Pennsylvania and Delaware: Potential Tax Reform Winners?


Joanne Butler Contributor
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In southern New Jersey over the weekend, I met a man who owned a $325,000 house (1950s ranch) and paid $13,000 in property taxes per year. He wanted to move to Delaware, but New Jersey’s property taxes are an albatross in the real estate market. Meanwhile, a Delaware friend told me how her new neighbor from ‘up north’ was amazed that property taxes were so low they were paid annually — not monthly! Hint: the new tax reform law curbing state and local tax deductions could be a boon for Delaware and Pennsylvania, if leaders in those states take the right steps.

We’ve heard a lot about how new limits on the deductibility of state and local taxes will impact taxpayers in New York City and its surrounding counties. But as shown above, homeowners in New Jersey (the entire state, not just the New York suburbs) will take a hit too. Connecticut is no better.

How can Pennsylvania benefit from this change?

Decades ago, Allentown in the Lehigh Valley (62 miles north of Philadelphia) had regular train service to New York City. That ended in 1984. Notably, Allentown and its neighboring cities, Bethlehem and Easton, are due west of New York City.

If you look at the reach of New York’s commuter railroads, a commute from Allentown is not unreasonable. Pennsylvania’s lower income and property tax rates and housing costs, plus the thousands of jobs created to service a new exurb of the Big Apple, seem to make a commuter line to the City a no-brainer. And with passengers easily using laptops and tablets work while commuting (something that didn’t exist in 1984), and the idea becomes even more attractive.

The problem lies with commercial rail traffic, which uses the same rail lines as a commuter line would. A common complaint among Northeast rail travelers is how their train must wait for a commercial train to overtake them before moving on.

Now comes President Trump’s next project: infrastructure. Pennsylvania’s Governor Tom Wolf is a Democrat, as is Senator Bob Casey. Senator Pat Toomey and (retiring) House Representative Charlie Dent are Republicans. However, using an infrastructure bill to bring commuter rail to the Lehigh Valley ought to be something all four men can embrace — if they want improve Pennsylvania’s economy. The timing of Trump’s infrastructure bill is perfect if Pennsylvania’s politicians want to capitalize on the benefits of tax reform.

Turning to Delaware, its opportunities lie in capturing more back-office banking and insurance operations. The First State already has a sizable share of this business.

A quick drive around Wilmington and its suburbs shows Citibank, PNC, Barclays, Bank of America and Capital One having a substantial footprint. The Chase tower in Wilmington is a high-rise landmark. Chubb Insurance and Blackrock Investments also operate in Delaware.

There’s always room for growth, of course.

In the 1980s, New York City finance firms started moving its processing operations out of Manhattan. Some went to New Jersey or Connecticut, others to Delaware.

With the new tax bill, we can expect the firms with operations in New Jersey and/or Connecticut (another high-tax state) to take a hard look at their cost of doing business there, and consider expanding or opening operations in Delaware.

Thanks to former Governor Pete DuPont (Republican), Delaware has become a hub of back-office financial operations. In 1981, the governor’s bipartisan initiative, the Financial Center Development Act, was passed – to attract two New York state banks expected to hire at least 1,000 employees. Eventually, it brought over thirty banks to the state (many have since consolidated) and created about 43,000 new finance related jobs.

Delaware also is a hub of student loan activity. Sallie Mae (formerly a government-sponsored enterprise, now private and listed on NASDAQ) and its spinoff Navient (which performs loan payment and collections for Sallie Mae and others) are headquartered in the First State.

Income taxes, property taxes and housing are cheaper in Delaware than in the New York City region, Connecticut, and New Jersey. I’ve heard car insurance is cheaper here too.

This would be a complete no-brainer, except Delaware’s schools need improvement. U.S. News ranks Delaware 26th in education, driven by a very low two-year community college graduation rate, plus high tuition and student loan debt. The state’s eighth-grade reading and mathematics scores rank in the 30s, compared to other states.

The upside is Delaware is relatively charter school-friendly, and if its politicians get savvy on this issue, they could make it attractive for businesses to establish schools nearby or on-site.

Manhattan will always have Wall Street, bank headquarters, the New York Federal Reserve, and law firms (and related employees). It’s about proximity.

However, with its limitations on the deductibility of state and local taxes, President Trump’s new tax law may give firms in high-tax states an incentive to consider moving operations to lower-tax states. If a commuter rail line existed between Allentown and New York City, the commuters would come.

Further, the tax law may spur financial firms to take a hard look at possible savings by moving more jobs outside the New York City region — to Delaware.

The question remains: Are Pennsylvania and Delaware’s politicians capable of taking advantage?

Joanne Butler is a graduate of the Kennedy School at Harvard, was a professional staff member (Republican) at the House Ways and Means Committee, and served in President George W. Bush’s administration. The Ghanaian poet, Kwesi Brew, has described her as ‘vibrant.’

The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.