Advisory Council on Revenues – 01/30/15 Meeting
Page 1
Minutes of the Advisory Council on Revenues
Buena Vista Conference Center – 01/30/15
Attendance:
Member / PresentJ. Martin, Chair / Yes
K. Lewis / No
E. Ratledge / Yes
P. Ross / Yes
G. Kenton / Yes
B. Townsend / Yes
G. Lavelle / Yes
Q. Johnson / Yes
R. Briggs-King / Yes
K. Simpler / Yes
J. Bullock / Yes
T. Cook / Yes
Others Present: A. Aka, J. Johnstone, R. Geisenberger, D. Gregor, J. Rosen, B. Crozier
1. Call to Order
Mr. Martin called the meeting to order.
2. Review of Data Requests
Mr. Martin states that the council will defer consideration of minutes from the last meeting until the next one.
David Gregor, Deputy Secretary of the Department of Finance, states that some data requests from the first meeting will be discussed later in the context of other revenue sources.
Jamie Johnstone, Economic/Fiscal Analyst with the Department of Finance, presents a modified version of previous charts detailing real, legislation adjusted revenue growth rates and requested measures of each revenue category’s volatility adjusted return.
Mr. Johnstone notes that prior tax elasticity measures and the provided Sharpe ratios tell the same story in regards to each revenues performance versus personal income. Mr. Johnstone states that the real adjusted growth rates demonstrate that several revenue sources have declined when adjusted for inflation, but that the growth rate rankings have remained consistent.
Mr. Martin requests further explanation of the coefficient of variation and the Sharpe ratio.
Mr. Johnstone states that the coefficient of variation adjusts standard deviation for the size of the revenue stream being measured. Mr. Johnstone states that the Sharpe ratio measures of growth and volatility simultaneously by comparing the growth of a revenue stream to some benchmark growth rate and adjusting the difference between those growth rates by the percent standard deviation.
Mr. Johnstone notes these measures all point out that abandoned property has been the driving revenue source over the past sixteen years.
Mr. Kenton asks about the final column’s significance.
Mr. Johnstone states that the last column covers the elasticity of various revenues for the forecast period.
Mr. Kenton notes that this is the same forecast data from the prior tables.
Mr. Simpler states that the Sharpe ratio provides a good measure of the volatility seen in the revenue streams that did grow faster than personal income and offers a measure of any excess return that exists. Mr. Simpler notes that this is data is backwards looking and we have to add human measures to understand, for example, why relying on abandon property in the future might not be recommendable.
Mr. Gregor presents a breakdown various revenue sources share of total general fund revenues throughout time. Mr. Gregor notes that growth in the lottery and abandoned property enabled policy decisions in regards to reduced reliance on personal income taxation. Mr. Gregor notes that over time the corporate franchise tax has begun to provide a larger share of the state’s revenue as lottery and abandoned property have begun to wane. Mr. Gregor also notes the volatility of the Corporate Income Tax.
Mr. Johnstone presents some research on how the estate tax and the income tax relate to one another. Mr. Johnstone notes that the research on tax migration is limited and often flawed. Mr. Johnstone states that the results in methodically superior studies have provided mixed results. Mr. Johnstone states that Delaware estate tax filings are consistent with the national rate of filings when compared to the annual number of deaths nationally and in Delaware. Mr. Johnstone states that if only .8% of the top 1% of income tax earners were to migrate out of Delaware as a result of estate taxation, the lost personal income tax revenue would swamp the estate tax revenue gained given current estimates.
Mr. Kenton asks about the current effective rates on the estate tax.
Mr. Gregor states that the rates range from .8% to 16% and that 16% is on estates $10 million above the federal exemption.
Mr. Kenton notes that the exemption is $5 million for an individual and $10 million for a couple.
Mr. Johnstone presents a look at the relative size of the various special funds compared to total state revenue over the past five years. Mr. Johnstone notes that the general fund is roughly 30-40% of all revenue and that the general fund plus appropriated special funds make up 40-50% of the total.
