Delaware’s New Tax Brackets: A Quiet but Significant Shift in the State Budget

Governor Matt Meyer

On Thursday, March 27th, Delaware's Governor Matt Meyer rolled out a reworked state budget that included the introduction of three new tax brackets for individuals earning more than $125,000. The announcement was met with a relatively muted response from the business community and other sectors, but don’t expect that calm to last. This new shift in tax policy, while seemingly quiet for now, could signal significant changes for the state's fiscal future.

A Quiet Promise Fulfilled

Governor Meyer, during his successful gubernatorial campaign, had quietly alluded to plans for adjusting the state's income tax brackets. Throughout his campaign, Meyer consistently expressed his belief that the wealthiest residents should contribute more to the state's coffers. His recent budget proposal now puts those words into action. However, the changes appear to be largely symbolic in nature—designed not to rock the boat too much. The top new tax bracket, for instance, will stay below the 7% mark, meaning it’s unlikely to cause an immediate outcry.

Despite the relatively modest tax rate adjustments, the revenues from this tweaking of the tax code could eventually rival the revenue generated from recreational marijuana sales—whenever that legal framework finally comes into play.

The Complexity of Delaware’s Tax Code

Delaware’s income tax code is notoriously complex. The impact of these new brackets may not be as widespread as some anticipate, especially when deductions and exemptions are factored in.

As it stands, a significant portion of the population already pays the current rate of 6.6%, which kicks in for individuals making $60,000 annually—a threshold that’s been in place for many years. When adjusted for inflation, that $60,000 figure from 2000 is equivalent to about $110,000 today. In essence, this means that middle-income earners could be seeing what amounts to a "backdoor tax hike."

The state's decision to implement a personal income tax system at the turn of the century was influenced by the Progressive movement, which arose in reaction to the excesses of the "Gilded Age." Delaware, in turn, softened the tax burden by avoiding a sales tax and maintaining relatively low property tax rates. Over the years, however, Delaware’s income tax rate has crept up, contributing to the near collapse of the state’s economy some 50 years ago.

The Rise and Fall of Income Tax Cuts

Delaware’s history with income tax cuts has been marked by a delicate balancing act. In the 1980s, Republican Governor Pete duPont spearheaded efforts to cut the income tax rate while boosting revenues through higher interest rates on credit cards. This move succeeded in attracting banks to the state, diversifying its economy and keeping it afloat. His successors followed suit, gradually lowering tax rates to remain in line with nearby states, with the notable exception of Pennsylvania.

However, as the state's economy slowed and the boom times of the '80s came to an end, Democrats took control of the state legislature and began to push for tax policies more aligned with progressive principles. Despite periodic recessions and budget deficits, no governor had moved to raise the top income tax rate for decades.

Efforts to introduce additional tax brackets in the past, led by now-retired State Representative John Kowalko, faced stiff resistance from both the governor’s office and the legislature. The primary concern was that raising taxes on the wealthy could prompt them to move to neighboring states like Pennsylvania or even Florida, where tax rates are often more favorable. Meanwhile, attempts by Republicans to lower the tax rate for high earners failed to gain significant traction.

A New Era in Delaware Politics

Meyer’s budget proposal represents a notable shift in the state’s tax policy, and it comes at a time when the General Assembly is increasingly dominated by progressives. This shift presents a mixed picture for the “great middle” of the legislature—those who approved the controversial Senate Bill 21 corporate overhaul. The challenge for these lawmakers will be finding the balance between supporting the new tax brackets and addressing the potential fallout from those affected by the changes.

Even with these new tax tweaks, Meyer’s budget faces another challenge: the state’s $400 million reserve, a cushion created by his predecessor, John Carney, to shield the state from the economic shocks of tougher times. This reserve may become more crucial as the state anticipates a potential slowdown in economic growth, as well as a reduction in federal funding for key programs.

A Stormy Forecast Ahead?

The Joint Finance Committee, a joint body of the House and Senate, now faces the difficult task of making decisions in the midst of uncertain economic times. As economic slowdowns become an increasingly likely scenario, it will be up to the state’s lawmakers to navigate the complexities of tax policy, revenue projections, and future budgetary shortfalls. The looming loss of federal funds adds another layer of complexity to an already difficult task.

Meyer’s tax plan, though seemingly minor in its immediate impact, introduces an additional wrinkle into the state’s already-complicated financial landscape. It’s still too early to tell whether these tax changes will significantly alter Delaware’s economic trajectory, but one thing is certain: the discussion around these new tax brackets is far from over. As lawmakers, business leaders, and residents adjust to these changes, the full implications of this new policy will unfold in the months and years to come.

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