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Property tax debate: Turn up the faucet or plug the drain?

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By Ken Mammarella

Facing a $385 million shortfall in the 2018 budget, Gov. John Carney told WDEL’s Rick Jensen last month that property taxes are “so low” they’re “too competitive.”

Colin Bonini

John Kowalko

The comment surprised some, but what it means for tax reform remains unclear.

“His budget proposals do not yet reflect that rhetoric,” said Joe Fulgham, communications officer for the House Republican Caucus.

Carney’s staff did not respond to multiple requests for comment, but other interviews reveal constraints. The most important: “There are no state-level property taxes in Delaware,” the Delaware Economic Development Office emphasized in a recent report.

One Carney proposal, however, could lead to higher property taxes. The governor suggested cutting $22 million from the state Educational Sustainment Fund and allowing school districts “to increase local property taxes to recover the reduction, without the hike being subject to referendum,” Fulgham said.

Other insight:

“It would be better to grow the economy than grow property taxes,” said Bruce Plummer, the Delaware Association of Realtors president. “Low property taxes grow the economy and help us all. If we do things that make [real estate] less attractive, we end up hurting ourselves.” Retirees, in particular, would consider a higher-tax Delaware a less attractive place to live, he said.

Real estate represents 18.4 percent of the state gross product, he said, including sales, construction, moving costs and related expenses. Each home sold generates $18,954 in income in related industries, the association calculates. Add in remodeling, other factors and economic multipliers, and it’s $61,144.

The association instead suggests auditing Form 5403 to collect transfer taxes from non-residents involved in the sale of Delaware property.

“Where do we want the burden of governance to lie?” said Matt Meyer, a Democrat who as New Castle County executive faces a $5.2 million deficit. The burden could be on wealth (property tax), consumption (sales tax) or income.

“We should deliver efficiency, have fair tax rates and have the right incentives,” Meyer said. “I question if it’s the right way that tax rates are compared to our peers. We don’t just look at our peers and see what they’re doing. If that’s the case, we’d have a sales tax.”

Former Gov. Jack Markell, Carney’s predecessor, proposed increasing the real estate transfer tax from 3 percent to 4 percent and increasing the state portion, he added. The state took in $89.5 million in 2016 as its share, the association said.

“You have to look at the overall tax burden, and it’s not low,” said James L. Butkiewicz, chair of the University of Delaware’s economics department. “Delaware’s one of the most expensive local jurisdictions.”

Raising taxes would raise more revenue in the short run, he said, but make the state less competitive in the long run. He wants the state to examine its reliance on “revenue sources that have proven unreliable,” such as gambling and unclaimed property.

Carney’s fiscal 2018 budget refers similarly to “rebalancing Delaware’s revenue portfolio” and cites recommendations by the bipartisan Delaware Economic and Financial Advisory Council.

“The first step has to be a statewide reassessment,” said Rep. John Kowalko, a Democrat from the Newark area.

He proposed a reassessment to catch up on dramatic disparities in values since the last reassessments: 1974 in Sussex, 1983 in New Castle and 1987 in Kent. His idea went nowhere, partly from the rule of thumb about the impact: a third see lower taxes, a third see the same taxes, and a third see higher taxes.

And a reassessment could have costs of its own: at least $13 million in New Castle County alone, a county study concludes.

Michael H. Vincent, the Republican president of Sussex County Council, agrees on a statewide reassessment to “level the playing field.” He said Sussex figures it would cost $9 million and take four years. “But a reassessment is not the goose that lays the golden egg. I think that education costs [$1.4 billion for public education from the state in fiscal 2017] are the golden goose.”

“The state is not living within its means,” said P. Brooks Banta, the Democrat president of the Kent County Levy Court. Carney needs to “carefully monitor every dollar” and look for “overstaffed and probably overpaid jobs that can be eliminated.”

That’s how Levy Court commissioners cut a third from Kent’s budget 12 years ago.

Colin Bonini, a Kent County Republican senator who lost the 2016 gubernatorial race to Carney, agrees.

“Delaware has a spending problem, and you can’t tax your neighbors out of it.” The state must look at salaries and benefits of state employees and Medicaid, which form nearly 70 percent of the budget.

“Instituting a statewide property tax is a dangerous precedent,” Bonini said, “regardless of how reasonable it sounds. The seductive part is that it’s just 1 percent or 2 percent.” But there’s temptation to let it grow, he said, recalling his youth in California, where taxes tripled.

A 2015 bill failed to create a state property tax to fund capital improvements for Delaware Technical Community College, mirroring funding of vocational-tech schools. That followed Markell’s 2014 proposal for a Clean Water for Delaware’s Future fee, “indexed to inflation and collected through county property taxes.” That failed, too.

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