Mr. Ratledge notes that non-appropriated special funds are targeted spending such as grants from the federal government. Mr. Ratledge states that some elements are not technically expenditures such as tax refunds.
Mr. Simpler asks if more granular data concerning NSF spending is available.
Mr. Ratledge states that a report by department is available with every DEFAC.
3. Delaware’s Personal Income Tax
Mr. Johnstone discusses the structure of Delaware’s personal income tax stating that Delaware takes federal Adjusted Gross Income (AGI) and federal itemized deductions except for state and local tax payments and has several state specific income modifications. Mr. Johnstone discusses Delaware’s marginal rates and the tax credits available in the state of Delaware. Mr. Johnstone presents a diagram on how states vary their personal income tax through rate structures, acceptance of federal definitions, and acceptance of the federal itemized deductions. Mr. Johnstone notes that each section of the diagram represents an example of where Delaware might go were the council to recommend some of the policy levers to be discussed.
Mr. Johnstone presents a comparison of all the top marginal tax rates in the forty-four states with broad income taxation. Mr. Johnstone notes that Maryland’s top marginal rate is adjusted for the average county income tax in the state.
Mr. Townsend asks for the county tax rates for all the counties that border Delaware.
Mr. Johnstone states that the median top marginal tax rate is 6.0%, that the median top marginal rate for states with similar tax structures is 6.7%, and the median top marginal tax rate for states that allow itemized deductions is 6.9%. Mr. Johnstone notes that Delaware’s top marginal tax rate is 6.6%. Mr. Johnstone notes that Delaware has a relatively narrow tax base and that the national median is pulled down by states with flat taxes and no itemized deduction that have lower rates because of their broader tax base.
Mr. Johnstone presents Delaware taxpayer’s relative income tax burden measure as taxes paid per $1,000 of personal income. Mr. Johnstone states that Delaware has the 9th highest income tax burden and the median burden is $23.23. Mr. Johnstone notes that because Delaware is a large commuter state these numbers may be biased upwards since high income commuters pay into the tax revenue but are not part of the state’s personal income.
Arsene Aka, Senior Economic/Fiscal Analyst with the Department of Finance, presents on the historical composition of Delaware income and tax liability. Mr. Aka’s presentation includes Delaware AGI and net liability averages for deciles of tax filers and various economic indicators over time.
Mr. Aka states that the data from 1997 and 2000 shows the direct impact of large tax cuts as average AGI rises significantly while average tax liability rises much more slowly. Mr. Aka notes that the economic indicators rise and fall with the business cycle. Mr. Aka demonstrates how the 2001 recession affected the 2003 tax data and the Great Recession affected the 2009 economic data. Mr. Aka states that this data demonstrates the volatility of personal income tax revenue results largely from fluctuations in liability in the top 10% of incomes.
Mr. Aka presents data on trends in resident filers, civilian non-institutionalized population, and the labor force. Mr. Aka states that there is a growing gap between civilian populations and the number of resident filers and suggest that one explanation for this gap is because of changing demographics skewing Delaware’s population much older. Mr. Aka notes that it is possible that the gap is also caused by changes to disability or just changes in the business cycle, but somewhere between 50 and 80% of this gap is attributable to changing demographics.
Mr. Kenton asks how this compares to other states.
Mr. Aka states this is in line with what is happening nationally.
Mr. Gregor states that this is happening in Delaware to a greater degree for a variety of reasons including low property taxes relative to our region.
Mr. Kenton asks if there is more senior migration than most states or if there is an issue with birth rates in the state of Delaware.
Mr. Gregor confirms this in terms of in migration.
Mr. Ratledge notes that labor force participation in Delaware has dropped off more sharply than it has nationally and that the nineteen to thirty-four age groups has also seen a large decline in labor force participation. Mr. Ratledge notes that the young individuals have also been forced into part-time work and as a result may also appear as non-filers.
