Now is the Time for Tax Relief, Not an Increase

BY JORDON N. ROSEN, CPA, MST, AEP®

No one likes a tax increase. The truth of the matter is that sometimes an increase is needed. This is not one of those times. House Bill (HB) 128 (effective in 2024), which passed the House Revenue and Finance Committee and is currently awaiting consideration on the House Ready List, contains such an increase.

Currently, Delaware taxes personal income on a graduated rate basis beginning at 2.2% on taxable income over $2,000, up to 6.6% on taxable income above $60,000. The bill would  add another bracket of 6.9% on taxable income over $100,000. This is not good for several reasons.

First, it opens the door for adding additional higher brackets above 6.9% in future years, with the thought that adding one new bracket at a time might fly under the radar. Second, we are still in a volatile economy, with high interest rates and higher than normal inflation. At the time of this writing, the expectation is that there will be another interest rate increase by year end. Everyone, in all tax brackets is hurt by higher interest rates on credit cards, home equity loans and auto purchases, as well as higher than normal inflation reflected on grocery bills and when filling our gas tank. Burdening any group of taxpayers with higher tax rates is simply adding salt to the wound.

A positive aspect of HB 128 is that it both expands the 4.8% bracket and completely eliminates the 5.2% bracket. This lowers the tax burden for many Delawareans by avoiding “bracket creep”, whereby an individual’s taxable income otherwise creeps into a higher bracket over time due to inflationary wage increases, but they are otherwise in no better financial condition due to the effects of inflation. By contrast, however, the bill does not provide expansion of either the 5.55% or the 6.6% brackets. To be fair to all Delaware taxpayers, all tax brackets should be indexed annually based on the prior year’s cost of living index to avoid bracket creep.

A corresponding bill is HB 89, which doubles the Delaware standard deduction beginning in 2024. This is certainly a welcome move as it will cause many taxpayers to switch to the standard deduction (and increases the deduction for those who already don’t itemize), saving many Delawareans from the burden of recordkeeping, as well as the State’s burden of administration and examination. Where this bill falls short is that it does not provide a similar provision to increase the additional standard deduction for taxpayers age 65 and over or blind. The Delaware legislature needs to address this oversight, given the growing population in the state of taxpayers aged 65 and over.

As if a rate increase, bracket creep, and no change to the additional standard deduction would have a negative impact on our senior population, the legislature also needs to consider doubling, or at indexing the $12,500 annual pension and retirement income exclusion for age 60 and over ($2,000 pension exclusion for those under age 60). These limits have long been stagnant and eroded by inflation, reducing the purchasing power of senior citizens. Keeping these limits at their original 1999 level is counterproductive as they were enacted in part to counter the fact that retirees could move to a state such as Pennsylvania, which doesn’t tax any retirement or IRA income. And again, the benefit is eroded by the impact of inflation over the past 24 years.

There is work to be done.

Jordon N. Rosen is a former tax director and shareholder at Belfint, Lyons and Shuman, CPAs and past chair and current member of the Delaware State Chamber’s Tax Committee.