This article was originally published at delawareonline.com on June 4,2015 and in The News Journal the next day.
As former chair of DEFAC (the Delaware Economic and Financial Advisory Council 1977-85), I read with interest and enthusiasm the May 2015 report of the DEFAC Advisory Council on Revenues. The recommendations and conclusions reached in that report were carefully explained, and in general, if adopted, would improve the State’s revenue structure.
A few of their excellent proposals include lowering the top rate and reducing the deductions and exemptions on the personal income tax (to enhance the tax base and remain revenue neutral), lowering the corporate income tax rate (among the highest in the nation) and modifying its structure, and eliminating the estate tax (which provides little revenue and much volatility).
Effective tax policy includes two tenets: transparency and predictability. A statewide property tax could be devised to generate those goals and would be a valuable addition to our revenue stream. Other states have made significant changes in their tax structures without serious political opposition by making those transitions gradual and imposing caps (legal limits) on the impact of the changes over a brief time period.
These modifications are called “hold harmless” provisions in the public finance literature. For example, we could employ a statewide reassessment of all residential property and guarantee that no property owner’s liability would increase by more than 3 percent annually over the next five years. In this manner, some of the perceived, and real, unfairness of our very obsolete appraisals would be replaced. (Sussex County’s last residential property appraisals were in 1974.) Gradually the property tax could assume a more important role in the total State and local tax picture. The average state and local reliance on property taxes as a proportion of total revenue is 12 percent; ours is less than half of that at nearly 6 percent.
To cover any revenue shortfall for the next fiscal year, beginning on July 1, I would advise a strict limit on expenditures by every agency and part of the state operations funded by the general fund at 99 percent of this year’s spending (i.e., one penny per dollar reduction) and using the budgetary reserve fund (currently at more than $200 million) to fill in any temporary shortfall, leading to a more efficient and economically competitive revenue structure.
The gross receipts tax should not be raised; in fact ultimately the rates should be consistent between types of endeavors, leading to a more efficient use of scarce resources. Dr. John Stapleford of the Caesar Rodney Institute made this case quite well in last Sunday’s News Journal. In addition, the corporate franchise tax and fees should not be raised – we are fortunate to have one-quarter of our general fund revenue stream financed by corporate-related operations mostly located out of the state. Raising these rates would certainly discourage future incorporations, as well as current ones.
The value of this DEFAC Report on Revenues cannot be overestimated. Hopefully, it will soon be followed by a comprehensive report on reducing state expenditures. Currently, our state spending on a per capita basis is 20 percent higher than that in the average American state. Perhaps a shift to a statewide reassessment policy would also allow a realignment for the responsibility for state services, relegating more toward the county and local governments. A more competitive tax structure would go a long way toward enhancing the economic health of our state, which once was among the most rapidly growing states in the United States.
Eleanor D. Craig is associate professor of Economics at the University of Delaware.