Legislators from both parties have introduced HB 235 the Delaware Competes Act, a measure that aims to reform the state’s corporate income tax.
According to a release, the bill would reform the way that the state apportions income tax for corporations to remove elements of the code that discourage new investment and job creation.
The bill, with a large number of co-sponsors from both parties, comes as the state faces the loss of 1,700 jobs at DuPont and the possibility that DuPont spin-off Chemours could move hundreds of headquarters jobs elsewhere.
Reports, making the rounds in the business community and elsewhere, have indicated that a tax reform measure was part of an effort to keep Chemours jobs and its headquarters in the state.
No estimate of the effect on tax revenues was included in the announcement of the bill. The state has been facing revenue gaps in recent budgets.
The bill seems likely to draw broad support, but might not be supported by a small group of legislators worried about the impact on the budget and in favor of a higher income tax on those in the top tax bracket.
For decades, Delaware has offered major tax incentives for banks that have contributed to the industry taking a lead role in the state’s economy.
Under current law, companies that create jobs or invest in property in the state must pay more corporate income tax. While the Delaware Competes Act does not change the tax rate, it changes the formula to remove the roadblock to investment and calculates taxable income using the revenue generated by a business’ activities in the state.
The Delaware Competes Act also makes several changes to the code to simplify the filing process for small businesses, and gives added protection from being penalized for filing errors.
“This bill will ensure that Delaware will continue to be an attractive places for businesses to relocate or expand,” said Governor Jack Markell. “I am grateful to the leaders of both parties for supporting these common sense reforms that will benefit all Delawareans. Employers should not have to pay more in taxes just because they decide to create more jobs in the state.”
House Majority Leader Valerie Longhurst, D-Bear, who is sponsoring the bill, noted in a release that the measure will benefit many small businesses throughout the state by reducing and simplifying filings they must submit, protecting them from being penalized due to errors during filing.
“Most other states have abandoned this method of calculating corporate income tax, which leaves Delaware at a competitive disadvantage. By taking these steps, we are putting Delaware on a level playing field with our surrounding states,” Longhurst. “I’m pleased that leaders on both sides of the aisle have quickly come together to make Delaware an even better place for businesses. I hope we can continue to work together on other efforts to address our fiscal situation.”
In recent years, more states have adopted this method of apportionment, with Pennsylvania, New Jersey, and New York among those who have made similar adjustments.
Senate Minority Whip Greg Lavelle, another sponsor, said that the bill was a win for both our citizens and business community. “Being able to review and modify our corporate income tax structure is worthwhile and worth doing. It’s a big deal.”
“The Delaware State Chamber of Commerce is pleased that the Administration and General Assembly are taking this step to help make Delaware more competitive regionally and nationally,” said A. Richard Heffron, president of the Delaware State Chamber of Commerce. “Policies like these are what we need to attract and retain companies in Delaware, which is vital to our long-term economic growth.”
The obsolescence of the provisions was identified earlier by the Governor’s Revenue Review Task Force. “I am happy to see that the General Assembly is taking steps to enact this change,” said Joshua Martin, chairman of the Task Force. “This recommendation had unanimous support from the group, and its adoption would have a positive impact on the state going forward.”
Currently, three factors are used to determine what part of a company’s total income is attributed to Delaware for assessment, total payroll in Delaware compared to their payroll in the US, their total property holdings in Delaware compared to their property throughout the US, and their total sales in Delaware relative to their total sales throughout the country.
The bill adjusts this calculation so that by 2020, attribution is determined by using the ratio of sales in Delaware. It phases in this change over the next four years, weighting sales at a 50 percent rate in 2017, a 60 percent rate in 2018, and a 75 percent rate in 2019. Companies with headquarters in Delaware would see the shift to 100 percent take full effect in 2017.
Currently, businesses must make payments totaling 70 percent of their estimate total tax for the year by June 1st. This can be difficult for small businesses because their revenue is frequently more volatile than larger corporations, and their cash flow is often more challenging to manage. The bill allows small companies to file 25 percent estimates each quarter, smoothing out the payments throughout the course of the year.
The legislation also adjusts the threshold for the safe harbor from penalties for incorrect estimates. The safe harbor provision for small businesses was enacted in 1984, but the qualification threshold has not been adjusted, so many small businesses no longer qualify.
Full text of the legislation can be found here.
