Delaware State of the State: Governor Admits Budget Deficit “A Simple Math Problem” But Proposes More Spending

To his great credit, Governor John Carney admitted in his 2018 State of the State Address, that the state’s substantial future structural budget deficits are “a simple math problem. Our long-term growth rate for state spending is two times the growth rate of our revenues. We have to find a long-term way to limit our spending growth.” Indeed, general fund spending jumped more than 14 percent in just five years, 2012-2017.

Citing rising healthcare costs as chief-driver of higher state spending, Carney warned that at the current rate of increase, healthcare spending as a proportion of the state budget—currently 30 percent—will more than “double over the next decade” putting  “a squeeze on both Delaware families and business owners. These rising costs also make it harder to invest in education, public safety, and our workforce.” Encouraging action, the governor declared, “we’re spending too much money on healthcare, and not getting the best results. We all need to come to the table – state government and hospitals most of all – and be part of the solution.”

On healthcare, Carney called for more spending and investments to fight opioid addiction, including reducing the over-prescription of high-level painkillers, and expanding access to drug rehab treatment. He also noted the need for better wellness and safety in state prisons – announcing the installation of better camera systems and more investment into corrections officers.

The governor also asked lawmakers to spend more on education, and to hire hundreds more teachers for schools across the state. The governor sadly acknowledged that public schools in Wilmington are some of the worst performing in the state, while also being comprised of a majority of lower-income individuals. He implored lawmakers to devote additional resources to schools and neighborhoods in Wilmington to reduce violence and improve education.

Although economic growth picked up towards the end of 2017, longer term, the  state ranks 30th in economic performance according to the ALEC-Laffer State Economic Competiveness Index. State GDP growth is 36th in the nation over the past 10 years and employment growth has been below average. Data shows positive net in-migration, but with working age population stagnating and retired population rising, the driving force of the economy is eroding.

Unfortunately, the governor’s solution for job growth is an expansion of crony tax subsidies and carve outs rather than broad-based reform. He boasted that the state has “partnered with the private sector to drive job creation…[and] directed new resources to support small business” and called for an expansion of the Angel Investment Tax Credit. This tax credit flows for particular “qualified investors” in specific types of businesses. This does nothing to reduce the negative impact the 11.69 percent top corporate income tax rate—the 3rd highest in the nation. And special favors do nothing to alleviate the damage from the 11th highest top personal income tax rate of 7.85 percent.  Academic evidence consistently shows these taxes on productivity (particularly corporate taxes) are especially detrimental to economic growth and jobs.

Despite raking in nearly double the tax revenue they did in 1997, Delaware continues to experience budget deficits. There’s no getting around that excessive spending is a key factor of the state’s long-term structural deficit, and only compounds the problem of a shrinking working-age population relative to retirees. The state is losing the very driving force of its economy.

The governor is right. The state “cannot build new ongoing spending on top of one-time revenues. It’s just not responsible, and we can’t allow it, no matter how compelling the cause.” But his hints at budgetary discipline were overshadowed by proposals increased spending on infrastructure, education, health, and law enforcement. With an Economic Outlook ranking 37th nationally in Rich States, Poor States, Delaware is a far cry from being competitive. Should lawmakers seek to improve this record and produce widespread opportunity, broad-based rather than narrowly-targeted tax relief and prudent budget prioritization are the solution.