Sunday, June 7, 2009

Tax System Lacks Fairness, Efficiency

This coming week the Governor's revenue bills will be filed. These bills as written, will do nothing alleviate the financial hit on school employees and other state workers. The Governor has boasted that his budget cuts more than it raises revenue.

In addition to not raising enough sustainable revenue, this administration is missing an opportunity to update Delaware tax policy and in the process make it more fair. Here are some "not so fun" facts about Delaware tax policy:

*Unlike many states, we still tax our poor. The DE Personal Income Tax starts at a mere $2,000 per year and takes 2.2% from them.
*By contrast, the Income Tax tops out at $60,000 per year; thus taxing some of our teachers at the same rate we tax millionaires.
*Limited Liability Corporations and Limited Partnerships are only taxed $250 per year. This tax is regardless of the size and income of these business entities. Some LLC are huge with hundreds of employees and millions in profits. The LLC is becoming the new "inc." In fact since Delaware law limits or eliminates their fiduciary duties, some corporate attorneys are advising that companies pursue the LLC instead of traditional incorporation.
*DE allows corporations to "carry back loss". If a corporation has been making money but loses money this year, they can reach all the way back to five years in the past and take the loss off of previously paid taxes and get that money refunded.
*DE allows "bonus depreciation". In this practice a company can take a 30% depreciation up front on brand new equipment.
*DE eliminated their tax on inherited wealth in 2000. This is a tax on estates of $4 million and more. It is estimated that the annual revenue would be between $35 million to $45 million.

The current DE tax code is in need of modernization to make it more efficient and reform to make it fair. Tax reform would position the state to withstand an economic hit in 2011 that is predicted to be as bad as 2010.

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