Should Delaware’s top earners pay more in taxes?

Delaware State News | by Matt Bittle

DOVER — What’s the difference between yearly earnings of $60,001 and $1 million?

Yes, it’s nearly $940,000, but in Delaware, there’s no distinction between the two figures for tax purposes.

All income above $60,000 is considered in the state’s top tax bracket. That means someone who makes $60,001 pays the same rate of 6.6 percent as a tycoon of industry pulling in millions of dollars each year.

Republicans say higher taxes stifle economic growth; Democrats have mixed views.

The Delaware General Assembly is no exception.

But with revenues projected to fall well short of projected spending, lawmakers have to do something to balance the budget for the fiscal year starting July 1. Those steps will be decided over the ensuing months.

But, the budget gap could also mean greater willingness to, as one of the legislature’s most liberal and outspoken members put it, “make the hard decisions.”

That lawmaker, Rep. John Kowalko, a Newark Democrat who has argued for raising taxes on big business and wealthy residents, has introduced several bills that would change the state’s tax brackets.

His proposals will not only face stiff opposition from Republicans but also fly in the face of what the executive branch, led by Gov. John Carney, a Democrat, aims to achieve.

One bill would create new brackets of $125,001 and $250,001, taxed at 7.1 and 7.85 percent, respectively. The second would do the same but also start phasing out itemized deductions at $125,001.

The final proposal, House Bill 109, would lower the current rates by 0.05 percent and institute the same two top brackets in the first bill, only taxed at 7.05 and 7.8 percent. As with the second bill, itemized deductions would also be removed gradually for individuals making at least $125,001.

People earning more than $250,000 would not be able to claim any itemized deductions.

“We have to have a sustainable, dependable revenue stream and it’s not going to get it with the current tax structure,” Rep. Kowalko said Wednesday during a committee hearing for House Bill 109.

But his proposals could meet opposition not just from Republicans but from his own party.

Gov. Carney last month recommended raising the rates for each bracket 0.2 to 0.4 percent, eliminating itemized deductions and increasing the standard deduction from $3,250 to $5,000. His proposal didn’t include new brackets.

His idea has not yet been filed in bill form.

The goal, the governor said, is keeping Delaware competitive with surrounding states.

“Our top marginal rate used to be 19-plus percent when Pete du Pont was governor in the mid 1970s, and because we were so uncompetitive, one of the largest employers … came out and said, “I would never recommend any company in America to locate their business here in Delaware,’” the governor said during his budget presentation.

According to Secretary of Finance Rick Geisenberger, House Bill 109 would bring in $43.1 million in the first full fiscal year after the change — although that calculation doesn’t account for additional money that cutting itemized deductions would generate.

The governor’s plan, meanwhile, would take in $203 million more from taxpayers in the first full year.

Dueling ideas

Senate Minority Whip Greg Lavelle, R-Sharpley, believes Rep. Kowalko’s measures would punish the top earners.

“We’re not going to raise taxes to get out of this,” he said of the budget crunch.

The Delaware State Chamber of Commerce is against House Bill 109.

Gov. Carney has repeatedly stressed his view that the only long-term fix to the state’s budget woes is economic growth,. While no one is against a booming economy, even members of the same political party disagree as to the best way to achieve that.

“The most progressive way to grow an economy is to leave as much money as you can in the hands of the people that spend it, that don’t have enough money to put under their pillow and ask those people that can afford it to contribute more to the services we provide,” Rep. Kowalko said.

The administration is concerned new tax brackets would not only not help but would drive people away.

“I think that as the governor has said many times, he’s taking a very practical approach to this, which is that the top tax bracket tends to be the headline that people look at, and I’m talking about the headline not locally but the headline when a company’s trying to decide to move 200 jobs from Pennsylvania,” Mr. Geisenberger said.

When it comes to considering changes to the state’s tax structure, “competitive” and “shared sacrifice” are the buzzwords used by the administration.

Delaware is ahead of New Jersey, which taxes income for single filers above $75,000 at 6.37 percent and above $500,000 at 8.97 percent. Maryland has four brackets of at least $100,000, though the highest rate is 5.75 percent.

Pennsylvania, meanwhile, has a flat tax of 3.07 percent.

“We think we’re the most competitive state in the country if people look at the totality of taxes,” Mr. Geisenberger said. He noted Delaware has no statewide property tax or sales tax.

About 82,000 Delaware taxpayers earned at least $125,000 in adjusted gross income; approximately 24,000 made more than $250,000 last year.

Gov. Carney said he believes his plan splits the burden by asking everyone to contribute a bit more, but Rep. Kowalko has a very different view.

Shared sacrifice, he said, is a “con artist term.”

His bills, he said, would not offer immediate relief but would avoid placing too much strain on the lower and middle classes.

Going forward

With House Bill 109 released from committee, it could be heard in the House soon.

House Speaker Pete Schwartzkopf, D-Rehoboth Beach, largely avoided talking in specifics about income tax changes, although he noted the General Assembly will consider several different ideas over the ensuing months.

“Where we end up, don’t know at this point in time, but we’re going to move forward,” he said. “We have a framework with the governor’s budget.

“Obviously, if we don’t like what he says then we just craft our own, and I’ve got 41 people in this chamber, 41 different ideas how to do things, 41 different walks of life.”

Asked what he thought an appropriate top tax bracket would be if the state was starting from scratch, Rep. Schwartzkopf said he did not know.

He cautioned competitiveness with other states would have to be considered in such a hypothetical.

Even if every Democrat decides to back tax hikes, there’s a complication: Because tax bills require a supermajority, Democrats cannot pass them on their own.

The House has just enough votes as long as the majority caucus sticks together, but the Senate needs two Republican votes, and Republicans are unlikely to bend.

While lawmakers of both parties have pledged to work together to tackle the budget situation, the Democrats may need to give up something to get members of the GOP onboard for tax increases.

In order to raise Division of Motor Vehicles fees in 2015, Democrats had to agree to raise the prevailing wage threshold.

This time around, the majority caucuses might have to make greater cuts in spending than what the governor proposed — although large-scale cuts could lead to some Democrats voting against the budget.

While extremely critical of hypothetical tax hikes, Sen. Lavelle said he is “not prepared” to say he would not vote for them under any circumstance this year.

House Minority Leader Danny Short, R-Seaford, said it is too early to discuss raising taxes.

“It’s all a big what-if right now,” he said.

Leadership in the four caucuses is expected to meet regularly with the administration to discuss the budget and ease the process of coming to a consensus.

The panel that sets the revenue forecast is to meet in eight days, and depending on what the projections say, the General Assembly could come closer to a consensus, either for or against tax hikes.

Just don’t expect Rep. Kowalko to bend.

“We haven’t passed a legitimate minimum wage increase (since 2014) and we’re going to take away from those same people? No. I don’t want to get moral about it but it is morally unacceptable to me,” he said.

Delaware tax brackets

Delaware has six tax brackets, not counting the income level at which there is no tax. Below are the state’s six brackets.

$2,001 to $5,000: 2.2 percent

$5,001 to $10,000: 3.9 percent

$10,001 to $20,000: 4.8 percent

$20,001 to $25,000: 5.2 percent

$25,001 to $60,000: 5.55 percent

$60,001 and up: 6.8 percent

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