Tax debates lead docket of early Delaware legislature bills

Delaware Business Times | by Jacob Owens

DOVER – The Delaware General Assembly kicked off Jan. 12, albeit without the usual fanfare at the State House as the 151st session is the first to begin in an all-virtual format amid the COVID-19 pandemic, and taxation is surprisingly one of the issues to watch.

Perhaps the most eyebrow-raising proposal filed so far is a tax hike on those earning $125,000 or more a year. Three new brackets created by House Bill 64 would tax those starting at $125,000 at 7.1% rather than the previous ceiling of 6.6%, as well as rates of 7.85% starting at $250,000 and 8.6% starting at $500,000.

The proposal was filed by Rep. John Kowalko (D-Newark), who has proposed similar tax increases in the last two assemblies, but is raising eyebrows this year due to its timing amid the pandemic and an expected state budget surplus.

Kowalko argued that personal income taxes are among the most consistent revenue streams for the state, as determined by the non-partisan Delaware Economic and Financial Advisory Council, and that higher-wage earners have not seen the job losses that lower-wage positions have. He said that he weighed his proposal carefully for a “fair and equitable” increase, noting that someone who earns $250,000 a year would pay about $625 more annually while a $500,000 earner would pay $3,750 more.

“I’m not saying that we expect the higher earners to bear the brunt of funding services, but if they’ve been intact and they remain intact, I don’t think it’s asking too much,” he said, noting the disparity in wages has grown for decades between lower, middle and upper classes.

Kowalko said that he consciously did not want to tie a tax bracket increase to a deficit or programmatic cost, because it then skews debate to whether it “fills a need.” By tying increases to a stable income source like employment, the legislator said that it would better prepare for future deficits or spending needs.

“Delaware is eventually going to have to face the piper. We are a parasitical revenue-source state that depends on corporate taxes and receipt taxes, etc., some of which are vulnerable to being disaffected,” he said.

While Kowalko has raised the prospect of higher tax brackets before, the co-sponsoring of HB64 by top-ranking Senate Pro Tempore David Sokola, and Democratic supermajorities in the state House and Senate exceeding the necessary three-fifths votes for tax increases have raised the specter than it could find the votes this time around without needing Republican supporters.

The proposal has already found its fair share of critics, including state Republicans and A Better Delaware, a non-partisan public policy and political advocacy organization that supports pro-growth, pro-jobs policies.

In a tangentially related filing, Rep. Mike Ramone (R-Pike Creek) has filed House Bill 71 that would decrease the state’s property transfer tax from 2.5% to 1.5%, or the rate it stood at until 2017 when a hike was approved. The December DEFAC report found that rapid home sales through the pandemic had produced a large increase in transfer tax payments, and a cut there would allow new homeowners to keep a bigger slice.

In a far less controversial measure, House Bill 65, sponsored by Rep. Ed Osienski (D-Brookside) and Sen. Jack Walsh (D-Stanton), would exempt unemployment benefits paid in 2020 from Delaware state income tax, maintain the new employer tax rates at 2020 levels, and waive the 13-week waiting period before the state could trigger on extended benefits.

More than 100,000 Delawareans have filed an unemployment claim during the pandemic, with the state paying out $965 million in benefits in 2020 – more than 14 times what was paid out in the year prior. By exempting the state income tax on the 2020 benefits, the state would forgo about $21 million in revenue.

Gov. John Carney voiced support of the measure in a statement, saying, “We have significantly expanded unemployment benefits to support Delaware workers and families who have been hit hardest by the COVID-19 crisis. We shouldn’t then turn around and tax workers on that income.”

The measure also establishes the 2021 new employer assessment rate, average industry assessment rate, and average construction industry assessment rate at the same rate as 2020 in order to avoid an increase in these rates as a result of the increase in unemployment claims due to COVID-19.

Maintaining the new employer tax rates at 2020 rates is expected to benefit more than 2,000 businesses. Holding the new employer tax rate at 1.8% will save employers up to $264 per employee in 2021. Holding the new construction employer tax rate at 2.3% will save employers up to $165 per employee in 2021, according to the Division of Unemployment Insurance.

A fourth bill dealing with taxation, House Bill 12, would extend a full exemption of county and school taxes to 100% service-disabled veterans, of which the state reportedly has about 2,000. Sponsored by Rep. William Carson (D-Smyrna), the exemption would apply only to primary residences of permanent residents who meet criteria set out by the U.S. Department of Veterans Affairs. The tax loss to school districts statewide could total as much as $1.6 million, according to estimates.

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