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Friday, March 5, 2021

Record realty transfer taxes push state to higher projected surplus

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On the strength of four record months of real estate transfer taxes as well as hefty initial public offerings and business incorporations, Delaware’s budget is projected to have a $347 million surplus heading into the new year.

The money, termed “extraordinary one-time revenue” in budgetspeak, can be used for one-time investments as well as restoring reserves in next year’s budget.

The welcome forecast stands in stark contrast to fears from many corners that shortfalls because of COVID-19 shutdowns and expenses would require taxes or extraordinary measures as the 151st Delaware General Assembly opens in January 2021. The legislature must pass the 2022 budgets by midnight on June 30. 

That surplus on a budget of $5.26 billion could still change drastically as the state continues to evaluate revenue and expenditures in the middle of a pandemic that’s wreaked havoc on business and family incomes.

 

But what financial reports in Monday’s Delaware Economic and Financial Advisory Council’s meetings show is that Delaware is faring better than others may be. 

“We never really tried to model a pandemic, and I don’t know that we could have since there hasn’t been one since 1918,” said Delaware Secretary of Finance Rick Geisenberger. “It may be that had we understood that dynamic, we might have been able to say that in a pandemic scenario, maybe our revenue structure is a pretty good revenue structure to have.”

That starts with not having a sales tax. Delaware has a gross receipts tax on all business revenue from goods and services. Other states may require solely on sales taxes, and some break that down further. Pennsylvania, for example, distinguishes between essential and non-essentials goods. So it does not tax groceries, but does tax restaurants. 

Delaware’s main sources of revenue are — in order —  personal income tax, corporate franchise taxes, unclaimed property, gross receipts tax, lottery and casino money, corporate income tax and realty transfer taxes.

 

Some revenue has been down, but not as much as feared, and some up, but one is overperforming anyone’s expectations. 

Delaware’s real estate transfer taxes set records in August, September, October and November.  Sussex County commercial and home sales by far led the way to the state’s $205 million in state realty transfer taxes. 

That seems to be partly because of low interest rates and because some people are fleeing urban areas as a result of COVID-19,  said David Roose, director of research and tax policy for the Department of Finance. Others who can work from home can work anywhere. But it’s hard to know for sure or to predict whether that will continue, he said.

Roose said there had been 22 percent growth in commercial real estate sales  in Sussex County and 18 percent growth in residential there during this calendar year. In contrast, New Castle County’s residential sales essentially were flat, and commercial is down almost 50 percent. Kent County saw 11 percent growth in commercial property and 5 percent for residential.

DEFAC details how Delaware's revenue is doing.
DEFAC details how Delaware’s tax revenue is doing.

 

Because no one knows if that could continue, projected revenue from real estate sales numbers were adjusted to go down in 2021 and 2022.

As property sales were booming, so were initial public offerings of companies such as DoorDash and Airbnb. Most companies listed on public stock exchanges are Delaware companies, and the state taxes them.

Taxes on limited liability companies and limited partnerships are up $9.1 million this year (8.3 percent growth) but expected to be flat next year.

Other points of interest:

— Taxes on alcohol were strong, Roose said, up $2.4 million from what was expected.

 

— Revenue from the Public Utility tax is down. Roose speculated that was because so many people were working from home, and therefore commercial buildings weren’t heating or cooling the buildings like they did when they were fully occupied.

— Income tax withholdings are down, indicating fewer people are working, but not as much as feared because they rose slightly over the summer before dropping again in November. The budget forecast a decline in 2021, but a rise in 2022 when the pandemic is expected to be over, or waning.

— The state is watching what happens with corporate bonuses in February. Last year they were high, but nobody knows what to expect this year.

— Except for a peak in summer, slots taxes have plummeted, but showed a one-week spike last week when Pennsylvania closed its casinos because of COVID-19. No one knew whether that increase would continue.

 

— Some states require people who are required to work from home to pay taxes to the state in which they are actually working. But nobody is sure how that is going to play out.

State officials worried that might really hurt Delaware. At one time, far more people came into Delaware to work, but it’s been closer to 50-50 recently, officials said Monday. And many of those who leave Delaware, but are now working at home, have higher paying jobs than those coming from out of state to work in Delaware. 

Roughly 65,000 people work in Delaware, but live elsewhere and there’s an equal number of about 65,000 who live in Delaware but work elsewhere,” Geisenberger said. “The question is what do those two groups make and where have they been working, and we don’t know where they’ve been working.”

 

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