This article was originally published at delawareonline.com on May 29 in The News Journal on May 30
The recent DEFAC Advisory Council on Revenue recommends an increase in the state's Gross Receipts Tax rate. This is a gross mistake for three reasons.
First, if you tax something you get less of it. An increase in the GRT reduces business income and leads to less hiring. Using data from 1975 through 2013 and controlling for the business cycle using Delaware personal income, an increase in Delaware's GRT rate has been followed two years later by a statistically significant 8 percent reduction in retail trade employment. A decrease in the state's GRT rate has been followed two years later by a statistically significant 7 percent increase in Delaware retail trade employment.
Increasing taxes will not grow an economy.
Second, the Council's major reason for advocating an increase in the state's GRT rate is that the additional revenue will allow a modest reduction in Delaware's Corporate Income Tax rate. At 8.7 percent, Delaware has the ninth highest CIT rate in the nation. On the face of it, this tradeoff appears sensible.
In the real world, however, businesses focus on the bottom line impact of state and local taxes, and do not fixate on one individual tax rate. That is why the Tax Foundation in its calculation of the corporate tax component of its state Business Tax Climate Index combines the impact of the CIT rate with the GRT tax rate. Delaware currently ranks 50th among the states on this measure (the most costly). Raising the GRT while modestly reducing the CIT is unlikely to change Delaware's rating.
Third, experts in the field of public finance have clearly identified the systematic flaws in the GRT. Because of political maneuvering it creates wide disparities in tax rates across products and industries (currently food processors in Delaware face a tax rate of 0.1991 percent while contractors pay 0.6472 percent and retailers pay 0.7468 percent).
Contrary to the goal of government transparency, the GRT is a hidden tax. It taxes products and services in multiple stages of production. A business can be losing money and still have to pay taxes on its gross receipts.
It is appropriate and commendable that the state of Delaware periodically examines the reliability of its package of taxes.
However, state government has consistently refused to examine the impacts on Delaware's economy of proposed changes in existing tax rates and proposed new tax instruments.
This is obviously poor governance.
Dr. John E. Stapleford is president of the Caesar Rodney Institute.
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