DOVER — Gov. Matt Meyer is seeking to raise taxes for those who earn more than $60,000 and one legislator has already filed a bill to start the conversation.
Earlier this year, Rep. Sean Lynn (D-East Dover) filed House Bill 13, which would adjust the tax rate for the existing tax brackets, but it would also add two new brackets. If the bill was passed as written, it would create two new tax brackets with the top rate coming in at $250,000. Both would be taxed under 7%.
That’s roughly in line with what the governor announced as part of his budget reset unveiled at the end of March, except for two differences. Lynn proposed slight tax cuts for those who earned less than $60,000 which accounts for most earners in Delaware.
Meyer also said he wants to see three tax brackets, with the top rate of 6.95% on $500,000 taxable income or more.
Last week, Lynn amended his bill to reflect the governor’s ambitions but also included slight tax cuts for those who earn less than $125,000. The representative confirmed to the Delaware Business Times that this was to bring his original proposal in line with the governor’s priorities.
“I think ideologically, the wealthiest should pay their fair share, especially as Senate Bill 21 laid bare the state’s dependency upon the corporate franchise tax. Other revenues are critical,” Lynn told DBT. “We’ve got to find other ways to raise revenue, and the wealthiest Delawareans ought to pay their fair share, just as a matter of equity and fairness.”
Meyer told reporters on Thursday afternoon after his State of the State of the State address he had not seen House Substitute 1 for House Bill 13 yet.
Senate Majority Leader Bryan Townsend (D-Newark) said that the Democratic Caucus had supported making the tax brackets more equitable for a long time, but there were still questions on the final numbers.
“We’re still waiting to see final numbers from the governor so we can also anticipate how that factors into all the different things that are happening,” Townsend said, referencing the unclear future of federal funding as well as the prospect of offering Delmarva Power customers relief from high electric bills. “It’s a matter of really drilling down those details… figuring out what the total picture is really important for our caucus to understand how to approach these revenues.”
The Republican Caucus had a stronger reaction, as House Minority Whip Jeffrey Spiegelman (R-Smyrna) argued that the 8% that will see their taxes increase often employ the other 92% of the state’s population. Meyer’s proposed budget includes a 7.4% increase of the current spending plan. The governor’s budget is a 7.4% increase from the current year- something Republicans have pointed out as the state has not been able to reign in spending.
“If you’re raising taxes on the small business owners, you’re making it less likely to hire someone from the 92%. We don’t really need this, because raising taxes is based on the idea that we’re facing a budget shortfall in the next couple of years,” he said. “If the General Assembly can’t get its own spending down, the income tax is designed to cover up the fact that we are shooting way beyond what our budget growth should be.”
History on income tax
In Delaware, personal income tax filing projections have grown significantly since 2020 as people continued to return to work and the state continued to see more people relocate here. In fiscal year 2019 the state recorded $1.5 billion and in fiscal year 2024 that’s tracked at $2.2 billion.
Over the course of 40 years, Delaware has also seen major changes to its tax structure. In 1971, the state had a top rate of 18% for those who earned more than $100,000 and gradual changes were made over the past 15 years. The biggest cut came in 1988 when the top rate dropped to 7.7%.
The most recent changes Delaware has seen to its tax rate were over the last decade. In 2010, the top rate changed from 5.95% to 6.95%. That was later lowered over the course of four years to 6.6%.
The Delaware Department of Finance reports that 38,400 people filed returns for those that earned between $125,000 and $250,000 in 2023. The department also reported that 13,700 people filed returns for those who earned more than $250,000 in 2023.
Meyer and the Office of Budget and Management said that by creating the three new tax brackets, the state would generate $16.4 million in fiscal year 2026 and $35 million the following year.
There is no fiscal note attached to HS1 for HB 13 yet.
Tax equity?
Analysts at various think tanks had mixed responses to the proposals. With those like Miles Trinidad, the State Policy Analyst at the Institute on Taxation and Economic Policy, a left-leaning think tank, said Meyer’s approach would move Delaware in a direction where the wealthiest would pay their fair share – but that may not be the best approach to offset other aggressive taxes.
The Institute on Taxation and Economic Policy reports that Delaware has the 40th most regressive state and local tax system in the country. That means those who earn the most will pay the least taxes, between property taxes, income and excise tax and more.
In the institute’s modeling, those who earn between $68,800 pay around 7.9% in total taxes while those who earn $190,400 pay around 7.7%.
“If [state legislators and officials] want to increase progressivity, the tax brackets are the way to do it. But if the interest is in cutting taxes to make ends meet, there’s more targeted ways to do that,” Trinidad said.
For example, Delaware could consider a graduated transfer tax instead of a flat 4% as well as offering a property tax credit for low-income taxpayers. Delaware also does not offer a child tax credit, and it partially refunds the Earned Income Tax Credit.
“The governor’s proposal does help remedy that bastion for those high earners, but this is also like casting a wide net to change the structures, Trinidad said. “If the focus is on reducing the tax burden for low-income and middle-income households, then the credits could be the way to go.”
Lucy Dadayan, a research associate with the Tax Policy Center, which is a joint venture of the left-leaning Brookings Institution and the Urban Institute, found that Meyer’s proposal was prudent tax policy.
“It’s kind of unusual at this time to see this, because in the past four or five years, we’ve seen states are cutting taxes aggressively,” she said. “But let’s be honest, from 6.6% to 6.95% is not a big rate increase. It’s not even an adjustment to inflation.”
Dadayan also made the case that any tax restructuring should take into consideration how it would impact the lowest-income taxpayers. She pointed to Iowa’s move to a flat tax rate of 3.8% as an example. That would mean that millionaires in Iowa would see a tax cut of around $23,500 while households earning under $20,000 would see a tax cut of $24 on average.
“There’s likely not many people making less than $25,000 in Delaware,” she said. “But from a tax fairness perspective, I do think this is in the right direction and it’s a proactive approach given the current fiscal environment.”
Abir Mandal, a senior policy analyst with the conservative think-tank Tax Foundation, pushed back against the Meyer proposal, as he sees more tax brackets as a way to incentivize those in the workforce to strive for higher incomes.
“It basically reduces the returns to labor at the margins. Say your salary is $59,999 and then when you get a slight raise, your taxes rise to that 6.6%,” Mandal said. “The additional return you get for working that extra hour is worth less than the hours you spent working before.”
The Tax Foundation’s research also indicates that raising taxes on the high earners only pushes them to other states, as seen in New York and California population declines. Mandal argued that high earners can help create economic growth in their state under the right conditions.
“Delaware has quite a lot of low-hanging fruit it can do, like perpetually repeal the gross receipt taxes and indexing the income tax to keep up with inflation,” he said.
