Kowalko offers budget alternatives for Delaware ….

“My alternative solution is equitable for all citizens of Delaware, sustainable past the current budget crisis and responsible by moving us out of the current crisis rather than making it worse.”

–Representative John Kowalko

It’s no secret that Delaware has a big budget shortfall; about $750 million out of at total budget of about $3.5 billion.  There are three basic ways this can be dealt with:  (1) run a deficit, (2) reduce spending, or (3) increase revenues.

Governor Markell’s approach relies mostly on spending reductions. For details see Markell’s budget address, “Solutions for the Budget Shortfall.”  As Markell says, “We cut much more than we raise.”  Cuts amount to $331 million and revenue increases amount to $166 million.

About $91 million of the cut comes from an 8% state salary rollback.  More “savings” come from health care cost increases for state employees, amounting, overall to about a 12 percent cut in state employee compensation.  Naturally, they don’t like it.  I’m been to one meeting between Markell and employees in the Carvel State Building in Wilmington, and a sizeable rally, mostly organized by unions, in front of Leg Hall.

One key objection is that the cuts are imposed across the board, not skewed towards the higher salaries.  Delaware state pay scales are relatively low, with pay grades tables beginning below $18,000 per year.  Morale in many state agencies sucks these days.   Good people are leaving.  A high proportion of DNREC employees, for example are at or near retirement age.

In favor of this approach:  it avoids out-and-out layoffs that many state and local governments have been making.  Despite Stimulus Funds, States to Cut More Jobs .

Why did Markell choose to cut rather than raise?  I don’t really know.  Markell hasn’t been talking to Green Delaware since he won the primary and was sure to become Governor.  I can’t even get a staff directory for his office.  His shop is no more open to us than was Minner’s.

But Markell has talked about expecting government to “get smaller.”  He’s held many public meetings around the state, but the opening question was not “how should state finances be handled?” but “how can the state save money?”  In other words, the discussions were initialized towards towards the “cut” approach.  The press and bloggers were lead down that path.

In general, Republicans seem happier than Democrats with Markell’s policies.

But Markell also says, and believably, that he wants Delaware to thrive, mostly, it seems, in terms of being a good place to do business.  He wants public health and quality of life to improve.  Can this be done without more, not fewer, government services?  Delaware is already a low-tax, low services state.  A state where corporations are respected far more than human citizens.

What is the proper balance between the public and private sectors of the economy?  How, much, optimally, should Delaware “tax and spend?”  I’m no expert, but this question can be addressed in various ways.  Ideologically, which in this country in recent times has amounted to demonizing taxes and government–with wealth and political power being concentrated in fewer and fewer hands.   Or pragmatically:  what level of safety net will make us most satisfied and productive overall?  These things can be studied objectively.  Alternatives and their consequences can be modeled  Has this been done?  Not that I know of.  But again, how would we find out?  Who would do it?  The visible Delaware economists, like Ed Ratledge and Eleanor Craig, seem mostly to shill for the corporate world.

My impression is that the most productive and successful countries have a stronger public sector and better services for residents.  Health care is the most blatant example–should we organize health care for the benefit of the health of our people, or should we leave it organized for the maximum profit of insurance companies and medical care providers, with many lacking access?   For some good thinking see Floyd McDowell’s site: http://deinformedvoters.org .

Enter Representative John Kowalko, who has made a serious effort to propose alternatives to Markell’s budget approach.  The essence of Kowalko’s arguments seem to be: (1) Wealthy people and businesses who have profited so greatly from Delaware’s low taxes and “business-friendly” policies should now step up to the plate and pay their fair share, (2) cutting the pay of already-low-paid employees in inequitable, and (3) the State of Delaware is the state’s largest employer, with about 30,000 full-time-equivalent employees–including public school teachers–and cutting the pay of so many people will reduce consumer spending statewide and harm the overall economy.

Let Kowalko speak for himself.

Here’s a recent press release from Kowalko:

A responsible and equitable path
towards an economic recovery

Delaware citizens are facing an uncertain future that threatens to tear at our state’s long term health.

Republican and Democratic labels must be cast aside, and we must all look for answers in a spirit of responsibility, equality and sustainability.

Every Delawarean, regardless of their position, shares a common fate, and by simple logic, must share in a common solution.

Every one of the approximately 870,000 business entities that call Delaware home must also share in a common solution.

Responsible and equitable and sustainable.  It is imperative that we find a solution that offers long term stability and fosters growth.  It is not possible to support any quick fix that in the end places a greater burden on already overburdened state agencies, weakens Delaware’s long term stability and makes our revenue and tax stream revenues even more regressive and punitive to those who can afford it the least.

In light of the Governor’s March 2009 budget proposal, which states, “No group will bear a disproportionate burden from this challenge alone,” the proposed 8% salary cut does not make sense.  In addition to the obvious issues of equity and fairness, there are potentially crippling economic consequences that will further damage our already fragile state economy.

In a time when increased consumer spending and confidence is a collective goal, the salary cut is a step backwards, taking nearly a hundred million dollars of spending power out of an already faltering economy.    Businesses up and  down the state, already reeling and many of them surviving week to week, will suffer even greater harm, damaging the overall economic picture.

Shrinking business revenue could lead to even more employee layoffs in the private sector resulting in fewer opportunities for those who have already lost their jobs to reenter the job sector. There is also the real risk of small business failures that would continue the downward economic slide in Delaware. Since small businesses in Delaware employ over 50% of the workforce this is a risk we cannot afford to take.

There is a more equitable and responsible path to travel, one that involves all of our state’s people, giving all of us a sense of stewardship in these difficult times.

