Is Revenue-Neutral Tax Reform a Good Choice for Delaware?

Delaware, with its low corporate tax rate and zero sales tax, is a popular state for businesses looking to incorporate and consumers looking to shop. Traditionally—and uniquely—the state has supported itself on its revenue portfolio’s strength via such sources as abandoned properties, the corporate franchise tax, and the state lottery. As a small state with a healthy casino industry, Delaware has kept taxes as a share of its total revenue among the lowest of the 50 states.

A changing economy, however, has Delaware legislators considering revenue-neutral tax reform. Delaware’s revenue portfolio typically does not change, even though the state’s budgetary requirements do. This inelasticity has led to a persistent and pressing concern: growth stagnation.

Revenue neutrality, the idea that any changes in budget spending or revenue gathering must be configured so that a government’s net revenue is unchanged or minimally affected, has taken root in conversations about tax reform in recent years. The idea is popular with deficit-minded analysts and politicians as a way to rein in spending increases.

New York City’s Revenue-Neutral Reform

A number of municipalities and states have used this neutral swap system to great effect. In New York City, for example, Mayor Bill de Blasio introduced revenue-neutral tax reform in January to conform the city’s corporate tax codes to those of New York State. This reform eliminates the need for separate city and state tax records, allowing the city’s tax base to expand by removing major administrative hurdles.

To secure revenue neutrality with this relief plan, the city government has merged the bank tax with the corporate franchise tax for C corporations and adopted a new determination method that treats most net income as business income. The reform also includes targeted relief for small businesses and small manufacturers and retains the alternative tax base on capital to help stabilize and protect large corporations’ revenues during low-profit years.

Adding Flexibility to Delaware’s Stagnant Portfolio

In Delaware, legislators are working to add flexibility to the state’s revenue portfolio without undercutting net revenue. In January, Governor Jack Markell called for the formation of a special revenue subcommittee under the Delaware Economic and Financial Advisory Council. The subcommittee proposed a host of reforms in May.

One possible change is the elimination of the estate tax, which, according to the subcommittee, forces Delaware to rely on the unreliable: how individuals plan for the distribution of their estates after death. Other proposals include abandoning itemized deductions, increasing the age senior citizens can receive tax breaks from 60 to 65, and reducing the corporate income tax.

A Balanced Approach

Opponents of revenue neutrality argue that this practice could handcuff a state’s ability to effectively deal with budget requirements, such as addressing an underfunded infrastructure repair program. Proponents note, however, that revenue neutrality allows for reform-focused conversations that don’t get hung up on spending, opening the way for course corrections that may be less potentially destructive than simply adding or cutting revenue.

As demonstrated in New York City, revenue-neutral tax reform offers a responsible way to address and manage the long- and short-term effects of tax change. We’ll see what happens in Delaware.

[cf]skyword_tracking_tag[/cf]