The News Journal | by Matthew Albright
Democratic leaders in the General Assembly have released a blueprint for raising Delawareans’ personal income taxes, including a new, higher top tax bracket that would charge the wealthiest residents more.
They say raising the income tax is key to fixing the state’s $400 million budget deficit because that tax will grow with the economy, so legislators won’t have to keep “kicking the can down the road.”
“PIT (personal income tax) is the one that’s going to be structural, that we’re not going to have to keep revisiting every year,” said House Majority Leader Valerie Longhurst, D-Bear, prime sponsor of the bill.
Longhurst said she is willing to change some of the details of the bill if it will help get the votes necessary to pass.
“Everything’s fluid,” Longhurst said. “Right now, in the next three weeks, everything down here is fluid.”
Lawmakers are supposed to have a balanced budget by the time they gavel out on June 30. Yet it does not appear Democrats have the handful of Republican votes they need to pass tax increases, at least not yet.
“I get 30-40 people at my [constituent coffee events],” said Rep. Danny Short, R-Seaford, and the House minority leader. “They are pretty much fed up with us cost-shifting our problems onto their backs, and that’s what a tax increase is.”
The Democratic leaders’ bill would bump up tax rates for every income bracket by 0.15 to 0.4 percent. It would eliminate itemized deductions and raise the standard deduction from $3,250 to $5,000 for people who file individually and from $6,500 to $10,000 for those filing joint returns.
It would also create a new top income tax bracket of 6.95 percent for those making $150,000 or more. Currently, the top tax bracket is set at 6.6 percent for those making $60,000.
The bill also would gradually raise the age someone has to reach before they are eligible for the $12,500 exclusion of income for pensions and other retirement income. Currently, those age 60 and older receive that exclusion; the bill would raise the age in one-year increments until it is age 65 in 2021.
All told, the increases would raise $68 million in the next fiscal year and $211 million in the next fiscal year. That’s because the state’s fiscal year starts in July, but the tax year starts on Jan.1, so the state will reap only half a year’s worth of taxes in the first fiscal year.
The bill is similar to the income tax plan Gov. John Carney proposed in March. The biggest additions are the new top bracket and the new retirement income exclusion rules.
Carney seems amenable to the changes.
“My focus is primarily on a personal income tax that will pass,” he said.
Democrats argue $60,000 is squarely middle class, and say people earning that much shouldn’t be paying the same amount as those making hundreds of thousands or even millions of dollars.
“Everyone in this building, if you gave them truth serum, would concede that Delaware is the most tax-friendly state in the region by a large margin,” said Sen. Margaret Rose Henry, D-Wilmington East, in a statement. “When a Delawarean who is earning $600,000 a year pays the same tax rate as someone paying $60,000, we think it’s appropriate to ask them to do a little bit more to help preserve the programs that make our state so great.”
Republicans say raising the top tax rate could drive wealthy Delawareans out to states like Pennsylvania, which has a flat 3.07 percent income tax across all income levels, or Florida, which has no income tax.
On Tuesday, Republicans unveiled a list of ideas for systemic spending cuts they wanted Democrats to consider in exchange for votes on an income tax increase. Those ideas got an icy reception from Democrats.
The income tax is a political minefield. Even as Republicans oppose any income tax, some progressive Democrats think Delaware should be asking even more of its wealthiest residents.
Firebrand Rep. John Kowalko, D-Newark sponsored legislation that would actually lower tax rates for the lower and middle brackets but more dramatically hike taxes on the top brackets. He said he would vote against Longhurst’s bill.
“It’s absurd to purport that this is somehow progressive tax reform,” Kowalko said, saying it was wrong to increase taxes on the lower-income earners. “It’s like stealing quarters out of the tin can of a beggar on the street.”
Other progressive Democrats said they would likely support the bill, even if it isn’t their ideal.
“I like this one a lot better than nothing, which is what’s going on now,” said Rep. Paul Baumbach, D-Newark, who has publicly supported higher brackets.
Baumbach and other Democrats clearly voiced frustration with Republicans, who they said are not doing the responsible thing to balance the budget.
While Carney has expressed worries about economic competitiveness, he said Republicans shouldn’t act like a few tenths of a percentage point increase will be devastating.
“When people think ‘oh, two-tenths of 1 percent increase, our economy will never survive,’ well it’s not always been 6.8 percent,” Carney said. He points out that Delaware previously had a top tax rate of 19 percent.
Short argues it’s not about this one tax, it’s about Democrats being too quick to raise taxes and fees in general.
“People aren’t just looking at this one thing,” he said. “They’re looking at the accumulation of all that’s going on in the state.”
HOW MUCH WOULD TAXES GO UP?
Virtually everyone would see their taxes increase under the Democrats’ plan. Here’s how big the increase would be for each income bracket:
Annual income — Current rate — Proposed — Change
$0 – 2,000 — 0 percent — 0 percent — 0 percentage points
$2,001 – $5,000 — 2.2 percent — 2.4 percent — 0.2 percentage points
$5,001 – $10,000 — 3.9 percent — 4.2 percent — 0.3 percentage points
$10,001 – $20,000 — 4.8 percent — 5.2 percent — 0.4 percentage points
$20,001 – $25,000 — 5.2 percent — 5.5 percent — 0.3 percentage points
$25,001 – $60,000 — 5.55 percent — 5.7 percent — 0.15 percentage points
$60,001 – $150,000 — 6.6 percent — 6.8 percent — 0.2 percentage points
$150,000 and up — 6.6 percent — 6.95 percent — 0.35 percentage points
NOTE: Currently, the top tax rate is $60,001. The Democrats’ plan would add a new top bracket at $150,000.