State of the State: Delaware
Governor Carney's agenda boils down to tax and spend combined with cronyism.
Delaware Governor John Carney acknowledged the looming $400 million budget deficit in his State of the State address, but he refused to call out the cause of the problem—namely the 4th highest per capita expenditures in the nation (greater than $10,000 annually). In fact, Delaware’s spending is more excessive than any other state east of the Mississippi River. To close this fiscal hole, the governor called for a 50-50 mix of spending cuts and new revenue. “It’s built on the principle of shared sacrifice,” said Governor Carney. But by his own estimates, expenditures will grow again next year by 0.3 percent. Considering the heavy tax burden already borne by the hardworking taxpayers of Delaware, increasing taxes is more akin to an additional fleecing rather than a “sacrifice.”
Years of shoddy fiscal management created this maelstrom. Debt service now eats up nearly 11 percent of every dollar of tax revenue (4th worst ratio nationally). Too light a tax burden is certainly not the problem, considering Delaware boasts the 11th highest top marginal personal income tax rate and the 3rd highest corporate income tax rate (a whopping 11.69 percent). The benefits of no sales tax and a mild property tax burden are outweighed by these other taxes; in fact, the remaining tax burden is the heaviest in the nation (nearly 5 percent of personal income). Not content with the current sky-high corporate rate, the governor hopes to raise taxes on the very largest businesses incorporated here and to raise “personal income taxes… in a way that requires those who can afford more to pay more.”
In a fit of rhetorical flourish, Governor Carney claimed the “north star in building this budget was making Delaware more competitive.” Indeed, this would be welcomed. Economic outlook in the First State ranks 37th in the nation in the 10th edition of the American Legislative Council report Rich States, Poor States. But the governor did not even entertain the notion of lowering the economically oppressive tax regime, promising only to decide “which taxes to raise and which to leave untouched.” Additionally, the governor refused to mention other dismally ranked major economic policy variables holding the state back. For instance, worker’s compensation costs remain 6th highest in the nation, and lack of right to work protection deters business expansion.
Instead of proposing significant reforms, the governor promised “to raise taxes only where our economy could bear it” and “to continue making investments critical to our next generation.” In other words, this agenda boils down to tax and spend combined with cronyism.
Notably, the governor called for placing the Delaware Economic Development Office (DEDO) on the “forefront of moving Delaware into the 21st century economy.” But much of this activity involves transferring taxpayer dollars to politically favored private entities through grants or tax subsidies. Politicians easily claim credit for the visible jobs supposedly created by these expenditures, but the economic opportunity costs of taking these funds from taxpayers prior to showering them on a select few are far harder to document. Broad-based tax and regulatory reform would attract businesses statewide. Look at Texas, Arizona and North Carolina— states booming from such an environment. DEDO’s targeted, crony handouts of tax credits, grants, loans and property tax incentives may create temporary goodwill for a few politicians, but such inefficient distortion of the tax code and policies create even more drag on economic growth.
On the bright side, the governor did remind legislators of the “strong obligation to make sure we’re spending tax dollars wisely.” The creation of the Government Efficiency and Accountability Review Board (GEAR) is a step in the right direction. Ultimately, a transition from traditional budgeting (where line items are presumed to increase year over year) to priority-based budgeting is desirable.
Governor Carney is right: “The best way to move beyond a fiscal crisis like the one we’re in is to grow our economy.” But his agenda resists overall spending reductions, advocates for higher taxes and neglects other needed policy reforms (such as worker’s compensation and worker freedom). With a legislature unlikely to circumvent the lackluster agenda of the new governor, don’t expect Delaware’s economic outlook to break through the median anytime soon.