House OKs making tax hikes permanent

Legislators remove sunsets on personal income, gross receipts taxes
March 26, 2013

Tax increases scheduled to expire this year could become permanent if any of four proposals passed by the House become law.

House representatives passed four bills related to personal income tax, gross receipts tax, estate tax and corporate franchise tax, March 21.  The package of bills now heads to the Senate.  If senators approve the increases, the revenue the bills produce would make up for a gap in Gov. Jack Markell’s proposed budget.

Markell presented his $3.7 billion operating budget, Jan. 24.  He said if the four tax increases were kept in place, it would offset about half a $56 million deficit in his proposed budget for fiscal year 2014.  He has proposed spending cuts to make up the other half, including a $16 million cut to Farmland Preservation and Open Space programs and additional cuts in the Transportation Trust Fund, Municipal Street Aid and Community Transportation Fund.

The four taxes were increased in 2009 when the state faced a major budget deficit.  The higher rates are scheduled to expire this year unless legislators vote to extend them.

Democrats hold the majority in the House and Senate, and Democratic leaders are behind a package of bills introduced in the House March 14. House Majority Leader Valerie Longhurst, D-Bear, is the lead sponsor of all four bills.

Under House Bill 50, the state’s personal income tax would drop from 6.75 percent to 6.6 percent.

The personal income tax top rate went from 5.95 percent to 6.95 percent in 2009.  Since then, the rate has been lowered to 6.75 percent. Department of Finance Secretary Tom Cook said only 20 percent of Delawareans are subject to the tax, which is imposed only on citizens who make more than $60,000 a year.

If HB 50 does not pass the Senate, the state personal income tax would go back to 5.95 percent for the state’s top earners.

House Bill 51 would make the estate tax permanent.

In 2009, lawmakers temporarily reinstated a defunct estate tax, which is levied on a decedent's assets.  The tax is not imposed on any estate valued under $5.12 million.

House Bill 52 would make the corporate franchise tax, enacted in 2009, permanent and maintain the maximum franchise tax of $180,000.

All three bills were approved by House representatives in a vote of 26-15, largely along party lines.

House Bill 53, which would remove a sunset on the state’s gross receipts tax rate, was approved in a vote of 25-16.  Rep. John Kowalko, D-Newark South, joined the majority of Republicans to vote against the bill.

Under HB 53, the current gross receipts tax rate would go down 1 percent for all businesses, and the rate for manufacturing businesses would go down 30 percent.

Businesses that make less than $100,000 per month in gross receipts are excluded from the tax.

Two amendments to HB 52 – proposed by Republican Representatives Deborah Hudson, R-Fairthorne, and Danny Short, R-Seaford – would have extended the sunsets for one and two years, rather than make them permanent.

Both amendments failed in votes of 26-15.  All Sussex County representatives voted for the extensions except House Speaker Pete Schwartzkopf, D-Rehoboth Beach.

Similar amendments to the other bills in the package failed by voice vote.

Short brought up a $63 million tax refund claim that is being investigated by the Department of Finance.  An unnamed corporation is claiming it paid taxes to Delaware for business it conducted out of state.  The refund is not included in Markell’s budget proposal.

“I think that is an issue that hands over the citizens of Delaware,” Short said. “I wish someone would explain it now, whether we owe it or we don’t owe it.”

Cook said the state budgets only 98 percent of its revenue and leaves 2 percent of the budget – $70 million – as a cushion.  If the state has to pay the refund, the 2 percent of unbudgeted revenue would absorb the cost, Cook said.

Hudson, Rep. Mike Ramone, R-Middle Run Valley, and Rep. Joe Miro, R-Pike Creek Valley, asked Longhurst to delay the package of bills until the Delaware Economic Advisory Council has a more accurate forecast for the upcoming fiscal year, which begins in July.

Ramone said the Bond Bill Committee does not meet until June and the Joint Finance Committee does not meet until May.  “I would just ask that we defer this decision,” he said.

Short made a motion to table the bills and reconsider them at a later date, but his motion died in a voice vote.

Rep. Melanie George Smith, D-Bear/Newark, said although the Joint Finance Committee writes the budget in May, it is planning the budget now.

Secretary of Finance Tom Cook said the state’s financial forecast would not change drastically enough from March to June to warrant a delay.

Longhurst said a delay would stall the budgeting process. “We have a known pot of money that’s going to go away if we do not pass these bills today,” Longhurst said.  Joint finance committee members need to know if the taxes will sunset as soon as possible so they can make appropriate cuts in the budget.  “We will have tens of millions of dollars that on day one we’re going to have to cut,” she said.

According to a press release from the House Majority Caucus, if the taxes were allowed to expire, the state will lose $36 million in revenue in fiscal 2014 and more than $180 million in fiscal 2015.

If the General Assembly approves the measures, officials predict the taxes would generate $27.9 million in fiscal 2014.

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