News

December 13, 2003

The long anticipated but slow to materialize economic recovery appears to have finally arrived. As a result, a year after raising an alarm which triggered a major retrenchment of state spending, the Delaware Economic & Financial Advisory Council is about to signal a cautious reversal of that pattern.

At its meeting on Dec. 15, the official state forecasters will increase their estimate of state revenue in the fiscal year ending next June 30 by $32.3 million and project a revenue growth rate of 7.5%, up from an anemic four-tenths of one percent in fiscal 2003.

The anticipated bottom line is now $2,618.6 million, up from $2,436.4 million.

Looking farther into the future, the council is now projecting 4.7% revenue growth in fiscal 2005 and 3.4% in fiscal 2006. In September, it was looking for 6.2% growth this year and 4.3% and 3.6% in the out years.

The council's December forecast is a key one because it forms the basis of the budget that Governor Ruth Ann Minner will propose to the General Assembly in late January. By law, there is a ceiling on the amount the legislature can appropriate from the state's general spending fund based on the financial advisory council's forecast.

No one on the panel is ready to suggest a return to the halcyon days of the 1990s, but current numbers crunching is generating a renewed optimism.

There is a major caveat to that, however, because, contrary to the usual pattern, job creation, both in Delaware and across the nation, continues to lag, with no more than half of one percent growth anticipated this fiscal year.

The Delaware forecasters are particularly wary of workforce downsizing and loss of relatively high-paying jobs at Du Pont and the Daimler-Chrysler and General Motors automobile assembly plants. A committee member quoted a Du Pont official as saying that company can hire three graduates from Massachusetts Institute of Technology in India for less than it costs to hire one American with those credentials. Assembly line automation, it was said, is enabling the plants "to make [significantly] more product with fewer people."

The recovery "is modest by historic standards, but one that is taking hold," David Gregor, the Department of Finance staff member who prepares and presents its forecasts, told the financial advisory council's revenue committee as it was preparing its recommendation to the full council. The council has rarely, if ever, not accepted the committee recommendation.

Ken Lewis, the University of Delaware professor who chairs the committee, said he is "a lot more confident across the board."

While national confidence is being buoyed by such things as the Dow Jones average crossing the 10,000 threshold, Delaware's financial officials are pinning theirs on a couple of 'solid as money in the bank' indicators.

Personal income taxes withheld from employees' salaries and wages are running $14.2 million ahead of a year ago at this point in the fiscal year. If that pace continues, it will yield a 4.7% growth rate in the overall personal income tax component on the income side of the state budget this year and better than 6% in each of the coming two fiscal years. There was 'negative growth' -- six-tenths of one percent -- in fiscal 2003.

The Delaware econometric model now projects 4.7% growth in personal income this fiscal year, which is nearly double what it was last year. The personal income tax is the largest source of state revenue, accounting for about 30% of the total.

Collections from the gross receipts tax -- Delaware's rough equivalent of a sales tax -- are up $4.9 million so far this year with growth in consumer spending expected in proportion to gains in personal income, tempered somewhat by concerns over job security and scarcity.

Also coming on strong -- up $7.7 million so far this year -- is the real estate transfer tax. That is attributed largely to a residential housing boom, particularly on the seashore side of Sussex County. In part, the committee was told, that is being driven by demand from the homosexual community, with at least one townhouse project in the Rehoboth Beach area now being built exclusively for that market.

And, to be sure, the continuing drive to collect escheat funds owed to the state by corporations, particularly in the financial services and retail sectors, chartered here. Those collections are up $8.8 million so far this year. Gregor said pending audits could boost such income this year to more than $300 million, up from $231.5 million. That was the one income stream which grew during the economic downturn.

Escheat funds are money in forms ranging from bank accounts to unredeemed gift certificates belonging to persons who cannot be identified or located. The U.S. Supreme Court has ruled that that money belongs to the state where the company holding it is chartered.

Corporate franchise tax collections continue to lag behind last year -- running $10.9 million less this year so far. With an economic recovery, however, corporation formation and new public stock offerings are expected to pick up in calendar 2004. With that in mind, the financial advisory council will stick with its September forecast that net franchise tax collected this fiscal year will be 17% higher. That matches the size of the rate increase enacted by the Assembly last June as part of its state tax restructuring package. Corporate franchise tax is the second largest source of state income, accounting for just under 20%.

On the other hand, formation of limited-liability corporations and partnerships has resulted in a $1.9 million increase in franchise tax from that source and a projection that full-year income will more than double the $25 million collected in fiscal 2003. The number of new entities using that form of business organization and existing corporations converting to it was at an all-time high last year and is expected to set a new record this year.

As expected, doubling the cigarette tax as part of the restructuring has resulted in a parallel doubling of income from that source -- to $29.6 million so far this year from $14.9 million at this same point in fiscal 2003.

Still uncertain, Gregor told the committee, is the effect of the ban on smoking on revenue from slot machine gambling. December is the first month in which there will be a direct year-to-year revenue comparison since the ban took effect. Revenue so far is running $5.9 million behind a year ago. He noted that is in line with the council's pre-ban projection. Since the ban was imposed, casinos have been allowed to increase the number of machines and extend operation hours.

The committee will recommend, however, that the full financial advisory council lower its estimate of revenue from the combination of slot-machine and traditional lottery gambling by $5 million from what its projected in September. That will reduce the anticipated growth rate from that source for the full year to 5% from 7.3%.

© 2003. All rights reserved.

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