Delaware's Job Credit for Banks

July 14, 2011

Delaware bankers saw an improvement to their bottom lines this month when legislators passed a bill reducing their taxes and providing hiring incentives. The bill, which passed unanimously on July 1, reduced the rates of the state's alternative bank franchise tax. In Delaware, banks can elect to file under a standard or alternative franchise tax. The standard franchise tax is a decreasing marginal income tax with rates ranging from 8.7% for the lowest bracket to 1.7% for the highest.

The alternative franchise tax is composed of two parts. The first is a similar income tax, albeit with lower rates-7% for the lowest and 0.5% for the highest. It also includes a "location benefits tax" levied on net assets. It is this portion of the alternative franchise tax that the bill lowers (see table).

Net assets

Old tax rates

New tax rates

Less than $5 billion

$2 million + 0.015%

$1.6 million + 0.012%

$5 to $20 billion

0.010%

0.008%

$20 to $900 billion

0.005%

0.004%

$900 to $100 billion

0.005%

0.000%

In addition to the lower rates, banks which add more than 200 new jobs and invest at least $15,000 for each of those jobs will receive $1,250 in tax credits per job added. The new jobs must go to state residents. The bank will continue to receive the credit for each year the employee is retained, for up to ten years, bringing the total potential incentive to $12,500 for each hire.

Officials estimate that these incentives will cost $3.4 million in FY2012 and $8.5 million in FY2013 in lost revenue. Of this, $2.4 million in the first year and $6 million in the second results from the lower rates with the rest coming from the credits.

Prompting passage of the bill, banks in Delaware have been slicing jobs . This year HSBC plans to lay off 500 employees, while M&T may be cutting 700. This is on top of an estimated 1,000 bank job losses already due to the downturn.

Best intentions aside, a credit of this size is unlikely to be much of an incentive. A large bank with net assets of $100 billion and annual income of $650 million, a bank that would be taxed at the top brackets, owes nearly $25 million a year in franchise taxes alone. The $250,000 break from hiring 200 employees is a mere 1% of this burden. The credit is also negligible when compared to labor costs such as wages, benefits, and training. As Economist Paul Merski said, "In financial services, the business model is to be less labor intensive and use more automation and computers... You don't want to hire an $80,000 employee to save [$1,250]."

The economic literature supports this conclusion. Most job creation tax credits do not induce firms to hire employees that they would not otherwise have hired. Rather, they reward firms for hiring people that they would have hired anyway. Tax incentives rarely play any role in firm expansion or location decisions. And nearly every study finds that these incentives represent a substantial fiscal loss to the taxpayers.

If Delaware is serious about improving employment, lower broader taxes coupled with effective public services will produce far better results than policies like this which attempt to pick winners and losers by subsidizing certain industries. Delaware ranks second from last in the corporate tax index portion of the State Business Tax Climate Index. The state should broaden its tax base and levy taxes at as low a rate as possible on all businesses. One-off tax credits are not the solution, they are part of the problem.

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