Monday, June 15, 2009

A Delaware Budget Alternative Offered By Rep John Kowalko

News-Journal Op-Ed 5-10-2009
Delaware citizens are facing an uncertain future that threatens to tear at our state’s long term health.

Republican and Democratic labels must be cast aside, and we must all look for answers in a spirit of responsibility, equality and sustainability.

Every Delawarean, regardless of their position, shares a common fate, and by simple logic, must share in a common solution.

Every one of the approximately 870,000 business entities that call Delaware home must also share in a common solution.

Responsible and equitable and sustainable. It is imperative that we find a solution that offers long term stability and fosters growth. It is not possible to support any quick fix that in the end places a greater burden on already overburdened state agencies, weakens Delaware’s long term stability and makes our revenue and tax stream revenues even more regressive and punitive to those who can afford it the least.

In light of the Governor’s March 2009 budget proposal, which states, “No group will bear a disproportionate burden from this challeng e alone,” the proposed 8% salary cut does not make sense. In addition to the obvious issues of equity and fairness, there are potentially crippling economic consequences that will further damage our already fragile state economy.

In a time when increased consumer spending and confidence is a collective goal, the salary cut is a step backwards, taking nearly a hundred million dollars of spending power out of an already faltering economy. Businesses up and down the state, already reeling and many of them surviving week to week, will suffer even greater harm, damaging the overall economic picture.

Shrinking business revenue could lead to even more employee layoffs in the private sector resulting in fewer opportunities for those who have already lost their jobs to reenter the job sector. There is also the real risk of small business failures that would continue the downward economic slide in Delaware. Since small businesses in Delaware employ over 50% of the workforce this is a risk we cannot afford to take.

There is a more equitable and responsible path to travel, one that involves all of our state’s people, giving all of us a sense of stewardship in these difficult times.

Delaware ranks, according to the Tax Foundation, tenth in the nation in business tax climate. But as equally important, if not more so, is the legal standing of Delaware Corporate Law. Website after website praises Delaware as a corporate haven, and even the Delaware Department of State Website states in a document titled, “Why Corporations Choose Delaware,” that Delaware law is “one of the most advanced and flexible corporation statutes in the nation.”

According to the Mone y Magazine, Delaware ranks as the fourth most tax friendly state for its citizens, beaten out by only Alaska, New Hampshire and Tennessee.

A quick look at proposal unveiled earlier this week reveals a menu of options from which to choose. We have looked at a over a dozen alternate revenue streams, any combination of which would spread the burden more evenly and would eliminate the need for an across the board salary cut to state employees.

The options include a closer look at the PIT structure, the Franchise Tax Cap for companies valued at over $660,000,000.00, fees for many of the 875,000 companies that have incorporated in Delaware, gasoline tax, and of course, dipping into the Rainy Day Fund. There are several more alternate revenue streams from which lawmakers can pull in our collective effort to balance the budget.

State employees make up approximately 6.8% of Delaware’s work force, and at an average salary of $44,000, are being asked to contribute an average of $3,520.00 per worker. Taking such a disproportionate amount of necessary livable income from median income workers directly contradicts the idea of a shared sacrifice and will further erode consumer confidence and spending. In reality, a salary cut is akin to a disproportionate tax on a small minority (6.8%) of the work force, and the effects go far beyond the ideas of fairness and equity to the very principals of a sound economy. When you factor in the increase in health benefits, the still frozen salary scales and the possibility of furlough days, the gap between rhetoric and reality widens even further.

An example of a more evenhanded and economically sound approach would be to ask for a small incremental annual amount from all workers rather than carve upwards to $$3,520.00 from a smaller limited number of workers averaging $44,000. There are six different PIT scenarios included in our proposal, and any one of them honors the ideas of asking all Delawareans, not just a small captive audience, to share in the burden.

Of the approximately 875,000 businesses that incorporate in Delaware, nearly 260,000 of them are traditional publicly traded companies. 1500 of these companies, all with a minimum asset value of $660,000,000 can be asked to contribute more with an increase in the Franchise Tax Cap, in an effort to live up to the ideal of shared burden and sacrifice.

In the “Center on Budget and Policy Priorities Report” by Nicholas Johnson (1/12/09) reference is made to a letter from Noble Prize winner Joseph Stiglitz of Columbia University and Peter Orsatz, (co-signed by 120 economists) to N.Y. Governor David Patterson. They write that “cuts could be more harmful for a state’s economy during a recession then tax increases…some types of reductions would reduce demand in the economy on a dollar-for-dollar basis and therefore be more harmful to the economy than a tax increase”. 0A

In light of these threats to a smooth economic recovery, and working in conjuction with the State Finance Department, the Office and Management and Budget as well as Controller General’s Office to ensure the accuracy of these numbers, we are confident that this plan follows the responsible and equitable path towards an economic recovery.

John Kowlako and Philip Kaplan

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