Bill to raise income taxes on wealthiest Delawareans stalls

A bill sponsored by a handful of Delaware Democrats would raise income tax rates for people who earn more than $125,000.

But the effort has stalled in committee, even though the party controls both chambers of the General Assembly, and now the House sponsor is considering a compromise measure.

State Rep. John Kowalko (D-25), the chief House sponsor, said he wants a more progressive rate for a system that currently taxes people who make $1 million a year at the same rate as someone whose income is $60,001.

The state’s top tax rate, for all people earning more than $60,000 annually, is 6.6 %. Rates are progressive with, for example, people paying 4.8% for income between $10,000 and $20,000. The tax rate increases from there, topping out at the $60,000 mark.

Kowalko said his proposal was modest and designed not to raise revenue but to create a more “fair, equitable, and sustainable” system.

The bill would not increase the tax rate for anyone whose income is up to $125,000. It would create three new brackets as follows:

• 7.1% for earnings between $125,000 and $250,000.
• 7.85% for earnings between $250,001 and $500,000.
• 8.6% for earnings above $500,000.

Kowalko shared a report with WHYY News from Delaware’s controller general that showed his proposal would only affect 28,400 of the 521,000 Delaware residents who are taxpayers — 5.4%.

Overall, the bill would affect 69,000 taxpayers including out-of-state residents — 10.5% of the 663,500 taxpayers.

He said the impact on the state’s highest earners would be minimal.

The breakdown is as follows:

• Earners making $250,000 would pay an extra $625
• Earners making $500,000 would pay an extra $3,750
• Earners making $1,000,000 would pay an extra $13,750

“We’re not hurting anyone,” Kowalko said. “I think at this time is when you want to establish a special bracket for the wealthiest. In the future, it will allow us to have a legitimately progressive system of tax brackets. It builds a fairness of the burden-sharing.”

State Sen. Marie Pinkney, a New Castle-area Democrat and the lead Senate sponsor, said the current top rate of 6.6% for income above $60,000 “should be the middle of the ladder, not the end.”

“As inequality grows and wealth is moved from bottom to top, our tax policy should change with the times.”

During a recent House Revenue and Finance Committee hearing, the proposed bill faced opposition not only from Republicans on the panel but from the administration of Democratic Gov. John Carney.

The minutes for the session have not yet been made public, but Rick Geisenberger, the state’s finance secretary, said he argued against the bill for several reasons. Among them are that he believes Delaware has a fair system and no sales tax, and that the 10.5% of people who would be affected by the measure already pay nearly half of the $1.7 billion in personal income taxes the state collects.

Geisenberger also emphasized that asking anyone to pay more now is unnecessary — at least for now — because Delaware has a “structural surplus” of more than $300 million in its $4.6 billion general fund budget and has received nearly $2 billion in federal coronavirus relief aid.

“We were against it and we are against it,’’ Geisenberger said. “The idea of raising tax revenues, given the surplus that we’re currently sitting on, as well as the federal money that’s coming in, it doesn’t seem to make a lot of sense to us from a timing perspective.”

Republican state Rep. Michael Ramone, who represents the suburban Pike Creek area and sits on the House panel, echoed Geisenberger’s opposition.

“I just don’t see how you even think of raising taxes on people when you have such an enormous surplus,” Ramone said. “What I suggest is, the surplus is people’s taxes. So let’s give it back. And for those in the higher brackets, maybe they don’t get any back or as much back, but for those in the lower brackets, we can absolutely take care of them by consolidating the brackets, giving more back to those in most need. And everybody’s happy.”

Those arguments won the day in the House committee hearings. Members voted 7-6 not to release the bill to the full House.

Kowalko said he’s disappointed and is now working on a bill with smaller increases for higher earners. He hopes to get it introduced in the coming weeks and get a hearing and a full vote by June 30, when the session adjourns.

Michael J. Quaranta, president of the state Chamber of Commerce, told WHYY News his members think it’s unnecessary and counterproductive.

“It’s really kind of hard to make the case that the state is resource short,” Quaranta said.

He also said that raising taxes on anyone while Delaware tries to recover from the pandemic is unwise.

“Businesses are still healing’’ he said. “We’ve got some sectors that have not taken a day off, like construction and trades, others that have been pretty much devastated, hospitality, restaurants, the arts, museums, etc.”

The smarter move, he said, is to put resources into rebuilding the middle class through workforce training and development.

“This is a math problem. You will have greater prosperity for a greater number of people, And you wouldn’t have to raise, frankly, any taxes.”