Posted: Feb. 5, 2003


By Celia Cohen

Grapevine Political Writer

If you believe the tax system in Delaware is bad, don't even think about going somewhere else.

Governing magazine, a nonpartisan, earnestly-written publication, concluded that no other state handles taxes better than Delaware -- a finding it reported in its February edition after a yearlong study it called "The Way We Tax."

In fact, the report was so favorable to Delaware that Finance Secretary David W. Singleton was moved to quip, "I wrote it."

Still, the Governing analysis, uplifting as it was here, does nothing to hide why the magazine undertook its study when it did, the reason being that all 50 states are struggling in bleak economic times. It hit the newsstands just as the National Conference of State Legislatures released a survey showing that the states collectively are experiencing their most serious budget crisis since World War II in a downturn that continues to worsen.

"State budgets are under siege," the legislative conference said in its survey. "The faltering national economy, declines in the stock market, contractions in the manufacturing and high-tech sectors and soaring health costs have combined to undermine the stability of state budgets."

Here at home, Gov. Ruth Ann Minner, a first-term Democrat, was forced in her budget address last week to propose a package of $155 million in cuts and $145 million in tax and fee hikes to finance a $2.4 billion spending plan for Fiscal Year 2004, which begins July 1. A budget bill will be drafted over the next several months by the legislature and sent to the governor for approval.

The message from Governing essentially was, as grim as the states' finances are, Delaware is in a better situation that others to cope.

It was an unusually positive assessment for a state more accustomed to bashing for its taxation -- primarily for the reliance on the corporate revenues that accrue here. They arise from the come-hither incorporation provisions of a century ago and the business law set by the internationally-known Court of Chancery, as well as the 1981 banking law that enticed the credit-card industry here.

As recently as last summer, for example, the New Republic magazine printed a cover story with a blaring headline: "Rogue State: The Case Against Delaware." It savaged Delaware as "a rapacious parasite state with a long history of . . . avarice."

The story was so scathing that U.S. Rep. Michael N. Castle, a six-term Republican who is also a former governor, felt honor-bound to appear on CNN's Crossfire to defend his state.

Governing acknowledged the populist view of the state -- "it's inevitable that Delaware is sometimes portrayed as a buccaneer on the high seas of state finance," it wrote -- but went beyond it.

"This is a carefully managed fiscal enterprise," the report said.

State officials will take it. "I'm proud, but I'm not surprised," said state Rep. Deborah D. Hudson, a Republican who chairs the Revenue & Finance Committee in the House of Representatives. "Thank heavens we had the visionaries who put the incorporation laws and the Financial Center Development Act in place. It's all in the past, and we're reaping the rewards."

The magazine rated the states in three areas: adequacy of revenue, fairness to taxpayers and management of the system. It gave each state from one to four stars in each category.

Delaware was the only state to receive two four-star ratings -- in adequacy and management. It had three stars in fairness.

Only nine other states were awarded even a single four-star rating: Florida, Hawaii, Michigan, Minnesota, Missouri, New Mexico, North Dakota, Washington and Wyoming.

Nevada came in dead last with a single star in all areas. Alabama and Tennessee were given one star in two of the categories and two stars in a third. While Governing is known for its restraint, it did not pull its punch with Nevada, writing, "There's something out of whack in its tax system."

The report is available at the Web site.

Delaware particularly was praised for the Delaware Economic & Financial Advisory Council, better known as DEFAC, the panel of academics, government officials and business leaders charged with projecting what the state's revenues will be.

"Whatever happens to revenues, Delaware's government will be better positioned than most to know about it in advance," Governing wrote.

"My God! I love it," said DEFAC Chairman Robert L. Byrd. The magazine article amounted to a sort of vindication for Byrd, a gubernatorial appointee who has taken some heat for making his living as one of the state's premier lobbyists while running DEFAC.

If there is any downside to the state's competence, it may be that it lulled Delaware into a false sense of security. "We took for granted our solid [revenue] flow," Hudson said. "We were so successful, we were able to overspend, so it's good to slow down now."

The upside is that Delaware is experiencing what Hudson called "a little pinch," not a crisis. As it turns out, that view is the same whether it is from inside the state, like Hudson's, or outside the state, like Governing's.

"From a distance, Delaware may look like it's wearing a pirate's hat," the magazine concluded, "but from the inside, the headgear bears a closer resemblance to a green eyeshade."