Delaware ranks, according to the Tax Foundation, tenth in the nation in business tax climate.  But as equally important, if not more so, is the legal standing of Delaware Corporate Law.  Website after website praises Delaware as a corporate haven, and even the Delaware Department of State Website states in a document titled, ‘Why Corporations Choose Delaware,” that Delaware law is “one of the most advanced and flexible corporation statutes in the nation.”

According to the Money Magazine, Delaware ranks as the fourth most tax friendly state for its citizens, beaten out by only Alaska, New Hampshire and Tennessee.

A quick look at proposal unveiled earlier this week reveals a menu of options from which to choose.  We have looked at a over a dozen alternate revenue streams, any combination of which would spread the burden more evenly and would eliminate the need for an across the board salary cut to state employees.

The options include a closer look at the PIT structure, the Franchise Tax Cap for companies valued at over $660,000,000.00, fees for many of the 875,000 companies that have incorporated in Delaware, gasoline tax, and of course, dipping into the Rainy Day Fund.  There are several more alternate revenue streams from which lawmakers can pull in our collective effort to balance the budget.

State employees make up approximately 6.8% of Delaware’s work force, and at an average salary of $44,000, are being asked to contribute an average of $3,520.00 per worker.  Taking such a disproportionate amount of necessary livable income from median income workers directly contradicts the idea of a shared sacrifice and will further erode consumer confidence and spending.  In reality, a salary cut is akin to a disproportionate tax on a small minority (6.8%) of the work force, and the effects go far beyond the ideas of fairness and equity to the very principals of a sound economy.  When you factor in the increase in health benefits, the still frozen salary scales and the possibility of furlough days, the gap between rhetoric and reality widens even further.

An example of a more evenhanded and economically sound approach would be to ask for a small incremental annual amount  from all workers rather than carve upwards to $$3,520.00 from a smaller limited number of workers averaging $44,000.  There are six different PIT scenarios included in our proposal, and any one of them honors the ideas of asking all Delawareans, not just a small captive audience, to share in the burden.

Of the approximately 875,000 businesses that incorporate in Delaware, nearly 260,000 of them are traditional  publicly traded companies. 1500 of these companies, all with a minimum asset value of $660,000,000 can be asked to contribute more with an increase in the Franchise Tax Cap, in an effort to live up to the ideal of shared burden and sacrifice.

In the “Center on Budget and Policy Priorities Report” by Nicholas Johnson (1/12/09) reference is made to a letter from Noble Prize winner Joseph Stiglitz of Columbia University and Peter Orsatz, (co-signed by 120 economists) to N.Y. Governor David Patterson. They write that “cuts could be more harmful for a state’s economy during a recession then tax increases”some types of reductions would reduce demand in the economy on a dollar-for-dollar basis and therefore be more harmful to the economy than a tax increase”.

In light of these threats to a smooth economic recovery, and working in conjuction with the State Finance Department, the Office and Management and Budget as well as Controller General’s Office to ensure the accuracy of these numbers, we are confident that this plan follows the responsible and equitable path towards an economic recovery.

Rep. John Kowlako and Philip Kaplan

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Another press release from Kowalko offered some more details:

[…] State Representative Kowalko said it would be economically irresponsible to not reconsider the imposition of salary cuts on State Workers.  “These cuts do, in fact represent a tax of disproportionately large amounts on 6.8% of the Delaware work force, ensuring that the 91M raised would not be available to sustain the economies of our small and large businesses in Delaware.”

Many Economists agree that these types of cuts can deny on a dollar for dollar basis, the infusion of consumer spending necessary to ensure small business success and rebuild consumer confidence especially in this type of recessive environment.

The enormity of these salary cuts, on a per capita basis virtually assures that the overall economic health of Delaware will suffer.  “This is not a sustainable revenue source and we must look at a more diverse and balanced accumulation of revenue by considering a menu of options and alternatives that can be combined to displace the proposed salary cuts.”  Therefore today I am releasing to the public my proposal that lists the actual dollar advantage to an assortment of options that can be combined in various proportions to displace the $91M proposed in the salary cuts.

“I am convinced that we can improve Delaware’s quality of life by making our revenue system fairer and more up-to-date.”

I’ve submitted this proposal to the Joint Finance Committee, The General Assembly and the Governor’s Office and today it is being made available to the Public and the Media for consideration.

For more details and full presentation and remarks go to www.johnkowalko.com

Below is a summary of the potential additional revenue options in my proposal

  • raises the Franchise Tax Cap for Corporations–$107.5 million
  • increases the minimum fees on corporations from $75 to $100–$5.94 million
  • increase annual coporate filing fee from $25. to $40–3.96 million
  • increase annual fee on LLC and LC from $250. to $300–$28.95 million
  • increase filing fees on foreign corporations from $100. to $250–$1.575 million
  • establishes fees for statutory trusts from $0 to $200–$2.1 million
  • utilizes 25% of Rainy Day Fund–$46.5 million
  • establishes fees on inherited wealth over $4,000,000–$40 million
  • increases gasoline tax by .05¢–$25.7 million
  • 3 furlough days for non-public school employees–$3 million
  • looks at the personal income tax codes to make them more progressive–$82.75 million

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My alternative solution is equitable for all citizens of Delaware, sustainable past the current budget crisis and responsible by moving us out of the current crisis rather than making it worse.

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Whether or not you agree with the details of Kowalko’s proposals, he’s doing what needs to be done–offering alternatives for discussion.  Let Governor Markell and your Senator and Representative know how you feel.  Contact information.

Kowalko told Green Delaware he would be happy to meet with groups to discuss his proposals: jkowalko@verizon.net.  Take him up on that!

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