Chamber Legislative Update - April 2017

The General Assembly adjourned for Easter break on Thursday, April 6.   They will reconvene on Tuesday, April 25.  Upon their return, they will have an additional set of budget forecasts with which to work and a number of substantial issues to consider.

State Budget Shortfall Widens with March Forecasts
In the December meeting of the Delaware Economic and Financial Advisory Council (DEFAC), revenue projections indicated a $350 million structural shortfall (a gap between projected revenues and the projected cost of running state government).  At the Monday, March 20 DEFAC meeting, projections indicated that that gap had expanded to $385 million. 

Between now and June 30, there will be three more DEFAC meetings.  Though the April numbers have in some  past years yielded some improvement, due to income tax collections, etc. – there are no indications that we can expect substantial improvement in projected revenue for the coming year. 

At the heart of the matter is a structural problem with the State budget. During the 1990’s, Delaware was awash in cash.  The Carper Administration saw eight years of tax cuts accompanied by expansion in the size of state government.  In those days, this was possible due to the financial services industry boom in Delaware, the unexpectedly large amount of revenue generated by the slots venues (video lottery), Delaware’s victory in litigation with the State of New York (and others) over abandoned property (escheat) and other factors. 

In those days, Delaware was host to MBNA, pre-merger DuPont, a General Motors plant, a Chrysler plant, ancillary manufacturing which supplied both auto plants, a larger employment base at the Delaware City Refinery and a variety of other elements which are missing today.  The State of Delaware was also disproportionately impacted by the Financial Crisis of 2008-2009.  

In the first decade and a half of the Twenty-First Century, Medicaid, education, employee health care and pension and benefits costs have grown year after year.  Even in years when governors have sought to reduce costs and/or curb budget growth.  Nondiscretionary spending items such as Medicaid and public education have brought about spending increases nonetheless.  Consequently, the General Assembly and governors have grappled with budget shortfalls on a nearly annual basis.  

Prior to Governor Carney’s inauguration, the Markell Administration released their final recommended budget package.  It was met with little enthusiasm in the Capitol.  Almost immediately, members in both parties on the budget writing committees were indicating that the final budget package which will come before the full House and Senate in June would be substantially different from what the Markell Administration had proposed. 

Governor Carney responded to the budget shortfall and the questions being posed to his administration about the budget by calling for a “budget reset”.   On March 27, Governor Carney released his proposal at a press conference. 

Governor Carney Releases Fiscal Year 2018 Budget Recommendations
In a culmination of his administration’s “Budget Reset” efforts, Governor Carney released his recommendations to close the existing $385 million structural budget gap and balance the budget. 
State spending for Fiscal Year 2018 is projected at $4,291,727,700.  Expected revenues, based on the projections released at the March 20 meeting of the Delaware Economic and Financial Advisory Council are $3,906,100,000.  Governor Carney’s proposal, assuming no further worsening of revenue projections in the coming months, would close the existing gap. 
Key revenue increase recommendations in the Governor’s proposal follow:

Personal Income Tax: Eliminate itemized deductions in Delaware and increase the standard deduction more than 50% Increase each tax bracket by 0.2 to 0.4 percentage points, with top rate rising to 6.8 percent. Increase the eligibility age for additional personal credits and retirement income exclusions from 60 to 65 in 1-year increments. Effective: January 1, 2018      Revenue in Fiscal Year 2018: $64.6 million

Corporate Franchise Tax: Create a second tier maximum tax at $250,000 for public companies with greater than $750M in revenue or assets and no less than $250M in revenue or assets. Increase the first tier maximum tax from $180,000 to $200,000 to reflect inflation since the last increase in 2009.  Make inflationary adjustments to miscellaneous filing fees. 
Effective: January 1, 2017      Revenue in Fiscal Year 2018: $116.1 million  

Tobacco Taxes: Increase the tax on cigarettes from $1.60/pack to $2.60/pack. Treat moist snuff and e-cigarettes as Other Tobacco Products (OTP). Increase the tax on OTP from 15% of wholesale value to 30%. 
Effective: August 1, 2017     Revenue in Fiscal year 2018: $16 million

Should these recommendations be enacted by the General Assembly, they would amount to $196.7 million in new revenue.   The remainder of the proposal involves cuts of about $189 million to reach the $385 million needed to balance the budget.  Key cuts and cost savings in his proposal follow:

