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Analysts forecast first post-pandemic Delaware revenue dip

March 24, 2023 |By Jacob Owens

Legislative Hall Statehouse Dover Delaware flag stock DEFAC — | DBT FILE PHOTO BY JACOB OWENS

Falling estimates on personal income taxes are driving Delaware’s independent fiscal analysts to lower their revenue outlook for the next fiscal year for the first time since the pandemic struck. | DBT PHOTO BY JACOB OWENS For the first time since the COVID pandemic struck, Delaware’s independent fiscal analysts are forecasting

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[caption id="attachment_230239" align="aligncenter" width="1200"] Legislative Hall Statehouse Dover Delaware flag

Falling estimates on personal income taxes are driving Delaware's independent fiscal analysts to lower their revenue outlook for the next fiscal year for the first time since the pandemic struck. | DBT PHOTO BY JACOB OWENS[/caption] For the first time since the COVID pandemic struck, Delaware’s independent fiscal analysts are forecasting lower revenue collections through the next fiscal year, a sign that they believe an economic easing may be in the cards. The Delaware Economic and Financial Advisory Council (DEFAC), a non-partisan group of business and community leaders, academics, and government professionals that sets the state’s official revenue estimates, decreased the spending limit for the Fiscal Year 2024 state budget that is currently under review by legislators by $36.2 million. The new limit is about $6.54 billion, which comes closer to the total spending proposed by Gov. John Carney. The FY 2024 budget, currently under review by the legislature’s Joint Finance Committee, includes $5.48 billion in operating spending, $324.9 million in supplemental spending, $59.8 million in grants-in-aid assistance and $664.7 million in cash outlay to capital projects – totaling about $6.53 billion. The state is sitting on considerable savings that help protect its AAA bond rating, including $316.4 million in its “Rainy Day” reserve fund and $402.6 million in the Budget Stabilization Fund, a discretionary fund that could be tapped to fix unexpected issues. Despite softening revenues, especially in personal income taxes, Delaware is still estimated to end the current fiscal year on June 30 with a surplus of about $583.3 million. “We may have reached an inflection point with respect to some of the key revenue sources that have experienced very, very strong growth over the last 12 to 24 months,” David Roose, the state finance department’s director of research & tax policy, told DEFAC at its March 19 meeting. Chief among the softening revenue projections is personal income tax, which the analysts downgraded by $57.7 million this fiscal year along with an increase of $15 million in tax refunds for overestimated payments. The booked declines from last year’s highs are explained in part by falling capital gains as the housing market has slowed and stock prices have declined, Roose said. “Before 2020, [Delaware has] only had four years of estimated payments above $200 million, and the highest was $231 million in Fiscal Year 2018. Since then, $354 million and $295 million are obviously well in excess of those numbers. So it just demonstrates the extraordinary growth of non-withheld income tax,” he added. The realty transfer tax, which boomed as a revenue source over the past two years as the housing market ran hot, has also declined significantly in the last three months, convincing the analysts to lower estimates for it this fiscal year by $24.3 million and by $38.4 million next year. Corporate formation growth remains strong, but is slowing, especially as initial public offerings have begun to dry up in the stock market. The corporate income tax has also remained somewhat stronger than expected, perhaps due to a more relaxed federal tax structure under the 2018 Tax Cut & Jobs Act. It convinced the analysts to book no change on formation taxes and an additional $36 million in net revenue after refunds for corporate income tax. DEFAC member Calvert Morgan Jr. also inquired about the revenue impact of the recent U.S. Supreme Court case concerning escheated MoneyGrams that were found to have been incorrectly claimed by Delaware. The resolution of the case has been sent to a special master of the court who is overseeing how repayment of the disputed property would be made. Michael Houghton, chair of DEFAC and a lawyer who specializes in unclaimed property, but wasn’t involved in the state’s case, said that although the state would lose some revenue it’s ultimately “a positive result” because the court explicitly did not change Delaware’s secondary common law claim to other properties. “This is really a very narrow, sort of arcane, area of property, but annual reporting securities, accounts payable, accounts receivable, credits and the like remain unchanged,” he added. Delaware Finance Secretary Rick Geisenberger added that MoneyGrams were not a growing source of revenue for unclaimed property. “Increasingly, people are taking take advantage of tools like Venmo and Zelle, where you don't have this owner-unknown property because the property gets transferred and is received immediately by the recipient as opposed to being in paper form,” he explained. DEFAC also briefly discussed the ensuing fallout of the collapse of Silicon Valley Bank and Signature Bank earlier this month, and whether the fallout could reach Delaware. State Bank Commissioner Robert Glen told DEFAC that “we don't see those problems with our banks here in Delaware,” noting that state banks don’t have a high proportion of uninsured deposits which was part of the reason for the downfall of the other institutions. Bad investments on long-term bonds stirred concern about solvency with SVB depositors, many of whom had more than the $250,000 federally insured limit invested, and a run on deposits tanked the bank’s liquidity. Glen added that his office has been “paying close attention to the condition of our banks” along with federal regulators, but no concerns have cropped up. DEFAC member David Gillan, the CEO of County Bank in Sussex County, concurred, and said that while some concerned depositors had withdrawn funds in the wake of the other banks’ failures, they had mostly returned as the situation became clearer. The same situation has played out at many community banks in the Mid-Atlantic region, according to colleagues, Gillan said. “I think that people are differentiating between the community banks and some of the niche banks that are doing crypto and fintech and that sort of thing,” he added. “From our perspective, we gather deposits in southern Delaware, we lend them in southern Delaware, we know the value of sand really well.”