Delaware Spending Away its Future

Delaware has a spending problem.  

That problem was on full display as the state’s fiscal year closed at the end of June, when lawmakers imposed $182 million worth of tax hikes on state residents.

This was the best lawmakers could do after years of cobbling together temporary and short-sighted budgetary fixes.

Sin taxes are part of the state’s budget increase in tax revenue

The estimated $182 million in new taxes include increases on the state’s real estate transfer tax, corporate franchise tax, and taxes on tobacco and alcohol.

In exchange for more taxes, Delawareans will surely receive new services and investments in our future, right? Wrong. They received cuts to flexible education spending, cuts to grants-in-aid to nonprofits, and reduced senior property tax credits, among others. And the new tax revenues will go directly toward a system of unsustainable spending that continues to grow faster than the economy.

It doesn’t sound like a great deal, and what’s worse is nearly everyone agrees the state will face another deficit in 2018.

How can this be? Simply put, the state of Delaware’s spending has grown faster than its economy for quite some time. Delaware outsources roughly one-third of its revenue from other states largely through corporate franchise taxes. Delaware is used to someone else paying for one-third of the bill, and so has spent without accountability. This has now caught up to the state.

The Democrats’ dream “fix” continues to be tax increases. Gov. John Carney and many Democrats in Legislative Hall wanted to increase personal income taxes as part of the new state budget. Thankfully the Republicans held firm. Delaware’s income tax is already uncompetitive, as the highest marginal rate, 6.6 percent, applies to middle class families making as little as $60,000.  That is much higher than the 3.07 percent and 4.75 percent similar families pay in Pennsylvania and Maryland, respectively. If Delaware increases this tax and becomes even less competitive, it is almost certain families will leave.

That is because every tax increase the Democrats propose only lays the groundwork for more spending, and subsequent tax increases. We have a precedent for this: Gov. Jack Markell raised the income tax in 2009 (from 5.95 percent) and just a few years later it is not enough. This year’s new $182 million in revenue will also not be enough. There will still be a deficit next year because the main drivers of state spending – health care costs for state employees, Medicaid beneficiaries, and Delaware’s above average per student education spending – were not addressed.

So, what are the big takeaways?

First, tax increases on Delawareans make Delaware more expensive and a less desirable place to call home. Due to the recent tax hikes, Delaware now boasts the highest real estate transfer tax in the country. By far. These policies provide quick cash to maintain our state’s bloated government in the short-term, while hurting residents and deterring others from moving here in the long-term. Delaware has lost billions of dollars of tax revenue due to these short-sighted policies that drive citizens and companies to other states, often just a few miles away.   

Second, the corporate franchise tax increases cannot go on indefinitely. Our government will only be able to soak those companies for so much. Eventually the increases will push companies elsewhere, thereby hurting Delaware workers in the industry, and lowering overall tax revenue.

Third, an unintended result of these bitter budget battles is that everyone is forced to devote extra attention to the budget. That means that other important issues are not dealt with.

It has become clear to the public that the current system of governing is broken and that our leaders are ignoring significant long-term problems.

Revitalize Delaware thinks state lawmakers should do the following.  

With health care spending increasing as much as 7 percent per year, the state needs to implement programs that focus on cost-saving preventative care. The state also needs to ask state employees to cover more of their premiums, a proposal even Gov. Markell supported just last year.

Also, education spending is extraordinarily high and currently absorbs over one-third of the general fund. Consolidating school districts and shifting the funding from the state to the districts through referendums should be considered.

Additionally, pensions are underfunded in Delaware, and younger workers can no longer count on the pension they’ve been promised to be around when they’re ready to retire. It is only fair to move new employees to a defined contribution plan where they have full control of their retirement future as opposed to the current system of empty promises that simply cannot be met long term.

Delaware residents deserve more than this budget runaround year after year. They simply can’t afford more tax hikes. Without structural reform to the state’s biggest cost-drivers – such as Medicaid, education and pensions – and a pro-growth agenda that encourages economic growth, Delaware will continue to find itself scrambling.

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About the Contributor

Kevin Dombrowski

Kevin Dombrowski

Kevin Dombrowski is a a professional in the investment industry and co-leads Revitalize Delaware. He holds a bachelor's degree in economics from the University of Michigan and an MBA from Northwestern University’s Kellogg School of Management.
He currently resides in Wilmington with his wife and two sons.

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