• 4.5 percent reduction in discretionary spending across all cabinet departments.
• $6.5 million cost savings via increasing state employees’ share of the cost of health benefits.
• $5 million in cost savings from eliminating 200 vacant positions.
• $3.5 million from the elimination of the double state share (a policy whereby married couples who are both employed by the State of Delaware are able to share a single premium for health coverage.
• $25 million reduction in funding for Open Space and Farmland Preservation, as well as for the Energy Efficiency Fund (until resources are available)
• $ 22 million reduction to the Educational Sustainability Fund; This proposed reduction was accompanied by a recommendation that school districts be afforded the ability to raise the match tax without a referendum in order to cover reductions.  
• $15 million reduction in funding for school district and charter school operations.
• $5 million in cost savings from reducing the Senior Property Tax Credit by $100.
• $3.3 million reduction in funds to higher education.
• $2.6 million in savings by reducing Medicaid dental reimbursements by 14 percent.
• $1.2 million in cost reductions from Fleet Services and energy expenditures.
• $594,300 for reduction to pass-through programs.
• $460,800 to reduce funding for Delaware Art, and Library Standards
• $125,000 from eliminating the Polly Drummond Hill Yard Waste Site
• $171,000 from eliminating the Board of Parole

Following are a number of spending items that Governor Carney highlighted:

• $11.8 million to fully fund Medicaid for low-income Delawareans, Delawareans with disabilities, and Delaware seniors for long-term care.
• $1.0 million to add funding for substance abuse treatment services.
• $4.0 million to maintain funding for affordable housing through the Housing Development Fund.
• $3.0 million for the State Rental Assistance Program, which targets assistance for specific groups with a high need, such as Delawareans with disabilities, those aging out of foster care, and homeless veterans.
• $4.5 million to increase hazardous duty pay for Delaware correctional officers.
• $2.3 million for 75 new correctional officers at James T. Vaughn Correctional Center and Baylor Women’s Correctional Institution.
• $1.3 million for new equipment and training for correctional officers.

The onus is now on the Joint Finance Committee and on the Joint Committee on Capital Improvement to fashion the final operating, grant-in-aid and capital budget bills which will come before the General Assembly for a vote in late June.   It will largely fall to the Joint Finance Committee, which constructs the operating and grant-in-aid budget bills, to determine which recommendations to adopt.  Governor Carney’s revenue recommendations will require legislation, as will any alternative tax or fee increase proposals. 
Tax and fee increases, which are constitutionally subject to a three-fifths vote in both houses,  must originate in the House of Representatives.  In the House, that amounts to 25 out of 41 votes for passage, in the Senate 13 out of 21 votes are required.  Democrats have a 25-16 majority in the House and an 11-10 majority in the Senate. 
Republican leadership is evaluating the Governor’s proposal.

Chamber Opposes Minimum Wage Increase, Bill Remains in Senate Labor Committee
On Wednesday, March 22, the Senate Labor Committee took up Senate Bill 10, legislation sponsored by Senator Bob Marshall (D-Wilmington) which would increase Delaware’s minimum wage by $2.00 between 2017 and 2020, in fifty-cent increments, and which would index increases thereafter to the Cost of Living Adjustment in the federal Social Security Act. 

The Chamber’s lobbyist, Joe Fitzgerald, testified in opposition to the legislation before the committee and provided a written statement for the record.  Among the objections raised were:

1. Increasing payroll costs in a year when the General Assembly will be seeking tax and fee increases;
2. Statutorily creating automatic increases in payroll costs.  Increases in the minimum wage merit a vote by our elected representatives. 
3. Increasing the minimum wage in an effort to get closer to a “living wage” ignores the fundamentals of economics and misunderstands how labor markets function/
4. Small and mid-sized businesses are still grappling with the substantial increases in health care costs and regulatory compliance costs brought about by the Affordable Care Act.  They cannot afford higher payroll costs.  
5. Increases in the minimum wage have an inflationary impact all along the wage scale - these increases do not occur in isolation.  

As of this writing, the bill remains in committee.  There are five members of the Senate Labor Committee:
Bob Marshall (D-Wilmington), chairman
Nicole Poore (D-St. Georges)
Jack Walsh (D-Montclaire)
Colin Bonini (R-Dover)
Anthony Delcollo (R-Marshallton)

We will continue to monitor developments with this legislation.