The Delaware Legislature and Governor Meyer’s proposal to increase personal income taxes for those earning more than $60,000 represents a fundamental misunderstanding of Delaware’s business community. While framed as making the wealthy “pay their fair share,” the tax hike contained within House Substitute 1 for House Bill 13 would burden small business owners at precisely the wrong time.
As a small business owner, I understand that business income on paper doesn’t equate to cash in an owner’s pocket. Most small businesses operate as corporations, partnerships, LLCs, or sole proprietorships where owners report business income on their personal tax returns. Unlike corporations that pay a separate business tax rate, these pass-through entities face the full brunt of personal tax increases.
When a business makes $500,000 (the new top bracket), that doesn’t mean they have $500,000 available for personal use. Those funds are essential for reinvestment, economic stability, and creating jobs. Higher tax rates directly reduce capital available for these functions.
The timing couldn’t be worse. Small businesses already face mounting challenges: the looming costs of Delaware’s Paid Family Leave program in 2026, persistent inflation, and worrying economic indicators like zero growth in the first quarter of 2025.
For more than four decades, Delaware maintained a bipartisan commitment to keeping our top marginal rate below neighboring states – a policy championed by four governors across party lines. This strategic positioning signaled Delaware’s pro-business climate.
Delaware’s current top rate of 6.6% already exceeds Pennsylvania’s flat 3.07% tax. Raising it to 6.95% widens this gap further, potentially encouraging high-skilled workers and small business owners to relocate. House Minority Whip Jeffrey Spiegelman points out that the 8% of taxpayers targeted by this hike include small business owners who employ 92% of Delaware’s workforce.
The proposal seems especially unnecessary given DEFAC’s recent upward revision of revenue projections. Personal income tax collections have already grown substantially – from $1.5 billion in FY2019 to $2.2 billion in FY2024.
The governor’s proposed budget includes a 7.4% increase over the current spending plan – far outpacing inflation or population growth. Before asking taxpayers for more, state government should demonstrate fiscal discipline by keeping the top rate where it is but cutting the rate on the lower brackets and exercising a bit of fiscal restraint.
Let’s reevaluate our spending priorities. While legislative leaders wisely postponed the $120 million Legislative Hall expansion project citing funding challenges, they should also reconsider the $37 million Legislative Hall garage project. Redirecting these funds back to the General Fund would address more pressing needs without burdening taxpayers with rate increases.
Other states offer instructive examples. Iowa implemented a 3.8% flat tax while maintaining budget surpluses through spending restraint. Meanwhile, states with aggressive progressive tax structures often face outmigration and revenue volatility. A Manhattan Institute study found that New York’s progressive tax structure caused a $24.5 billion revenue shortfall over five years due to taxpayer exodus.
If the Legislature and Governor Meyer is truly concerned about tax equity, there are better approaches than burdening small businesses. The state could consider inflation-indexing tax brackets (Delaware hasn’t adjusted them since 2017) or repealing the gross receipts tax – a 0.22% tax on business revenue regardless of profitability that few other states impose.
Delaware’s business community has long valued our state’s predictable, moderate tax environment. Before endangering this competitive advantage, lawmakers should focus on spending restraint and targeted reforms that would benefit all Delawareans.
The small businesses that drive Delaware’s economy deserve better than shortsighted tax hikes that threaten their ability to grow and prosper. Now is the time for fiscal responsibility and pro-growth policies – not new burdens on Delaware’s job creators.
Rob Martinelli is the president and CEO of Today Media, the parent company of Delaware Business Times.
