June 17, 2003

State coffers have 'recovered' $170.2 million since the Delaware Economic & Financial Advisory Council sounded the alarm last September about its finances, but the top money officials in the Minner administration maintain nothing has happened to restore fiscal health.

In fact, according to Secretary of Finance David Singleton, the coming fiscal year will be the first since 1970 in which anticipated state revenue will be "significantly lower" than in the previous year -- if the advisory council's current take on the outlook holds up. Only 1991 saw any such glitch and that was only a one tenth of one percent drop.

Singleton made the comment after the panel officially declared that the state is in for so-called 'negative growth' in the year which begins July 1 unless the General Assembly acts to boost income. It forecast a 3.4% decline from the  $2,440 million now projected as revenue in the year about to end.

Budget director Jennifer Davis said that is the result of continued 'structural defects' in the revenue system. Governor Ruth Ann Minner has proposed, and the Assembly is considering, a 17% increase in incorporation taxes and fees as well as a doubling of the cigarette tax rate and other measures to add about $150 million on the revenue side while government spending is held in check by a like amount.

Singleton acknowledged that the original $300 million need she sought to address in the budget she proposed has come down "a little bit since January," but he said the gap "remains well in excess of $250 million." He declined to be more specific.

The advisory council's latest projections "clearly show we continue to have a serious problem," he added.

As Delaforum previously reported that it would do, the panel, at its meeting on June 16, increased its estimate of  income this year  by $17.6 million to $2,439.8 million. That compares to actual collections totaling $2.425.7 million in fiscal 2002. It anticipates a $1.5 million decline in the coming year, which would take it below the 2002 level.. (CLICK HERE to access previous Delaforum article.)

The 2004 forecast means that legislators, who are bound by law to use the advisory council's prediction as the basis for the state's operating budget, will have $2,472.8 million to work with. That is $16 million more than was thought in May. The state debt limit, which also is pegged to the forecast, is now $117.9 million.

As often happens in families when the margin between income and spending are discussed, there was a bit of bickering among panel members before they decided on the bottom line. Jeffrey Bullock, chief of staff to former Governor Thomas Carper, ended up casting a very rare negative vote when it came to endorsing the working committee's proposed estimate for fiscal 2004. The council usually approves committee proposals by unanimous voice votes.

Bullock's objection was to the fact that Minner asked for and the General Assembly agreed to setting up a special fund for the one-time federal grant provided by the recently enacted tax law. Delaware stands to get about $50 million, spread over the next two years. Had half of that amount been available to apply to its fiscal 2004 forecast, the advisory council would have more than wiped out the anticipated revenue decline.

Bullock said he agreed with creating a special fund, but objected to it having been done ahead of the council's meeting, when the merits of doing so could have been publicly discussed outside of the legislative arena. Noting that the expected adverse impact of the federal tax cut on personal and business income taxes had been factored into the revenue forecast. Bullock objected to "using half of the equation, but not the whole thing."

Singleton disagreed on the grounds that the federal grant is intended to provide for states to finance federally mandated programs, particularly internal security, which are not accompanied by money to pay for them. That, he said, differs from the effects of changes in federal tax law which directly impact state revenue. Delaware personal and business income taxes are linked to the parallel federal taxes.

In a separate context, the finance secretary said that President George Bush's continuing penchant for federal tax cutting bodes further negative impact on Delaware and other states that 'piggyback'. But, he said, the convenience the arrangement provides for state tax payers offsets that. Minner's budget package does include 'uncoupling' inheritance taxes, which are being phased out at the federal level under a previous law.

On the other hand, if the President and his supporters are correct and the federal tax cut stimulates the economy, Delaware and other states stand to gain tax revenue. "It all depends on how business reacts to the tax cut," David Gregor, the Department of Finance staff member who prepares and presents its forecasts, told the advisory council.

Revenue committee chairman Kenneth Lewis noted that the committee was sharply divided over what to recommend. Its members questioned how much faith they should put into the continuing effort to collect escheat money. Banks and other corporations are required to turn over so-called 'abandoned property' to the state and federal courts have ruled that the state of incorporation is the one that is entitle to get them.

To go after that money, Delaware now uses a dual system of voluntary submission and audits, targeting major corporations incorporated here as objects of the latter.

As a result, it appears that escheat will bring in $235 million this year, up from $156 million last year. Although no one on the advisory council seemed to notice, that is the third largest revenue stream this year -- behind the $426.6 million that incorporation taxes and fees are expected to net. Personal income tax, which is expected to net $706.9 million, is far and away the largest category.

The divided committee finally settled on a prediction that 'abandoned property' income will slip back next year to the 2002 level although the Department of Finance clearly doubts that will happen. "There seems to be on-going strength" in the collection effort, Gregor said.

"It all depends on audit activity," Singleton said. "We have a lot of wells out there, but we don't know what's in them."

He said there is at least one early sign that Delaware corporations which are hit up for significant payments could make some defensive moves. A major retail chain, for instance, has decided to set up a new subsidiary to handle its gift-certificate business but to incorporate that company in Ohio. Delaware claims unredeemed certif8icates to be subject to escheat while Ohio does not and that is significant to that particular company and probably other large national retailers.

The council also was stymied in trying to assess the impact on Delaware if neighboring Pennsylvania and Maryland decide to sanction casino gambling.

Gregor said the department tried to get a handle on it by determining travel distances of winners of large puts -- whose winnings are documented under federal Internal Revenue Service requirements -- who now come to Delaware Park, near Stanton, or Dover Downs. The conclusion was that Delaware would 'lose' about $30 million during the first full year of operations in Pennsylvania from its share of gambling revenue. That, he said, would increase to between $35 million and $36 million if a venue in Chester, Pa., is approved.

A similar study will be done for Maryland. A much less comprehensive one done two years ago resulted in a $50 million setback.

It is considered inevitable that both states will eventually approve gambling, but politics in those capitals seems to dictate that it is not imminent. "It's going to be a hit," said Robert Byrd, chairman of the advisory council. "But I think we're going to make a lot of money [from gambling] for a long time," he quipped.

2003. All rights reserved.

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