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The
official forecasting panel will add $37.7 million to its
December, 2003, prediction, reflecting continued improvement in
both the national and state economics. But it will knock off $5
million from what it said will happen in fiscal 2005, leaving an
expected growth rate of just over 3% then.
Because
the General Assembly is required to use the forecast as the
basis for the operating budget it will adopt in June for the
year which begins July 1, the latter forecast is the more
significant of the two. The coming meeting is the first of four
to be held monthly before the Assembly acts, leaving open the
possibility -- some observers would say likelihood -- of some
upward revision before legislators act.
While all
that is in sharp contrast with the situation a year ago, before
the recovery from recession took hold and before the Assembly
agreed to the so-called 'structural changes' in the state's
revenue stream requested by Governor Ruth Ann Minner, there are
glitches:
•
Corporate franchise tax proceeds would be running well behind a
year ago if the 19% boost in fees had not been enacted and the
rate at which new corporations are being added to the roster is
just keeping pace with normal attrition.
• The
bank franchise tax is lagging more than 4% behind a year ago and
current developments in the banking business are raising
questions about that important revenue stream.
As a
result, the advisory panel will reduce, by $13.3 million and
$16.3 million, respectively, its December forecast of what those
two taxes are expected to bring in during fiscal 2005.
As
regards the economic outlook, the determinant in a state which
holds tight rein on its public spending, an otherwise buoyant
recovery from recession is clouded by an historically unusual
lag in the rate at which new jobs are being added. More than a
curiosity, that has everyone from top policy makers to folks
with modest mutual fund holdings worried.
"If we
don't get the jobs, what kind of growth rate can you sustain?"
Fred Dixon, a former corporate economist now in private
consulting work, asked rhetorically at a meeting of the advisory
council's revenue subcommittee. "I don't think we can get
consistent G.D.P. growth without job growth." 'G.D.P' stands for
'gross domestic product', which is considered the fundamental
measure of economic performance.
The state
Department of Finance is now looking for a sixth-tenths of 1%
growth in employment in Delaware this fiscal year and 1.5%
growth in the coming one. The latter figure is down from the
2.5% growth it forecast in December.
Nevertheless, the advisory committee is bullish on personal
income tax, which is far and away the largest component of state
revenue. It has upped its December forecast for this year's
revenue by $3.7 million and will predict 6.2% growth next year.
"It's a
great year if you have a job," said Kenneth Lewis, the
University of Delaware professor who chairs the revenue
committee.
Given the
pace of improvement in other components of the economy, "we
should be seeing 2% to 3% growth in employment" but it was
"virtually nil" in the first two months of 2004, finance
department economist James Craig said.
Dixon
told the committee that so-called 'outsourcing' of work by
businesses is "a scapegoat." The real cause of the job lag, he
said, is a fundamental change in business-management philosphy.
"They're using their employees the way they do their inventory,"
he said, explaining that involves taking on temporary help
rather than permanent employees for as long as possible akin to
the way manufacturers arrange 'just-in-time' delivery of
supplies. "Why go out and hire new workers when health care
[cost] is rising faster than wages?" he said.
The
committee was told there has been a decline of between 4% and
4.5% since 2000 in the number of corporations hosted in
Delaware, largely as a result of a dearth of new public stock
offerings. In all of 2003, there were only 75, less than a
quarter of the average number during the 1990s. Richard
Geisenberger, assistant secretary of state, said Delaware chartered 51 of those
companies.
Overall,
he said, the number of companies delisted as a result of
mergers, dissolutions and other causes continues to more than
offset the number of new ones being signed up. As a result, net
franchise tax revenue this fiscal year is expected to be only
16% higher than a year ago despite the 19% increase in fees. The
advisory council will forecast a 1.6% decline from this year in
fiscal 2005.
On the
other hand, Geidenberger reported, formation of limited-liability
partnerships and corporations is booming. Revenue from that
source is now expected to double this fiscal year, compared to
last and the advisory council will predict nearly 10% growth in
the coming year.
Those
business organizations, however, are much smaller than
traditional companies and the revenue they generate this year is
expected to be in the range of $50 million, a tenth of what
corporate franchising is expected to bring in.
Bank
commissioner Robert Glen told the committee that Delaware has
not yet felt an impact from the acquisition by J.P. Morgan Chase
of Bank One and does not look for a significant one in the
immediate future. Both of those banks have major credit-card
business based in the state which is likely to eventually be
consolidated.
However,
Glen said, there currently are tax disputes "with three [banks]
and they are significant."
The
disputes involve how they allocate income for tax purposes among
states in which they do business, specifically in those cases
Delaware and New York. He declined to identify the banks,
saying, "I don't think I ought to say who we are having problems
with" or to go into detail about the disputes.
The
advisory council will forecast that this year's 4% decline in
bank franchise revenue will be followed by a similar one next
year.
On the
plus side of the ledger, abandoned property coming to the state
as the result of enforcement and voluntary compliance with
escheat laws continues to run strong. That is now expected to
bring in $265 million this year, up from $231.5 million in
fiscal 2003. Playing it cautiously, the advisory council will
estimate that there will be no change in the amount of that
revenue next year.
Legislation now pending in the Assembly would consign any
increase over the current level of 'abandoned property' --
everything from unclaimed bank accounts to unredeemed gift
certificates -- reverting to the state be put into a 'video
lottery transition fund' to offset the loss of revenue when
Maryland and Pennsylvania institute slot machine gambling.
The
advisory council will lower its estimate of lottery revenue,
from both slots and traditional games, from its December
forecast by $3.6 million, but forecast 3.3% growth next year.
The council's policy is to base all forecasts on existing
conditions and not anticipate future developments no matter how
certain they may appear.
On the
other hand, action by Pennsylvania in raising its tobacco tax is
given as a major reason for an expected doubling of revenue from
the cigarette tax this year and a further increase of nearly 14%
in fiscal 2005.
There
also is notable growth in revenue from the real estate transfer
tax as a result of what is described as a booming housing
market. The advisory council is now looking for 27% revenue
growth from that source this year, but a 3.6% pull back next
year.
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