Delaware counties, taxpayers face higher costs

• Delaware's cities and counties avoided budget cuts in June.
• A state committee has endorsed raising property tax rates or imposing a statewide property tax.
• Delaware's property tax rates fund 7 percent of government services.
• How much state government spends per resident is down since Markell became governor.

Local governments and homeowners could face higher costs in upcoming years as Delaware's budget continues to face instability, with rising expenses worsened by erosion of key tax collections.

A committee created by Gov. Jack Markell to study Delaware's tax structure has already endorsed what many in Delaware might consider sacrilege: raising historically-low property tax rates – or even imposing a property tax at the state level.

Committee members also contemplated shifting additional costs to the county level, which could force local officials to rely on higher property taxes.

Top Delaware cabinet officials and lawmakers from both parties served on the committee and endorsed the plan. They said property taxes, at the state or county level, would "likely be the best available revenue source on which to place greater emphasis as an alternative to less responsive, more volatile sources of revenue."

Property taxes fund just 7 percent of all government services in Delaware, lower than all but three other states, according to 2012 Census data.

Edward Ratledge, a University of Delaware demographer, said greater reliance on property taxes could provide some measure of stability. "It's something that needs more consideration," said Ratledge, who served on the committee. "People ought to be willing to talk about it."

The report was published in June, as lawmakers threatened to reduce two-decade-old realty tax subsidies for local governments. County administrators, who rely heavily on state tax dollars to fund public safety, admit they're worried about funding reductions.

"It's an ongoing concern," said Todd Lawson, Sussex County administrator."As recently as the last few days, I've had conversations with our elected officials," Lawson said. "My message right now is let's not wait until June of next year."

Delaware's cities and counties avoided budget cuts this summer, after lawmakers threatened to reduce the share of realty transfer taxes directed to the county, but walked away at the eleventh hour. Lawmakers also considered cutting $1.2 million in funding for Delaware State Police patrols downstate, before backing off.

In Sussex, 84 percent of realty taxes fund public safety services.

Uncertainty in funding at the local government level is just one result of an increasingly unstable budget debate in Dover, where lawmakers negotiated nearly until dawn on July 1 to close a $60 million gap between spending and available revenue.

Delaware's budget continues to face higher costs for healthcare and state employee benefits, while simultaneously coping with an erosion of corporate unclaimed property revenue and taxes on casino gambling, two sources of money that have helped balance state spending plans since the mid-1990s.

The state's financial problems cannot be blamed merely on over-spending during Markell's tenure, as some might suggest. Annual budget growth since 2009, the year Markell took office, is 2.3 percent, a figure that just barely outpaces rising prices, according to a News Journal analysis of state budgets.

Adjusting for inflation, the amount that Delaware's state government spends per resident is down since Markell became governor.

"Those numbers are not showing rapid growth," said Jim Butkiewicz, an economist and chair of the University of Delaware's Department of Economics, who reviewed Markell-era budget figures.

But structural problems on the expense and revenue side are troubling policymakers in Dover. Among the issues, according to an analysis by The News Journal:

•Medicaid costs have risen 59 percent, to $668 million, since 2009, partly the result of higher state-level matches that took effect as the economy improved coming out of the recession;

•Annual pension and fringe benefit costs for state employees are up 27 percent during Markell's tenure, and rising healthcare claims resulted this year in a $116 million deficit in Delaware's group health plan;

•Corporate unclaimed property revenue, which funded 15 percent of the budget two years ago, is now expected to fall 22 percent with Delaware facing legal claims, contributing to an expected budget gap that could surpass $100 million in 2016;

•And gambling revenue, one of the state's top source of tax dollars since the mid-1990s, has dropped 29 percent since 2011, as Delaware's casinos have struggled to cope with increasing regional competition.

Business groups are pressuring Markell and other top state leaders to gain greater control of Delaware's budget. In June, the Delaware State Chamber of Commerce urged lawmakers to embrace spending reductions, saying businesses would not support a budget balanced only on tax increases.

