The News Journal | by Matthew Albright
Democrats and Republicans are deadlocked over how much to raise in tax increases and how much to cut with only a month left in this year’s session of the General Assembly.
Fundamental disagreements over the budget threaten to clog a legislative agenda that still includes controversial bills ranging from reinstating the death penalty to legalizing marijuana to overhauling the historic Coastal Zone Act.
When legislators return to work on Tuesday, they’ll have 13 legislative days left.
“All these other issues are being held up because of the budget,” said Rep. Pete Schwartzkopf, D-Rehoboth. “The sooner we can get it done, the better off we all are.”
The two parties have agreed to a $119 million tax hike on the state’s biggest corporations, but Democrats are pushing for more new revenue. They say it is necessary to stave off harmful budget cuts and put the state on more solid financial footing.
“We can’t responsibly cut our way to a long-term budget solution, or rely on one-time gimmicks that will make our financial problems even worse,” Gov. John Carney said.
The corporate franchise tax was part of Carney’s recommended budget, but the governor insists the other tax increases he proposed are as important — particularly an increase in the personal income tax. Overall, Carney wants to make a roughly equal amount of spending cuts and tax increases.
“I get it — nobody wants to raise taxes. I don’t either,” Carney said. “But our plan would raise new revenue in a way that’s fair and keeps us economically competitive. It’s time for legislators to step up to the plate, vote on our revenue proposal, or offer a responsible alternative. We can’t afford another short-term, short-sighted solution.”
Republicans remain unconvinced. And Democrats need at least a handful of Republican votes to pass tax increases, which require three-fifths votes in each chamber.
“We’ll never be able to tax our way out of this problem,” said Rep. Danny Short, R-Seaford, and the House minority leader. “We’re not willing to just think that [the income tax] is going to solve our problem. That is purely taking from somebody else to cover our costs.”
Short and other Republican leaders say they will only consider further tax increases if Democrats give serious consideration to some of their ideas for managing growth in government spending.
GOP leaders say they don’t want to negotiate their proposals in the press. Among ideas they’ve previously pitched are reductions to the “prevailing wage” that is paid on government contracts, “right to work zones” in which union participation would not be mandatory and early retirement incentives for state employees.
“There’s ways that we’re currently doing business that we just can’t continue to do when it comes to what we pay for or give money to,” Short said.
The budget debate speaks to fundamentally different philosophical views of the role of government.
“Republicans think we raise too much. Democrats think we don’t raise enough,” Schwartzkopf said. “There’s a difference in ideology. I’m not the kind of guy who’s just going to say ‘I’m right, you’re wrong,” but we’ve got to find some way to compromise.”
The sooner a budget deal is brokered, the better, Schwartzkopf said.
“When the budget’s in flux, everything is in flux,” he said.
The stakes of this debate go beyond political palace intrigue. If no additional taxes pass, the budget-writing Joint Finance Committee would need to slash more than $280 million.
If the mix is equal, they need to cut about $200 million.
The committee had already settled on roughly $80 million in cuts before Democratic leaders asked them to halt their work last week. And Rep. Debra Heffernan, D-Bellefonte, said even that amount would cause real pain.
Several members said they received many calls from constituents and groups, worried about what was on the chopping block.
“I did not support many of the cuts because we are hurting Delaware’s most vulnerable citizens — those who are elderly, those who have disabilities, those who are children,” Heffernan said.
Among the cuts JFC has approved are reductions to early childhood education, property tax breaks for seniors and 20 percent cuts to many public health services, like needle exchanges, the infant mortality task force, immunizations and the cancer council.
One of those public health programs is the Nurse Family Partnership, in which nurses work with low-income mothers who are pregnant for the first time. They help the new moms understand proper health and nutrition and teach them parenting skills.
“We’re teaching them to parent differently than they were parented,” said Leslie Newman, CEO of Children and Families First, the nonprofit that runs the program. “We’re trying to break that cycle of poverty right here and now.”
Newman says her group is trying to tackle at the source family issues that are often at the root of Delaware’s problems in schools, violence on the streets and the epidemic of heroin overdoses. If the cuts go through, fewer moms will be able to participate.
It’s reductions like these that cause Heffernan heartburn.
“We’re now trying to decide who to hurt the most,” she said.
Some Republicans say they’re sympathetic to those affected by cuts. but they say tax increases would hurt Delawareans, too.
