Delaware's Structural Budget Problem:
Causes, Potential Solutions, and Policy Tradeoffs
Perhaps most significantly, Delaware was dealt an enormous blow to its economy as a result of the Great Recession. The state lost thousands of jobs with the closing of the General Motors and Chrysler plants and the Valero Refinery. Market changes in the poultry industry and restructuring in the financial sector also resulted in the loss of thousands of additional jobs. The state’s unemployment rate hit a high of 8.7 percent in February 2010, from a low of 3.4 percent in January 2007.
Notwithstanding the strong headwinds of the recession, Delaware has begun to make progress, as a number of recent reports and data suggest. The state’s unemployment rate has dropped to 4.7 percent in July, less than the national average, job growth rate has picked up considerably, and a number of reports have noted that achievement and pointed to it as signals for future success. For example, Moody’s Analytics in a May 2015 report placed Delaware in the 2nd quintile nationwide for forecasted employment growth over both a 3-year and 5-year window.
State finances are driven by a delicate balance of taxing, spending and economic growth. How our leaders deal with these three interrelated factors will determine the economic prosperity of Delawareans for years to come.
A fundamental review of a state’s tax structure and spending commitments help to determine whether the state’s budget is structurally balanced – that is, whether the state’s spending commitments are consistent with expected revenues over the long term.
In recognition of this challenge, state leaders began by focusing on the revenue side of the state budget equation. The Governor issued Executive Order 47 creating the Advisory Council on Revenue within the Delaware Economic and Financial Advisory Council (DEFAC). The revenue council was charged with considering and evaluating “whether Delaware’s principal revenue sources are appropriately responsive to economic growth, whether they are too volatile, whether they are economically competitive, and in making such evaluations, note other tax policy issues that the pursuit of these objectives may entail.”
On May 15, the Commission released its report, which identified many shortcomings in the state’s revenue system - most importantly that its revenue portfolio is not responsive to the economy, or is “inelastic.” It offered recommendations to address issues of revenue elasticity and volatility, as well as to improve budget management, and make the tax system more competitive. As part of the report, the Commission offered various options to raise revenues, including broadening the personal income tax base by eliminating exemptions for senior taxpayers, raising gross receipt tax rates, and reassessing real properties to raise property tax revenues.
There are multiple dimensions to any budget problem. The Commission itself stated “Council members noted the importance of examining both revenues and expenditures, but the Council focused only on the former, given that its mandate from Executive Order No. 47 did not include an analysis of expenditures.”
It is our understanding that Governor Jack Markell is planning to take the necessary step of creating a similar council which will be charged with conducting a review of state expenditures and efficiency.
While we expect state leaders to look carefully at all dimensions of the budget challenge, the Delaware Business Roundtable determined that an independent, external view of the state budget and the need for enhanced economic growth would represent an important contribution to the challenge we face. Accordingly, the Roundtable commissioned Capitol Matrix Consulting to look at all the dimensions of Delaware’s fiscal sustainability, taking into consideration economic, revenue and expenditure factors that have led to the state’s shortfall. This report presents the findings of that review and analysis. In the following sections, the report:
Provides historical perspective on Delaware’s current budget problem;
Estimates the size of the state’s structural budget problem, by presenting a long-term projection of the state’s economy, revenues, expenditures and resulting annual operating balances under current-law policies;
Analyzes the relative contribution of sub-par economic growth, inelastic revenues and unsustainable expenditure growth to the problem;
Provides information on how Delaware compares to the rest of the country, including its neighboring states, with respect to its levels of taxation and various measures of state and local spending; and
Discusses broad options for addressing the budget shortfall.
As John Adams famously stated, “Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence.” No doubt some may disagree with the findings in this report – specific statistics or data will be checked and challenged. That is to be expected. Nevertheless, it is important that public discourse on this matter be fact-based, thoughtful and focused on creating economic prosperity for all Delawareans.
The goal of the Delaware Business Roundtable is for our leaders – in the political, community and business arena – to focus carefully on state revenue, spending and economic growth to help ensure economic prosperity for years to come. As part of our contribution, the Roundtable plans to conduct research, work to focus on state spending reduction opportunities and help to develop an economic growth agenda for current and future state leaders, and we will continue to provide advice, counsel and resources to make Delaware a better place.
Click "next" below or on the links in the box above to navigate the report. The full footnoted report can be found here.
Delaware has long been considered
one of the best managed and most fiscally prudent states in the country, a reputation that has served the state well over many years and has continued with the Markell administration.
Now, as a result of a number of economic factors often beyond the state’s control, Delaware is finding it increasingly difficult to maintain a balance between revenues and expenditures in its annual budgets.