Markell seeks to reform state's corporate income tax

Gov. Jack Markell and some of the state's highest-ranking lawmakers, both Democrats and Republicans, want to overhaul Delaware's corporate income tax to make it more attractive for businesses to hire and own property here.

Markell's office announced late Friday afternoon that the Delaware Competes Act has been filed in advance of next week's legislative session. Its co-sponsors make up a third of the entire General Assembly, including the leadership of both parties in both houses.

The measure would alter the formula used to determine how much corporate income tax companies owe. That amount is now calculated based on the proportion of employees, property and sales in Delaware compared to a company's global holdings and revenue.

Starting in 2017, the bill gradually would change that calculation until Delaware's corporate income tax is based solely on in-state sales by 2020.

The bill will cost the state $8.2 million for the next fiscal year and $48.7 million over the next three years, including both one-time and re-occurring costs, according to Finance Secretary Tom Cook.

The move would make it less expensive for companies to hire workers and expand infrastructure in the state, state leaders said.

"Employers should not have to pay more in taxes because they decide to create more jobs in the state," Markell said.

That would lead to increased economic development, they argue. And that would lead to bumps in payroll and property tax revenues, offsetting the initial cost, as the disincentives to corporate growth are removed.

State leaders hailed the move in a press release.

"Most other states have abandoned this method of calculating corporate income tax, which leaves Delaware at a competitive disadvantage," House Majority Leader Valerie Longhurst, D-Bear, said about the current system. "By taking these steps, we are putting Delaware on a level playing field with our surrounding states."

Currently, 21 states determine their corporate income tax based on sales alone, according to state reports cited by the Delaware State Chamber of Commerce. Sixteen other states, including Delaware, use some mix of other factors, and only nine still use the three-factor system Delaware has.

"Delaware is the only state on the East Coast that has an equally weighted, three-factor formula," said James DeChene, the chamber's Director of Government Relations. "The main takeaway is that, if you are a Delaware-based company, this change would give you more of an incentive to increase your personnel and property here."

While the measure is not expected to staunch the bleeding at DuPont Co., which is in the process of laying off 1,700 Delaware workers, it could help convince companies like Chemours, the company's performance chemicals spin-off, to remain in Delaware.

Pennsylvania and New Jersey both levy a corporate income tax based only on in-state sales, while Maryland uses a multi-factor system but double-weights sales.

"Because Delaware is so small, we have to be competitive," said Barry Crozier, director of business development for the accounting firm Belfint Lyons & Shuman and a member of the State Chamber's tax committee. "We have to be in sync with our neighbors."

The corporate tax income changes were recommended by a task force Markell created to study the state's tax structure. That group issued its report last May.

"This recommendation had unanimous support from the group and its adoption would have a positive impact on the state going forward," said Josh Martin, the task force's chair.

Also included in the bill are two measures aimed at simplifying how small businesses pay their corporate income taxes.

Currently, businesses must pay 70 percent of their estimated total taxes by June 1. The bill would change that so small businesses pay 25 percent a quarter, smoothing out the tax burden to ease cash-flow.

The bill also would change the threshold for how small a businesses must be to qualify for reporting tax data quarterly instead of monthly. That means more small businesses can spend less time and resources on tax issues, Cook said.

Contact business reporter Scott Goss at (302) 324-2281, sgoss@delawareonline.com or on Twitter @ScottGossDel.

Contact Matthew Albright at malbright@delawareonline.com, (302) 324-2428, or on Twitter @TNJ_malbright.