CRI News


Delaware's 204.07% Personal Income Tax rate harms small business owners
By Charlie Copeland, Director 
Center for Analysis of Delaware's Economy & Government Spending
 
 
Several decades ago, Delaware instituted a gross receipts taxaka Delaware's hidden sales tax, that is applied to the business rather than the consumer. When instituted, the tax was meant to be temporary to handle a budget shortfall.

 

So, why does Delaware still impose this tax when 45 other states have repealed it? A gross receipts tax (GRT) is a horrible public policy.

 

This tax on Delaware's small business owners frequently creates "the equivalent" of the highest Personal Income Tax rates in the Country because most small businesses are "pass-thru" entities, meaning that the business owner pays the business's taxes at their personal income tax rate.

 

 

THE DIRTY DETAILS

 

Let's look into the mathematics of a small business income statement- it's necessaryChart 1 below is an example of a "generic" income statement when a gross receipt tax is applied vs. when it is not applied to a business.

 

This income statement assumes a "Professional Services" firm with $150,000 per month in revenue (the first $100,000 is exempt from GRT), a GRT tax rate of 0.3983%, and a Personal Income Tax rate of 6.6%.

 

In this example, the business is barely profitable. During the pandemic, many small businesses were performing even worse than this.

 

 

Chart 1: Generic Income Statement "No GRT vs. GRT"

 
GRT TaxPic1.png

(Source: Author's own calculation using Delaware's Division of Revenue.)

 

As can be seen, the small business owner is paying a tax rate of 204.07% on their income in this scenario (of course, if the business loses money during the month, the "tax rate" is effectively infinite because the GRT is paid whether their business is profitable or not).

 

Chart 2 is a more "normal" scenario of a ~5% profit margin; the small business owner only pays the equivalent of a 9.33% Personal Income Tax, which would be the 7th highest tax rate in the Nation.

 

 

Chart 2: Normal Scenario Income Statement "No GRT vs. GRT"

 
GRT TaxPic2.png

(Source: Author's own calculation using Delaware's Division of Revenue.)

 

In short, during bad economic times, Delaware's hidden sales tax, aka the gross receipts tax, ensures that Delaware small business owners pay among the highest personal income tax rates in the nation - taking money out of the business at the exact moment the business most needs that money.

 

 

OTHER HIDDEN IMPACTS OF THE GRT

 

In addition to creating among the highest income tax rates in the Country, the GRT is a "Pyramiding" tax. It gets applied to every step of the supply chain, as shown in the graphic below.

 

 
GRT TaxPic3.png

(Source: The Tax Foundation)

 

By the time a Delawarean is consuming a local brew at their favorite beer garden or restaurant, the GRT has hurt four small businesses.

 

 

DELAWARE ALMOST STANDS ALONE

 

Most states have recognized the destructive impact of imposing a gross receipts tax. Only five states still have GRTs, but of those five, Delaware's is the most convoluted, with 54 different tax rates ranging from 0.0945% to 0.7468%.

 

These percentage rates look small, but their impact, as demonstrated above, is enormous. Details on the convoluted nature of applying this tax can be reviewed on Delaware's Division of Revenue website.

 

 

CONCLUSION

 

Previous CRI analyses of Delaware's economy have shown, using State and Federal data, that Delaware has been one of the worst economic performers in the Country for the last 20 years.

 

The GRT is one of the horrible policy ideas that has kept Delaware's small businesses from growing or adding high-paying jobs.

 

There are over 17,000 businesses in Delaware with fewer than 20 employees. These firms have almost 70,000 employees making over $3.2B a year in payroll.

 

Delaware Legislators should allow these small businesses to thrive and add high-paying jobs. They should NOT tax them into failure with what is often the highest "equivalent" personal income taxes in the Nation - 204.07%!

 

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