly breaks for the year, the bills would have to be approved in 2016, an election year. For evidence of how tax bills might fare at such a time, lawmakers need only look to the failed gasoline tax push of 2014.
Rep. Kowalko declined to predict exactly how the legislation might fare beyond noting he believes many fellow Democrats will back the bills. Each proposal has the same seven co-sponsors — all Democrats.
House bills 181 and 196 are scheduled to be heard in the Revenue and Finance Committee Wednesday.