Mr. Lavelle asks for the definition of Civilian non-insitutionalized population.
Mr. Aka states that this is all individuals older than sixteen who are not institutionalized or in the armed forces.
Mr. Lavelle asks for more granular demographic data and mentions anecdotal information about Newcastle County population potentially shrinking.
Mr. Ratledge states that Newcastle County’s growth is not as high as it used to be and that Sussex County’s growth has also slowed. Mr. Ratledge states that roughly 60% of Sussex’s in-migration is the elderly.
Mr. Aka presents on the changing composition of Delaware AGI and tax liability, noting that the majority of volatility occurs within the top 1% of incomes.
Mr. Aka presents inflation adjusted measures of data seen earlier concerning the historical composition of Delaware income and tax liability. Mr. Aka states that real incomes in Delaware have been stagnant between 1997 and 2012.
Mr. Aka presents on the number of tax filers per tax bracket for the year 2012.
Mr. Gregor states that this data is the most recent available, but notes the top marginal tax rate has declined since 2012.
Mr. Kenton asks how the table might have looked in 1997 and if there are fewer filers at the lower end.
Mr. Gregor states that the bottom income ranges have not changed in a long time and as a result the state experiences bracket creep.
Mr. Kenton notes anecdotal recollection that many tax filers may have been dropped from the base by some tax law changes.
Mr. Gregor states tax changes in the nineties were built to increase tax competitiveness and maintain progressiveness. Mr. Gregor states that these tax law changes would have removed thousands of returns. Mr. Gregor states these revisions ended in 2000 and that bracket creep has likely brought these tax payers back into the base over the subsequent years.
Mr. Gregor presents on the available policy options to be considered. Mr. Gregor notes that the discussion is all about the base and rates. Mr. Gregor states that policy changes enacted this fiscal year would not show up as revenue until FY17 and that the DEFAC estimate for PIT for FY17 is currently $1,341 million. Mr. Gregor states that decoupling from itemized deductions would garner roughly $180-190 million based on currently available data. Mr. Gregor notes that these changes to the base would have some whipsaw effects because these changes do not show up in the withholding tables. Mr. Gregor states that we would still piggyback on federal AGI and continue to benefit from federal conformity. Mr. Gregor notes this would still be progressive and simplify the tax filing process.
Mr. Ross notes that federal changes to AGI can be both positive and negative unknown for us.
Mr. Cook asks for the viewpoint of a CPA in the audience.
Mr. Jordan Rosen, member of the public, states a fear that removing itemized deductions would make it difficult for people to keep their beach front rental properties as a result of losing the mortgage interest deduction or that Delawareans provide less charitable giving to Delaware organizations. Mr. Rosen notes that this would require a slow implementation process and a drop in marginal rates similar to those in Pennsylvania.
Barry Crozier, member of the public, states that marginal rates would have to be lowered if itemized deductions were removed. Mr. Crozier states that political will would be difficult to garner because changing itemized deductions is so much more complex than simple rate changes. Mr. Crozier states that removing the itemized deduction is not possible given the current political will. Mr. Crozier states that it would take time to figure out tax rate that would generate similar revenue after removing itemized deductions while still being fair to the citizenry.
Mr. Gregor notes this policy change could be softened via caps or means-tests for itemized deductions or via increases in the standard deduction or changes to rates. Mr. Gregor notes that itemized deductions have benefits, but also unintended consequences.
Mr. Gregor states that base broadening could also include changes to the Delaware modifications which largely apply to elderly taxpayers. Mr. Gregor states that retirement income could be exempt in a blanket fashion at $25,000 which could be means-tested over a range of $50,000 to $100,000 which would generate roughly $47 million. Mr. Gregor states that the eligibility for an extra personal credit could be changed from 60 years old to 65 years old generating roughly $4 million. Mr. Gregor states that the eligibility for the pension exclusion could be changed from 60 years old to 65 years old generating roughly $15 million.