Many have told The News Journal they don’t want to see taxes increased.
“The taxpaying public is not a never-ending source of income for our representatives to keep giving out without true monitoring,” wrote one DelawareOnline Facebook commenter. “If they ran their own households without a fair budget and cutting waste, where would they be?”
Senior citizens on fixed incomes, who already are losing money on a property tax subsidy, say it will seriously hurt their budgets to pay hundreds of dollars more on their tax bills.
“They raise taxes on me, but I don’t get any more money,” said Mona Wyatt, a Wilmington retiree on Social Security, in an e-mail. “That’s just less money I’ve got to spend on medicine or food or other things.”
Dollars and votes
The politics of the budget come down to the cold, hard math of dollars and votes.
Legislators fixed about $119 million of the $400 million problem with a deal to raise the corporate franchise tax in exchange for repealing the estate tax. But that’s the easiest tax to raise politically, since it does not affect many voters.
If legislators followed Carney’s outline, they would need to raise more than $80 million more in new taxes. The income tax is the biggest-ticket item, but increases in taxes on tobacco and alcohol also are possible.
“This is a simple mathematical issue: Solving our budget issues requires both parties to work together and reach consensus,” legislative leaders said in a joint statement. “Budget issues are not partisan, and neither are the solutions.”
Republicans don’t want to hike taxes without firm commitments on cutting spending. Some of them were irked by a decision Schwartzkopf and McBride made Wednesday to halt the finance committee’s work after it had only made $80 million in cuts — not even halfway to the nearly $200 in cuts the legislature would need to make if Carney’s “balanced solution” was followed.
The committee hasn’t voted on some of Carney’s proposed cuts to discretionary funds for school districts or reductions in state employee health insurance.
“The governor’s proposal was out there, and it surprises me that they didn’t even want to go to the degree that he’s suggesting,” Short said.
Democrats have 11 out of 21 members in the Senate. They need 13 votes to pass a tax increase, so they need to “flip” two Republicans, assuming all Democrats fall in line.
In the House, Democrats have exactly the 25 out of 41 seats they need to pass a tax increase. But there are several Democrats who are averse to tax hikes, so a perfect party-line vote isn’t guaranteed.
“I don’t think anybody’s being unreasonable,” Schwartzkopf said. “I feel optimistic that in the end we’re all going to do the right thing.”
Income tax is key
The income tax is not the only potential new revenue source being considered, but Democratic leaders consider it the most important.
It is also perhaps the most difficult to pass.
Carney’s administration thinks an income tax increase is crucial because it is a stable, consistent source of revenue.
Task forces and analysts that have studied Delaware’s budget say the state is too reliant on revenues that shift dramatically from year to year and don’t keep track with the economy — like unclaimed property and casinos.
While the corporate franchise tax would raise more money for next year, the income tax would bring in more money over the long term, Carney’s administration says. It would help Delaware’s revenues grow at the same pace as its expenses.
If the General Assembly doesn’t pass the income tax, Schwartzkopf fears it won’t have done much to fix budget problems in the long term.
“Part of the reason why we want structural reform is so we’re not sitting here 365 days from now doing the same damn thing we’ve been since doing 2009,” Schwartzkopf said.
But many Republicans say it would be hard to convince them to vote for an income tax increase.
“I just don’t think it’s right for us to act like we can just raise the income tax as a way to solve our problems,” said Rep. Mike Ramone, R-Middle Run Valley and finance committee member.
Legislative leadership faces a particularly tough juggling act with the income tax because some Democrats are unhappy with the method Carney chose to increase it.
Carney’s idea is to eliminate itemized deductions and increase the standardized deduction while growing tax rates across all the income tax brackets. His administration said the changes to deductions will help lower-income residents and hit higher-income residents harder, making the tax progressive without major increases in the top income bracket.
Some Democrats think Carney’s proposal doesn’t ask enough of the wealthy. They back a plan from Rep. John Kowalko, D-Newark, that would create new, higher tax brackets for those with six-figure incomes.
Such a plan would be even more radioactive to Republicans, though. So if an income tax is going to pass, leaders like Schwartzkopf need to walk the line between their two caucuses.
While they acknowledge the political difficulty of the situation, most leaders in both parties feel confident they’ll have a budget by the end of the session. They say the state has patched worse budget holes before.