BEAR – A state panel that sets revenue projections for Delaware forecasted a Fiscal Year 2025 budget limit of about $6.4 billion, setting the first target for Gov. John Carney to develop one of his last state budgets.
That budget limit includes about 1.5% more revenue than is anticipated in the current fiscal year that runs through June 30, but analysts warned that spending patterns are outpacing estimated revenues.
The report from 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 and expenditure estimates, is highly scrutinized by the governor’s office and state lawmakers who craft the final budget.
DEFAC anticipates ending FY 2024 with a $273.5 million surplus that will be rolled into the next fiscal year, but the spending limit is nearly identical to the current year’s limit – a sign that revenue growth is slowing in the First State. An operating budget deficit of almost $237 million will also be cured this year by the state’s cash balance, meaning Delaware is spending more than it is taking in this year and resolving the difference through savings.
That, combined with sizable spending and cost growth over the past few years, will spell trouble for state lawmakers, forcing them to pare future spending or raise new revenue through taxes or fees beginning in FY 2026, which starts July 1, 2025, Delaware Finance Secretary Rick Geisenberger said.
While some of the annual budget spending has been discretionary, other increases are coming on fixed costs, including pensions and post-employment health care, both of which have increased together more than 9% in the last five years. State employee salaries have jumped nearly 6% in the last five years, with big hikes in the last two years to keep pace amid a workforce shortage.
“If we continue growing the budget 7% to 10% and we have 1% or 2% revenue growth, we’re going to have a problem very, very quickly,” Geisenberger told DEFAC at their Monday meeting. “These potential budget increases, coming in the way they are, are going to make our lives very difficult in a very short period of time.”
As increasing the state’s personal income tax rate would likely be politically unpopular, state lawmakers are likely to examine other income streams that would less directly impact households, such as the state’s corporate income tax and franchise tax or its unclaimed property – the latter of which is already under attack by other states following the loss of a U.S. Supreme Court case over MoneyGram products.
“[Unclaimed property] is way too unpredictable in light of what’s happened in the last five to 10 years in terms of litigation, so the pressure on the Franchise Tax becomes attractive, but I don’t think that’s sustainable either,” said Michael Houghton, chair of DEFAC and a legal expert on unclaimed property.
With some legislators weighing a personal income tax increase only on the state’s highest earners, Houghton said he didn’t believe that approach would raise the needed level of funds to balance anticipated revenue losses.
One of the biggest forecast changes made by DEFAC on Monday was in the state’s realty transfer tax, which they decreased by $22.1 million in the current fiscal year and $40.5 million in the next year, citing falling home and commercial sales as mortgage interest rates have risen.
The council also got an early estimate on marijuana tax proceeds after recreational sales begin, forecasting $7.8 million in FY 2025 and $27.7 million in FY 2026, assuming retail sales begin by Feb. 1, 2025. Those tax proceeds are earmarked for specific uses and not the state’s General Fund, however, so DEFAC won’t track estimates for marijuana proceeds into the future, officials said.
DEFAC will next meet in December, where it will publish an updated look at revenue estimates that Gov. Carney will use to build his state budget recommendation.
