Delaware's unrealistic look at its finances

On Jan. 14, Gov. Jack Markell issued an executive order establishing the DEFAC (Delaware Economic and Financial Advisory Committee) “Advisory Council on Revenue.” The primary charge to the council is to evaluate whether the state’s principal revenue sources are adequate and appropriately responsive to economic growth, i.e., generating enough money to maintain the state’s desired level of spending.  

There is no charge to the council to explore effective and efficient ways to reduce state government spending. Which on the face of things seems unusual.   From 2009 through 2015 the state’s general fund revenue has increased over 25 percent. This flow of revenue has out-stripped the combined increase in inflation (11 percent) and population (6 percent) and the increase in Delaware per capita income.

According to the Tax Foundation, the state ranks fifth in tax revenue per capita and sevnth in state debt per capita.   While it requires the expertise of state finance officials to cover the details, when one looks at the change in the state’s operating budget over the last 10 years (fiscal 2006-2016) certain aggregate changes do jump out. The budget of the State Department of Finance, for example, is up 88 percent, including a 161 percent increase in personnel costs.

And somewhere in the absolute dollar increases in spending in the Department of Health and Social Services ($433 million) and Department of Education ($349 million) there must be some potential for savings.   The state’s push for additional general fund revenue is also evidenced in its aggressive tax rate increases that then were not allowed to sunset.

Most notably, the top personal income tax rate (on $60,000 and above) was raised from 5.95 percent to 6.95 percent in early 2010 with the proviso for the rate to sunset four years later. Instead of the sunset, the top rate now stands at 6.60 percent. The state increased the Gross Receipts Tax rates by 25 percent in 2009 and another 8 percent in 2010 and has subsequently ignored the sunset provisions. At 8.7 percent Delaware continues to have the highest corporate income tax among all the states.  

The governor’s executive order does not charge the council with estimating or even considering the impact of tax changes on the state’s economy. There is, of course, a direct link.   A notable example is the experience at Dover Downs. Dover Downs Gaming & Entertainment, Inc., is a publicly owned company for which performance data is readily available.

The company was first hit by the approval of casino competition in nearby Pennsylvania in 2006, then by the downturn of the 2008 recession.   According to filings with the SEC, the company’s net earnings went from $25.3 million in 2006 to (-$706,000) in 2014. During this steady erosion of net earnings, the state raised the effective tax rate on gaming revenue (after winnings) from 35.8 percent to a current 43.5 percent.

This is one of the highest rates among all the states with gaming casinos.   The company is the second largest private employer in Kent County with a total payroll and benefits of $53 million and payments to Delaware vendors of almost $20 million. To compete against the now 28 other casinos in its primary market area, Dover Downs must continue to invest in its facilities and engage in strenuous marketing.  

The council knows that Dover Downs passed nearly $190 million on to the general fund in fiscal 2013. But apparently the deteriorating financial and competitive position of the company given the impact of the extraordinary tax rate is not to be a consideration. Puzzling.  

Dr. John E. Stapleford is president of the Caesar Rodney Institute.