Why Should Delaware Care?
Financial analysts recently estimated that Delaware could stand to lose hundreds of millions of dollars in corporate taxes under new cuts made in the One Big Beautiful Bill Act. That has led Democrats to push for decoupling the tax code, while Republicans want the governor to pare back spending.
State legislators may be once again heading back to Dover for a special session to address a concerning financial projection for next year’s budget by making a fairly substantial change to the state tax code.
On Wednesday, Gov. Matt Meyer called on the General Assembly to reconvene before the end of the calendar year in order to approve legislation that would decouple Delaware’s tax code from that of the federal government. It is up to statehouse leaders to actually call such a session.
The governor’s request comes a little more than a week after the state’s independent board of financial advisors projected that Delaware would see almost $350 million less in corporate income tax revenue over the next two years. That represents about 5% of Delaware’s $6.8 billion budget – and importantly the lost revenue would come from unrestricted funding.
Calling the projections a “sobering update,” Meyer moved quickly to point the blame for the budget hole at the Trump administration.
“I don’t want to sugarcoat it. President Trump cares more about his gold ballroom than your dining room, your classroom or the emergency room. Now, more than ever, the Trump administration has made it clear that they have no interest in supporting American working families,” he said at a Wednesday press conference.
Yet, state Republicans have decried that rhetoric, noting that the budget analysts predict the state will end this fiscal year with a $46 million surplus. The revenue drops are concerning only because of rising public spending, Republicans said. The state’s spending has risen by 29% in the last three years alone.
“What’s hurting Delaware isn’t federal reform, it’s runaway spending and misguided state policy,” the Delaware Senate Republican Caucus said in a statement.
What happened?
The lost revenue comes on the back of the Trump administration’s One Big Beautiful Bill Act (OBBBA), which made certain tax cuts for corporate America permanent.
One of the most important tax cuts in the bill signed by President Donald Trump in July was the ability for companies to fully depreciate assets in their first year – an accounting tactic known as “bonus depreciation.”
While traditional accounting would slowly depreciate the value of an asset, such as a building, vehicle or equipment, over its useful life, bonus depreciation allows companies to fully write off the value in the first year of its reporting. That can dramatically lower a company’s tax burden, and therefore lower the size of a tax bill paid to the IRS and states.
The OBBBA also restored a bonus depreciation of sorts for research-and-development costs.
For the past three years, companies have been required to spread their R&D costs over five years in order to not stack that tax-deductible spending. Now, however, companies will once again be able to deduct the full value of their R&D costs in a given year. They also will be able to go back retroactively to the last three tax years to claim those deductions.
The combination of those two tax deductions caused the Delaware Economic and Financial Advisory Committee, an appointed group of academics, business leaders, public servants and legislators who review cash flows and market trends to estimate future revenues, to cut $155.1 million from anticipated corporate income tax revenue for this fiscal year which ends June 30 and $169.7 million from next year’s budget.
What is decoupling?
Both Meyer and a coalition of all Democratic statehouse leaders have called for Delaware to “decouple” its tax code from the federal government in order to stave off some of the projected revenue losses.
Many states, including Delaware, choose to piggyback on the federal tax code known as the Internal Revenue Code as a matter of uniformity and clarity to residents and companies alike. But over the past few decades, an increasing number of states have chosen to create their own codes or deny certain provisions within the IRC in order to save revenue specific to their industries and communities.
When it comes to bonus depreciation, 24 states have already decoupled from the federal code, including both blue states like California and New York and red ones like Georgia and Idaho. Delaware is essentially the only outlier left on the Northeast corridor north of Virginia.
No state has yet to decouple from the R&D tax write-off, and in fact 10 states had actually extended the benefit during the three-year period where its impact had waned.
Democratic legislators appear prepared to remove some of the tax benefits offered to corporate America through the OBBBA, although it is unclear when a special session could be called to take up the measure.
“We support taking appropriate, timely action that makes it clear our state laws will not double down on Washington’s corporate tax giveaways,” said a coalition of statehouse leaders, including House Speaker Melissa Minor-Brown and Senate President Pro Tem David Sokola, in a statement. “Delaware instead will preserve the resources needed to support Delawareans and show what is possible not through division and wealth inequality, but through a government by, for, and committed to serving the people.”
It is also unclear what vote threshold may be necessary to complete a decoupling of the tax code. If interpreted as a tax increase on companies, the bill would need a three-fifths majority to clear both the State Senate and House of Representatives.
Democrats currently control enough seats in both chambers to meet that threshold without seeking Republican help, but they would have little room for defectors or absences at a time when legislators would not typically be meeting.
The legislature is not scheduled to reconvene for its 2026 session until Jan. 13, but if decoupling does not occur before Dec. 31, then companies will have another tax year of deductions that would hit the state budget.