Delaware's Business Roundtable, a coalition of chief executives, is preparing to publish a report on state spending in an attempt to influence the debate in Dover.

"We're concerned about the future, where we're heading," said Rich Heffron, the Delaware chamber president. "We need to start looking at it, addressing it, and not at the last minute. We've got to start discussing it now."

Markell defended his financial record on Friday. The governor cited 2011 reforms requiring state employees to contribute a greater share to their own pension and healthcare benefits. The changes were expected to generate state-level savings of $480 million over 15 years.

He also touted his administration's effort to reduce more than 1,000 positions through attrition since 2009, a move that lessened growth in state employee salary costs.

But Markell acknowledged it was necessary to look at rising costs.

The governor said Friday he would use executive power to create a committee to study government spending, or ways the state could be more efficient, heeding calls from Republicans who have called for a spending committee.

Census data from 2012 show that Delaware still spends more per resident than all but five other states. And about three-quarters of state spending is tied up in areas that are difficult to reform: state salaries and benefits, pension costs, Medicaid and payments on Delaware's debt.

"I will be very open to taking a careful look at the work of the efficiency committee," Markell said, adding, "I think it's important for people to recognize that what we have already done is unprecedented."

For some, conversations about shifting costs to local governments, or otherwise relying more heavily on a property tax is overdue. Funding for services like education, prisons and transportation is centralized at the state level in Delaware more than the in most states.

Only Hawaii provides more services at the state level than Delaware, according to 2012 data collected by the U.S. Census Bureau. And property tax rates here are 43 percent lower than any other state in the region.

Ratledge, the University of Delaware demographer, said instituting a statewide tax with rolling assessments could provide Delaware with a stable source of revenue. New Castle County has not reassessed properties since 1983; Kent since 1987; and Sussex since 1974.

"If you need more money, the first thing you do is you look at the taxes which are not currently overtaxed," said Ratledge.

Delaware Rep. Quinn Johnson, a Middletown Democrat, also served on the revenue committee and said conversations are "continuing" about what government services should be shouldered at the county level.

"Everybody is taking a hard look at it," he said.

Jeffrey Bullock, Delaware's secretary of state, said counties likely did not end the debate in June, when they persuaded lawmakers to back off plans to reduce realty transfer taxes directed to local governments.

Bullock, a former chief of staff to then-Gov. Tom Carper who later worked as chief administrative officer of New Castle County, suggested counties could fully absorb costs for functions already operated locally, like paramedic and other public safety services.

"The counties have an ability to raise property taxes," Bullock said.

Markell, who is term-limited and will leave office in January 2017, agrees that greater debate is warranted.

"Compared to most places, our counties don't have the same level of responsibilities that a lot of local governments do around the country," Markell said. "As a result you have these really low property taxes.

"I think it's reasonable to look at whether in fact it's more efficient to provide those services at the state level, and which county services ought to be subsidized by the state."

Of course, any significant changes to Delaware's tax structure, or core spending, would require significant political will in Dover that likely will be lacking in 2016, an election year when voters will select a new Delaware governor.

And imposing higher taxes, cutting services or shifting costs to the county level would spark significant opposition.

Tom Gordon, New Castle County executive, said Delaware's northernmost county funds a "full-service" county police operation and cannot afford state funding cuts. Likewise, residents cannot afford higher taxes on their homes.

"What we can't do is continue to raise property taxes. That's not a viable option," Gordon said.

And Republicans, who have enough members in the Delaware Senate to block tax increases, will continue to urge spending cuts first.

Ken Simpler, the newly-elected state treasurer who also served on the revenue panel, said Delaware should focus on getting results out of healthcare and education programs that consume so many tax dollars.

Until then, higher taxes might not be the answer.

"I think you've already seen there's going to be a lot of pushback on the spending side before we go down the path of more revenue," Simpler said. "I think that's fair."

Contact Jonathan Starkey at (302) 983-6756, on Twitter @jwstarkey or at jstarkey@delawareonline.com.