Delaware's tax problem

Delaware's state government has a problem. Expenses are soaring in critical budget categories. But key tax revenues aren't keeping pace.

From 2000-2012, the cost of Delaware's Medicaid program, which provides government insurance for low-income state residents, rose from $700 million to $1.6 billion, a 120 percent spike, according to Pew Charitable Trusts.

Delaware taxpayers' share rose from $400 million to $700 million in that time. Since 2004, the cost of teachers' salaries and other school personnel costs, another budget driver, is up 73 percent* to more than $840 million.

Compare that to collections from two of Delaware's biggest sources of revenue: corporate franchise fees and gambling taxes.

Since 2004, state gambling revenues, including taxes imposed on casinos and traditional lottery games, have fallen 30 percent when adjusted for inflation.

Franchise fees, paid by companies that incorporate in Delaware, are up 21 percent to $625 million, aided by two tax increases. But even franchise tax revenues have not kept pace with price increases.

Delaware, unlike the federal government, is obligated to balance its budget. Higher personal income taxes have helped make up the difference, but individual income tax collections have also been suppressed by an economic recovery with low wage growth.

Controversial abandoned property collections have also helped, but those revenues are considered volatile and unpredictable.

And with Medicaid and public employee costs consuming a greater portion of the budget, that's left little room for new government investment in areas like education and public infrastructure.

Gov. Jack Markell discussed the problem during a meeting with News Journal reporters and editors last week. He said Delaware's tax collections don't adequately reflect growth (or decline) in the state's economy, making it difficult to plan and budget.

"There is a lot of interest in taking a hard look at the reliability of our revenue sources," Markell said. "This is not a precursor to saying I think we ought to have a sales tax. But in a world where more than half of our revenues are not really reflective of the economy, it does make it a challenge."

Markell administration officials produced documents Monday showing that 56 percent of Delaware's revenues, including gambling taxes, corporate franchise fees and abandoned property collections, are not directly tied changes in Delaware's economy. Those same documents said Delaware is "too dependent on static sources" of revenue.

With Markell's support, a new committee will begin a review of Delaware's tax base next month. The new panel is being formed by the Delaware Economic and Financial Advisory Council, the public-private committee that produces revenue estimates for state government.

Meeting on Monday, DEFAC predicted tax revenues would be off $17 million over the next two years. Markell and lawmakers must use the committee's estimates when compiling the annual budget.

Joshua Martin, a Delaware lawyer and chairman of DEFAC, said the new committee will report back to the General Assembly and Markell by spring 2015.

"The Delaware economy has seen good growth but that growth is not reflected in our revenues," said Martin, who will chair the panel. "Too many of our revenue sources are becoming too difficult to forecast and manage."

Ken Lewis, a University of Delaware economics professor who will also serve on the new committee, said the group will consider recommendations for new taxes, as well as ways to broaden taxes already imposed by the state.

Nothing is off limits, Lewis said.

"We'll consider anything," Lewis said. "We want to explore all of our options, understand all our options."

Contact Jonathan Starkey at 983-6756, on Twitter @jwstarkey or at jstarkey@delawareonline.com.

*Correction: Cost of teachers' salaries and other personnel costs are up 73 percent since 2004. That number was miscalculated in an earlier version of this story.