Kowalko on Minor Fee Increases for Multi-Nationals vs. Major Pay Cuts for 6% of DE Workforce
John Kowlako and Philip Kaplan wrote this editorial which makes a strong case for minor fee increases for multi-national corporations that call DE home because we have corporate tax laws that they drive truckloads of money through.
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”.
0AIn 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.
Raising fees and taxes is not the answer.
I know pay cuts are painful, I took a 40% one with a pension loss while senior management got bonuses and protected their pensions.
Still, our government in Delaware is inefficient and too costly. Last year we heard about a bottom of review, where is it?
The focus should be on early retirements, buyouts and common sense ways to reduce personnel costs by 15%.
Our budget is 46% personnel costs, you can’t ignore that fact so when you say no group should have to take a larger burden- agreed but then you have to ackowledge you must address that 46% number and get it much, much lower.
Mike Protack
Kowalko for Senate.
Kowalko for Governor.
Really? John Kowalko for Governor? I think John is just fine where he is… I think his talents are well-suited for the House.
This is opposed to the Burris plan (embraced by Protack, too): fire people.
Protack and Markell seem to be on the same side of an issue.
That is telling.
Here’s the deal. I don’t have a problem with layoffs. But there is no way that Markell has done the homework required for that. He needs to find the fat in the budget and the people that aren’t pulling their weight. So that when you lay off, you are improving the government, not stupidly making untargeted cuts. Bravo to him for not going off half-cocked on that (like Burris and Protack would).
However, the across the board cut is not in any way targeted or advisable.
I would love to see JK go on to bigger and better things, but he is doing wonderful things where he is.
Take your choice:
If you were voting in the Dem primary tomorrow, Biden or Kowalko?
LG.. I think your analysis is correct, that Markell intends a more intelligent reengineering later. But notice that you have rejected both pay cuts and layoffs. I think modern liberals are going to have to choose one or the other or both, instead of trying to fix everything with tax increases.
Also, didn’t Markell respond to the “not targeted” charge a few weeks ago, saying that there’s just not enough state employees in the upper brackets for a progressive graduation to make a difference.
It is true though that it seems unfair to ask state employees to take cuts without fully exploring other options. One idea I have not heard explored is the possiblity of summarily cutting the rates the state pays to private vendors and contractors, Walmart-style
FYI, the Kowalko suggestions are largely on target… the small fee increases are a no-brainer, and the PIT needs to become more progressive.
Yes, John Kowalko can run for whatever Office he wants to. He has earned the respect and admiration that is coming his way from all directions. I know that I would do all I can to further his political carrier.
Anon – I am not rejecting layoffs. I am rejecting dumb layoffs (like, each department has to cut their payroll by $X). I am in favor of layoffs that are smart (like “I have no idea why Minner put that person in that job. Buh-Bye.”). It will take time to separate the wheat from the chaff here.
Governor Markell has responded to the “targeted cuts” but not in the way that you assert. He has said that he is forced into an abbreviated budget cycle by the election cycle, so he has not been able to adequately assess the targets (although it may be a target-rich environment).
In the meantime, we can and should increase fees on corporate entities that are living large because of our legal structure. I am not talking about innovation-killing increases, but modest increases like the ones that Rep. Kowalko has proposed.
…instead of trying to fix everything with tax increases.
Such bullshit. As if anyone ever suggested that. I hope that this level of intellectual dishonesty is not going to be a hallmark of the administration.
Just as Markell got nailed for tying the racino bill to the pay cut… we need to be careful about tying the Kowalko proposals to the pay cut. Given the size of the shortfall it is likely some of both will be needed this year.
“intellectual dishonesty”
J – I’m on your and Kowalko’s side, and even I got the impression that the Kowalko list was being touted – not by Kowalko – as an alternative to pay cuts.
It is designed to offset the need for across-the-board pay cuts. Period.
Honestly, I don’t know whether that has been Kowalko’s public position, but it is my understanding that it initiated the entire process. I suspect that many of us would shut if there were an even exchange of Kowalko’s plan for pay cuts. Kowalko’s increases would account for an even greater revenue stream than would be required to off-set the pay-cut savings. This may help in light of the two upcoming DEFAC meetings.
“Kowalko’s increases would account for an even greater revenue stream than would be required to off-set the pay-cut savings. ”
Assuming 100% of them were implemented. I don’t think that is likely.
