Economic Growth Starts at Home
In his recent State of the State address the Governor
asserted that the legislated expiration of both his earlier 17% increase
in Delaware's top personal income tax rate and the 34% increase in the
average gross receipts tax rates were "unaffordable tax cuts today."
How has Delaware fared since Governor Markell's first State of the
State speech and proposed budget? Between January of 2009 and today
Delaware has lost almost 7,000 jobs, the unemployment rate is unchanged
at 6.9%, the labor force has fallen by more than 3,000, and per capita
income remains below the U.S. average.
Governor Markell says he does not support "turning our backs on our most vulnerable citizens" or
"compromising public safety" by imposing significant cuts to the
budget. That said, are there easy examples of spending cuts which are
needed?
Take, for example, the Delaware Department of Education (DDOE), the top spending department in the state.
This fiscal year DOE will spend $604,000 on on-line periodicals,
even though these are available through the University of Delaware's
Morris Library. A report issued in 2008 recommended consolidation of
school districts to save administrative overhead, but no action has been
taken and Delaware ranks 8th among the states in
administrative spending per pupil. Delaware spends over $81 million a
year on student transportation, which is more than 47 other states.
And what is the opportunity cost to Delaware's economy of keeping taxes higher and not cutting any state spending?
Growth in jobs within a state is a result of the net migration of
firms, the birth and death of firms, and the expansion and contraction
of firms. Recent analysis of the National Establishment Time-Series by
the Illinois Policy Institutes (IPI) provides important insights for
Delaware.
IPI examined job data spanning 1995 through 2009. Over that period employment in Delaware rose just 1.6%, ranking Delaware 41st among the states and well below the national increase of 11.6%.
The lack of job growth wasn't due to the net out-migration of
companies from Delaware. Over the study period net-migration added 2.3%
to the total jobs in the state, ranking Delaware second among all
states. Certainly Delaware's economic development community's business
recruiting efforts paid off.
Delaware did not fare as well with respect to net start-ups. The
jobs created by business start-ups in Delaware fell short of the jobs
lost through the closure of businesses. This placed Delaware in the
bottom fifth of the states in job change from the birth and death of
firms.
Finally, and most significantly, Delaware ranked dead last among
the states in the net jobs gained through the expansion and contraction
of existing firms. Over the study period Delaware had a net gain of 8%
from the process of expansion and contraction, which is half of the U.S.
average across the U.S and less than a third of the net gains in the
leading states of Arizona and Florida. Delaware ranked fourth to last in
rate of expansion of existing firms.
The lackluster performance of Delaware's existing firms is a major
factor behind the state's poor job growth. It is a reflection of higher
taxes, regulations, relative energy costs, and poor quality public
schools. The state doesn't need to do a better job recruiting; it needs
to create the conditions that encourage investment and expansion of its
existing businesses over the long haul.
Allowing households to keep and spend more of their income, and
allowing businesses to reinvest their gross receipts rather than turning
them over to the state, requires belt tightening by state government in
the short-run, but will restore economic growth to Delaware over the
long-run.
Dr. John E. Stapleford, Director
Center for Economic Policy and Analysis
