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State analysts add $322M to upcoming budget limit

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The independent panel of fiscal analysts raised the ceiling for next year’s state budget due to improving revenue streams despite the lingering effects of the pandemic. | DBT FILE PHOTO

DOVER – In a continuing batch of good news for state lawmakers, Delaware’s independent panel of fiscal analysts added $322.1 million to the state’s spending limit for the next fiscal year, now totaling more than $5.4 billion.

The increase may significantly pad Gov. John Carney’s ability to pass his record-breaking $4.7 billion Fiscal Year 2022 operating budget and $894 million capital budget proposed in January without serious cuts from the legislature. The final budget limit will be amended again in the more important May and June reports, but the March report has the ability to help shape discussion by lawmakers and the public in the weeks beforehand.

Ever since the pandemic struck, officials have anxiously watched the analysis 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 estimates.

DEFAC is tasked with forecasting revenue and expenses for the state to remove politics from the equation and its approved recommendations set the parameters for the governor and legislators to determine how to spend state funds.

While many states around the country have struggled with revenues amid the COVID-19 pandemic, Delaware has not. The analysts now estimate that Delaware will end the current fiscal year in June with a surplus of more than $675 million that will roll into the Fiscal Year 2022 budget starting in July.

David Roose, the director of research and tax policy for the Delaware Department of Finance, said Monday that it is, at least in part, a “pretty significantly stronger economic outlook than had been the case a few months ago.”

“We had been particularly cautious with several of the key revenue sources with respect to a virus resurgence and several related issues, but those fears weren’t realized, so we do have a generally very positive outlook,” he said, referring to the advisory panel’s last meeting in December.

The increasingly positive economic outlook can be attributed to a few different revenue sources, but the biggest are connected to Delaware’s position as the nation’s incorporation capital. The state’s franchise tax and fees connected to limited partnerships and liability corporations (LPs/LLCs) brought in nearly an additional $62 million over DEFAC’s December estimates.

The state’s corporate income tax, derived from its employers, also rose $31.9 million over December’s estimates while personal income taxes increased $41.7 million.

Roose explained that quarterly income tax payments rose in the third and fourth quarters of 2020, which is perhaps evidence of the growing economic divide amid the pandemic.

“This may reflect the bifurcated nature of the economy that we’ve discussed before, with higher income individuals and larger businesses doing well to extremely well in this environment, and lower income and smaller businesses not,” he said.

Roose noted that passage of House Bill 64, which waives personal income tax on unemployment benefits during the pandemic, earlier this year resulted in an $18.8 million reduction in FY 21 and $6 million reduction in FY 22. While Delaware has added more than 40,000 jobs back since the massive unemployment spike last spring, the state is still short some 43,000 jobs from its March 2020 high.

With the real estate market continuing to be buyer-weighted due to low mortgage interest rates, realty transfer taxes also increased $8.4 million from the last DEFAC report, continuing a string of outperformance of expectations.

Delaware’s lottery tax revenue increased $9.1 million, likely due in part to Pennsylvania’s decision to close its casinos during the holiday period as a preventative measure for viral spread as well as increased lottery ticket purchases during record Powerball and Mega Millions runs, Roose said. Tobacco tax estimates rose $700,000 due to Maryland’s increase in its tobacco tax from $2 to $3.75, Roose said, noting that could result in an additional $6 million in revenue next fiscal year from buyers coming over the state line.

One trend that Roose’s department is tracking closely is the prospect of employers permanently moving staff to work-from-home models, which could impact Delaware’s personal income tax revenues that can only be collected if employees physically work in the state. According to biweekly U.S. Census Bureau surveys, about a third of Delaware respondents said that at least one household member was working remotely from August through March.

“If this does not improve over the summer, as vaccines become widespread, there will be an impact on all sorts of businesses that revolve around business districts and getting people to and from work, like gas stations, convenience stores, dry cleaners, and other sorts of related businesses,” Roose said.

With a large number of workers coming to Delaware jobs from Pennsylvania, New Jersey and Maryland, it could have a lasting impact if a significant number of jobs remain remote. That impact could also work in reverse though, if Delaware residents working out of state are allowed to work remotely from their homes here.

“It’s something we will be monitoring very closely through the filing season,” Roose said.

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