Kowalko: Dollars & Sense

The News Journal | Delaware Voice | by Rep. John Kowalko

News Journal picture for articleWhen I originally sat down to the task of composing my thoughts on Delaware’s budget situation, we were facing a $200 million deficit. It was the end of session on June 30, 2015. The Democratic house leadership finally convened our first caucus meeting on Oct, 15, and details were given confirming the dire economic straits facing Delaware taxpayers.

Recently it was announced that the Delaware Economic and Financial Advisory Council (DFAC) had concocted an estimate that included an extra $80 million in revenue. In my 10 years of experience with the DFAC numbers, I’ve found these early estimates to be an unreliable measure of Delaware’s economic health, and the final one issued before June 30th is the number that essentially will be used to show that we have met our constitutional requirement of a balanced budget by the end of session.

In the first week of the 2016 session, HB 235 was pushed through the legislative process with little discussion and at an unusually accelerated pace. The bill, posited as corporate tax reform, cleared the Revenue Committee and the Appropriations Committee in a mere two days and was then brought to the floor under a “Suspension of Rules,” passing the House with only two nay votes, mine and Representative Kim Williams. It was pointed out that this policy change in corporate taxation has never been proven to grow more businesses in other states where it has been imposed. More importantly, no proof was provided that Delaware’s current corporate tax policy has shrunken the number of incorporations in Delaware nor was any evidence offered that corporations were fleeing the state because we have not changed. The only acknowledged and provable conclusion was that this bill would have a price tag for Delaware taxpayers of more than $48 million.

The question raised of how the governor and legislature intended to fill this ever growing deficit went unanswered. This restructuring of Delaware’s corporate taxation will outflow a substantial amount of revenue that we cannot afford. This proposal was originally crafted from a DFAC advisory committee report that suggested these outlays of money will be countered with a pursuit of “revenue neutrality.” The report also specifically suggests that the state can counter revenue outlays by trimming “senior tax breaks,” realigning state employee benefits packages (higher co-pays and deductibles), and a myriad of other recommendations that suggest that the cost of corporate welfare granted by the State will be borne by the average middle-class worker, those on fixed incomes, and the impoverished.

Aware of this looming deficit last year, the administration and the General Assembly had ample opportunity to craft a balanced proposal of bureaucratic cuts and more progressive taxation that would have set the state on a responsible and stable course. House Bills 181 and 196 would have created two new tax brackets that would have been well under any higher tax brackets in any of the surrounding states. Reformulation of the corporate tax cap would have netted the treasury $25 million to $50 million in revenue drawn from only the largest conglomerates incorporated in Delaware. Cutting some of the jobs that have recently been created in our Department of Education, jobs that do not ever reach the classrooms, would have been prudent. Instead, despite the public demand of the General Assembly and the Joint Finance Committee to not do so, the DDOE continued to fund eight six-figure jobs for Race to the Top positions that were no longer federally funded. Tens of millions of dollars were also given to special interests and corporate projects in the budget and through the strategic fund administered by the Delaware Department of Economic Development. None of this advice to cut costs was heeded, and the revenue bills (which both cleared committee) were never brought to the floor for a vote. Instead, we set ourselves and our taxpayers on a road to economic perdition. We continue to succumb to the pressure of having our small state attempt to compete with much larger states and budgets for unknown corporate largesse that may never materialize.

The Governor’s proposed budget is normally closely adhered to by General Assembly leadership and the Joint Finance Committee. The Governor’s recent State of the State address gives us a glimpse of what recommendations we should expect moving forward. His pronouncement that he will seek increases in teachers’ starting pay grades was welcome news to most, but once again he has outlined a revenue outlay with no apparent revenue recovery. Other parts of the speech suggests that he will target state worker benefits after vigorously praising the sacrifices and dedication of those same workers in his opening remarks. His suggestion of a two-tier benefit and salary reduction imposed on new government hires will burden future economies with working families unable to afford their benefits and left with no consumer spending capabilities necessary to sustain local businesses.

This type of short-term thinking will add to the costs of already overstressed government programs and decelerate any economic recovery. Depriving a majority of consumers of spending money could potentially plunge Delaware’s economy into a deeper recession and impede growth in the small business community leading to more job loss. Some legislators implied that we’ll figure something out before June 30, but I believe that we will be presented with options that will impede sustainable economic growth. It looks like there will be calls for shrinking necessary government programs, leaving behind an ever shrinking middle class and creating a burgeoning impoverished community that will be ever more dependent on costly support programs. Proposing to raise revenue on fixed-income taxpayers is also economically irresponsible in this current climate. Unfortunately we have not yet been offered options that would legitimately sustain and stabilize economic recovery and the clock is ticking.

This year we have another opportunity to create a sustainable and balanced budget by passing either HB 181 or 196 and HB 216 (raising the corporate tax), cutting the waste in the DDOE, freezing the millions of dollars available to the Strategic Fund, and dedicating money to local businesses in the form of tax cuts and incentives for job creation and local business expansion. Our efforts must be unwavering. We must balance the budget responsibly and not succumb to corporate extortion.

John Kowalko is a Delaware State Representative from the 25th District.

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