DOVER — The budget proposal crafted by outgoing Gov. Jack Markell includes significant changes to state employee health care, the elimination of a senior property tax subsidy and $212 million in new taxes.
The budget, which totals $4.13 billion, represents a 1.09 percent increase from the current year. Because of a projected deficit based on current spending and revenue, the proposal takes several drastic steps that are sure to be controversial.
However, come Tuesday, it will no longer be Gov. Markell’s problem — instead, it will be up to Gov.-elect John Carney and the General Assembly to ensure the budget is balanced by June 30. Gov.-elect Carney did not help craft these recommendations, according to state officials.
State officials say there is a $201 million gap between revenue and the current spending level, with another $149 million stemming from increased costs included in Gov. Markell’s budget.
“This proposal shows that we can continue to invest in our progress, while still addressing the serious challenges that have resulted from unsustainable budget growth in a few areas and revenue sources that don’t increase when the economy improves,” Gov. Markell said in a statement. “There is no sugarcoating that hard decisions are needed to make our budget sustainable and responsible over the long-term, but if we continue to focus on the investments that have the greatest impact on the current and future prosperity of all Delawareans, our state will thrive for years to come.”
Lawmakers have resisted large-scale changes in recent years, something House Speaker Pete Schwartzkopf, D-Rehoboth Beach, believes needs to end.
“We have structural financial revenue problems. We need to fix it,” he said.
But Gov. Markell’s proposed solutions are already facing opposition.
“I’m very skeptical of these numbers floating around the place, and then somewhere magically at the end of the year — Poof! The rabbit comes out of the hat,” Sen. Dave Lawson, R-Marydel, said. “It’s time to take a really, really hard look at what the needs are and what the spending is.
“Coming from a business side of things, I was less concerned about the income than I was the spending. If I spent judiciously the income took care of itself. If I was careless with the spending, the income was the problem.”
For the state’s three counties, the budget represents several problems. The realty transfer tax, a 3 percent tax divvied up evenly between the state and county whenever real estate is purchased, would be altered. The tax itself would be bumped up to 4 percent, and the county would lose .25 percent, meaning the state would get 2.75 percent instead of the 1.5 it currently receives on each purchase.
While most of the tax by volume comes from New Castle and Sussex, all three counties would be hit about the same proportionally, state officials said.
The counties would also be responsible for the entirety of the paramedic program, which they currently share with the state, and would pick up an additional 20 percent of the cost for public school transportation.
School districts would be responsible for 50 percent of construction costs of new schools. Currently, the state pays between 60 and 80 percent.
Rep. Schwartzkopf expects the counties to strongly protest the changes that would affect them.
Meanwhile, all state workers hired after Dec. 31, 2007, would be locked into a Health Savings Account, a type of plan that allows the state to contribute money used to pay for health care. For an individual, the state would contribute $1,000, with a $2,000 deductible.
“I don’t know how they can go back to 2008 on employees,” Sen. Lawson, a member of the Joint Finance Committee, said. “I think that’s kind of — wow. That’s kind of harsh.”
Health care plans plan would see an increase in deductibles of $500 for an employee and $1,000 for a family. For plans that currently do not have a deductible, it would be set at $500 for an employee and $1,000 for a family.
Delawareans over age 65 who have lived in the state for at least three years are currently eligible for a subsidy — the lesser of 50 percent or $500 — on their property taxes. Gov. Markell proposed halving it two years ago, but the recommendation met with a chilly reception.
Undaunted, he’s calling for eliminating the tax break entirely, something that will likely be a hard sell.
“Well, if you really look at it, it proposes to balance the budget on, more than anything, two areas: senior citizens and state employees,” Joint Finance Committee co-chair Sen. Harris McDowell, D-Wilmington, said of the recommendations.
Several taxes would be adjusted, although the biggest — the franchise tax — would not affect most Delawareans.
The tax rate for income above $60,000 would be raised from 6.6 percent to 6.8 percent and itemized deductions from federal tax filings would be eliminated, although the standard deduction would be raised. The standard deduction for a single taxpayer would jump from $3,250 to $5,000, and married couples filing jointly would see it increased from $6,500 to $10,000.
