Delaware House passes legislation aimed at shrinking impact of federal tax breaks on state budget

What are journalists missing from the state of Delaware? What would you most like WHYY News to cover? Let us know.

The Delaware House passed legislation Thursday aimed at plugging a projected $410 million revenue shortfall to the state’s budget over the next three years.

State Democratic leaders say that corporate tax breaks in the “one big beautiful bill,” the massive tax bill Congressional Republicans passed this summer, could take a heavy toll on the state’s corporate income tax receipts.

Delaware’s House Bill 255 decouples parts of the state tax code from the federal tax code. The bill, sponsored by House Majority Leader Kerri Evelyn Harris, D-Dover,  passed with a three-fifths vote along party lines.

House bill spreads out the years for companies to deduct expenses

The federal tax bill allowed immediate tax breaks for research and development expenditures and the instantaneous expensing of business and qualified production property.

State officials say the federal bill will gut Delaware state revenues because it permanently extends trillions of dollars in 2017 tax cuts scheduled to expire at the end of this year and adds new ones.

State House Democrats argued businesses can still claim these deductions, but the bill adjusts the timing so they are spread out over multiple years, similar to how it previously worked. HB 255 decouples research and development tax breaks retroactively going back to tax year 2022, but allows it going forward. It also decouples federal retroactivity for full bonus appreciation expensing for tax year 2025 and future years.

Under Harris’ measure, small businesses can still immediately deduct certain equipment purchases, with the federal tax bill raising that amount from $1.25 million to $2.5 million each year.

Amendments to Harris’ legislation shortens the number of years that companies have to spread deductions for R&D expenses and adds a 2030 tax year sunset for changes to bonus depreciation.

Republicans say the changes will drive businesses from Delaware

House Democrats and Republicans debated whether the decoupling from this year’s federal tax code changes would hurt or help the state.

Harris said the changes were necessary to reduce the negative impact of  corporate tax giveaways on Delawareans struggling to afford basic needs.

“We would rather gamble on the well being of the individual, of the family, of the community,” she said. “Is it through people first or corporations first? And I think for us, it’s people first.”

Some Republicans said that the tax code changes would drive more businesses from Delaware, citing the company Coinbase’s recent decision to reincorporate in Texas.

“If we lose these corporations that are paying the corporate income tax, which is 5% of our budget, we’re going to lose the formation tax of that same corporation, that’s a third of our budget,” said state Rep. Shannon Morris, R- Harrington. “Everybody in the state of Delaware is going to feel the wrath of stuff moving forward if we don’t be careful on what we’re doing now.”

Delaware Secretary of State Charuni Patibanda-Sanchez said businesses incorporating in Delaware and paying the corporate franchise tax is completely different from what Harris’ bill was addressing, which is the corporate income tax.

“Businesses do not choose Delaware as a state of incorporation because of federal tax laws,” she said. “They choose Delaware because of our Court of Chancery and our Division of Corporations. So that third of our general fund budget that you’re referring to is distinctly related to the corporate franchise, not related to federal tax law or decoupling.”

A fact sheet from the Department of Finance shows that without the decoupling legislation, the state could face a loss of about $222 million in fiscal year 2026, $107 million in FY 2027 and nearly $80 million in FY 2028. The handout also projects revenue losses and gains from different decoupling options.

How the bill amendments impact those numbers is unclear. A House spokesperson cut off Harris’ response to WHYY News to this question and ended the interview. Gov. Matt Meyer’s office did not respond to a request for comment.

The Delaware Senate is expected to take up the legislation next week.