Maybe I am all alone in favoring some (but not all) pay cuts along with some (but not all) of the Kowalko proposals.
I think the Kowalko proposal is useful as a prod to a compromise that includes some tax/fee increases as well as some pay cuts, hopefully less than 8%.
You know that is how it was going to go down anyway, even before Kowalko’s proposal. At least we now have some progressive options on the table thanks to Kowalko. And the idea of a quick sunset is appealing for the increases as well as the cuts.
If the General Assembly comes up with $92 million in other cuts or taxes, there would be no need for the pay cut. Kowalko proposed options that, if all were used, would raise more than that. It’s up to the legislature to figure out where they want it to hurt.
I don’t know how serious Markell is about that 8% but it is pure genius in that it certainly has lit a fire under the General Assembly to come up with other cuts or revenue, like no other political force could. If they patch the deficit without any pay cuts, Markell will have taken the heat for proposing it, but the goal will be accomplished. Now that’s leadership. It is amazing how much you can accomplish if you don’t care who gets the credit.
Sorry anon, but we’ve been getting wording like yours from the Governor’s office, eg:
..and “we can’t tax our way out of this.” and i just find that more than a little disingenuous given the proposal.
I agree the “overburden” statement is weaselly… the small fee increases are no-brainers and are not real burdens to anybody. Increasing the upper income PIT is fair and is not much of a burden, as long as we start a good deal north of $60K. Not so sure about the franchise tax; I’ll have to look into that.
“I am in favor of layoffs that are smart (like “I have no idea why Minner put that person in that job. Buh-Bye.”). ”
Precisely. That’s one place to start, as there are a surprising number of those positions. They’re given generic titles such as “Deputy Principal Assistant”, and are typically paid out of Special Funds (revenue generated by the department) because they are easier to manipulate, and harder to track, than General Funded positions.
http://php.delawareonline.com/state/paycheck/popup.php?title=Deputy%20Principal%20Assistant
The next place to go would be to lay off those employees who, by not meeting MINIMUM performance standards, have been placed on probationary status. In addition to saving money, I can only think it may inspire borderline performers to become more proficient.
Another step to take would be to adopt a true pay for performance plan for state employees. While, it would seem like it would be difficult to develop and labor intensive manage (it is), there already is an existing model in place that works. And, it was created within the confines of the Merit System, so no statutory or regulatory changes would be necessary.
Another area that needs close scrutiny is the process by which the state awards and administers contracts. In a perfect bureaucracy (sure thing!), bulk purchasing can save money. However, in most cases, the state’s process is astoundingly wasteful. In order to save money stimulate the local economy, some preference should be given to Delaware vendors. Should the contract be awarded to an out of state vendor, a provision should be placed in the contract that would allow agencies to to purchase supplies locally ( off contract) if they could prove a significant savings (say… 10%). I routinely went off contract by specifying additional features on a product if I could get it locally. It resulted in a cost savings, superior product, and faster delivery. I took a lot of shit for it, but I had a budget to manage. I believe such a provision would benefit the local economy and inspire vendors to be more realistic in their bids.
And don’t get me started on matching Federal grants and the uses of seasonal employees.
Mis… don’t be surprised if you see some or all of your suggestions in next year’s budget. Right now there is not time. Think about the review processes that would be required to avoid screwing it up.
Exactly. And that is why we need stop-gap sources of revenue. Enter Kowalko.
Ironically, I made many of those recommendations, and more, between 5-10 years ago. True enough, if you’re looking for a quick fix, Kowalko’s plan works for me. For the amount of money businesses make by being incorporated in Delaware, a modest fee increase is negligible.
Holy…
I just clicked on your link. It seems that If we just did away with the Deputy Principal Assistantships we’d create a huge budget windfall.
Jason, I think you may be seeing why so many State Employees are just a bit annoyed 🙂 at the pay cut issue. I’ve not done the math, but I think you may have 3 million just in those positions. Add to that “Director of Special Projects” and you may see even more savings.
He has solidified himself as Taxpayer Public Enemy Number 1.
Tax gas, income, corporations, sneezing just don’t reverse the huge spending increases. The world will fall apart if government tries to get a hold of its budget. The answer is to punish everyone in the state so some can avoid sacrificing with the rest of us.
Oh please. You and David Anderson would make a great couple.
LG, that’s not allowed in this State 🙂