The cigarette tax, which was raised from $1.15 to $1.60 in 2009, would be increased another dollar, something applauded by the American Cancer Society Cancer Action Network, American Heart Association and American Lung Association in Delaware.
Farmland preservation, which was funded to the tune of the $10 million suggested by the General Assembly only twice under Gov. Markell, would be completely zeroed out to help balance the budget.
“Our state’s encouraging economic growth has meant solid revenue growth in areas like personal income tax, but, unfortunately, much of our revenue portfolio is not tied to the economy’s performance,” Secretary of Finance Tom Cook said in a statement. “The revenue changes we propose adhere closely to the recommendations of the recent bipartisan revenue task force which established a blueprint for reshaping state revenues to better grow with the economy.”
Increased spending comes from a higher number of special education students in schools, mandated pay increases for educators, increases in Medicaid and other areas.
Gov. Markell’s capital budget totals $555.3 million and includes money for a new police barrack in Lewes, library improvements and the fund used to incentivize companies to move to Delaware.
The Joint Finance Committee will begin meeting at the end of the month to start making changes to the recommended budget, and Gov.-elect Carney, who takes office Tuesday, will have a chance to make his own alterations after that.
Proposed tax hikes
Gov. Jack Markell, in a Fiscal Year 2018 budget proposal, suggests $212 million in new revenues through tax increases.
The budget, which will continue to be developed under incoming Gov. John Carney and the legislature, addresses a projected $350 million shortfall through cuts and new revenue sources.
Gov. Markell’s recommended increases:
• Inflationary adjustments to corporate franchise taxes and establishing a new top rate of $250,000 on corporations with $750 million or more of reported revenues or assets — $115 million
Personal Income Tax:
• Eliminate itemized deduction, increase standard deduction by 50 percent — $18.1 million
• Top rate from 6.6 percent to 6.8 percent at $60,000 — $ 9.9 million
Realty Transfer Tax
• Increase state assessment from 1.5 to 2.5 percent — $44 million
• Take .25 percent from counties and local governments — $11 million
• From $1.60 to $2.60/pack — $18.6 million
Proposed budget cuts
Gov. Jack Markell suggested the following cuts in state spending:
• $31.8 million in agency reductions, with the largest shares coming from Department of Education ($16.1 million) and Health and Social Services ($9.8 million)
• $9.8 million from Open Space
• $9.8 million from Farmland Preservation
• $4.9 million from the Energy Efficiency Fund
• Elimination of state property tax subsidy for senior citizens, saving $25 million (currently state pays 50 percent or $500 of property owners’ school taxes)
• Changes to employee/retiree health plans (adds “Consumer Driven Health Care Plan with Health Savings account for employees hired after Jan. 1, 2008; deductibles for all plans; elimination of health insurance premium preference for married state employees), with targeted savings of $24 million
Capital improvements, grants in aid
Capital spending — $555.3 million
• $120.1 million in public schools projects;
• $165.1 million for Higher Education projects;
• $10 million to recapitalize Strategic Fund;
• $8.5 million for Downtown Development Districts;
• $15 million for infrastructure improvements at Diamond State Port Corporation;
• $2.9 million for Riverfront Development Corporation;
• $6 million for Delaware State Housing Authority Housing Development Fund;
• $5.8 million for library projects;
• $12.8 million for new Delaware State Police Troop 7 in Lewes;
• $2.5 million for statewide Trails and Pathways;
• $6.4 million to upgrade 800 MHz radio infrastructure;
• $5.3 million for statewide facility improvements.
Change to school construction
Currently, state pays maximum of 80 percent or minimum of 60 percent of all school construction costs, except for special schools that are 100 percent state funded. Gov. Markell proposes the state pay 50 percent for all construction costs for all projects moving forward, effective with the Certificates of Necessity for Fiscal Year 2018 and 2019 budget requests. He does not recommend a change to the 100 percent funding for special schools.
Grant-in-Aid — $33 million
• $12.8 million reduction
• Eliminate partnership with counties for Paramedic Program ($10.8 million)
• Reduction in agency grants ($1.6 million)