Small businesses go front-and-center
State Sen. Gerald Hocker and Gov. John Carney on Aug. 16 invited a small group of local businesspeople to join them for lunch and a roundtable discussion on the state’s economy and their concerns about their individual businesses and beyond.
“Businesspeople want to stimulate the economy,” Carney said after introducing himself to the small group of 10 local businesspeople at the Cottage Café near Bethany Beach, which also included state Rep. Ron Gray. “It’s your meeting, and your time to voice how we can stimulate our economy.”
“Things have changed since I was young,” living in a big industrial town, Carney acknowledged. While “a handful, like my dad, worked for the government, as a teacher,” he said, the bulk of available jobs then were in industry and manufacturing. “Those jobs aren’t as available today.”
Carney particularly noted the downsizing of Delaware stalwart DuPont’s presence in the state, from 6,000 jobs 18 months ago to 5,000 or fewer today.
To address that shift in the economy from big industry to small business, Carney said the State has restructured its economic development office.
“We are putting small business equally front-and-center,” he said, “as we try to build more of an entrepreneur economy.”
Interwoven with the downsizing of big industry in the state has been the State’s budget woes.
“We have a structural problem,” Carney said of the budget shortfall that caused significant cuts in the new fiscal year to areas including education. “It’s not unlike the business challenges you face,” he told the local business owners, noting particularly the rising costs of education and healthcare with which the State’s revenue has not kept up.
“We had a good year,” he said wryly, of the increase in the State’s own healthcare costs. “It went up at three times the rate of revenue.”
The best way to address those issues, Carney said, is to have revenue growth and job growth that keeps up with expenses.
“And we are making a longer-term commitment to figure out how we in Delaware can be more competitive in 2017/2018 and beyond.”
The local businesspeople Hocker invited to last week’s roundtable included Teddy Banks of Banks Wines & Spirits, builder Bruce Mears, Butch Evans of Old Inlet Bait & Tackle, Hale Bennett of Bennett Orchards, Cottage Café co-owner Tom Neville, Scott Kammerer of SoDel Concepts, Gerry Hocker of Hocker’s/G&E and David Wilgus of Wilgus Insurance.
Banks concerned over increase in alcohol tax
Banks noted that while his family now runs a liquor store in Millville, they’ve been in the area for four generations as a family of farmers.
“We got into the liquor business 15 years ago, and we’ve had growth every year,” he noted. “This is the first year we’ve felt a pinch. Our traffic count is down. Consumption of liquor, beer and wine in the whole state is down.”
Additionally, Banks said he was particularly concerned with an increase in the tax on alcohol that was adopted by the State in July, and especially the timetable for putting it in place at the point of sale.
“With people on fixed budgets, it is going to be very difficult,” he said. “We’ve got one to two months to increase prices across the board — that’s man-hours, time and paper — and I still don’t have the price increases from my suppliers yet. I hope you can rethink this.”
The law goes into effect on Sept. 1 and is predicted to bring in an additional $7 million in revenue for the State.
The rate for beer increases from $4.85 to $8.15 per barrel of beer; from 16 cents to 27 cents for each gallon of cider; from 97 cents to $1.63 per gallon of wine; from $2.50 to $3 for each gallon of spirits containing 25 percent or less ethyl alcohol by volume; and from $3.75 to $4.50 for each gallon of spirits containing more than 25 percent ethyl alcohol by volume. (The tax increases on beer, wine and cider were all decreased from the amounts in the initial draft of the bill.)
Those increased costs are typically passed along to consumers, who will pay about 6 cents more for a traditional six-pack of 12-ounce cans of beer, about 3 cents more for a 5-ounce serving of wine and about 15 cents more for a 750ml bottle of spirits containing more than 25 percent ethyl alcohol.
That is an increase of pennies on the dollar, but Banks said it makes a difference to customers, who he said could go to Maryland now and buy their alcoholic beverages cheaper than he can buy them from a wholesaler.
“I make 60 cents on a case of beer,” he said, “and it’s just going to crush us. People on a fixed income will just go nuts. And I’m the one that’s going to have to deal with them.”
Carney said the timing on the liquor tax troubled him. “We usually don’t start anything until January,” he said.
“The liquor tax wasn’t my preference,” he added, but he emphasized the deficit in the state budget and the spending and revenue problems involved. “I will talk to people and see how we can do better,” he told Banks.
Carney expressed some dissatisfaction with the budget process.
“I wanted to see us deal with the tough stuff — healthcare. It’s not going to be done in a year. Our expenses per person are one of the highest in country,” he noted. “Part of it is we could be healthier, but our costs could be lower.”
“You guys are the ones who have it hardest, which is why we’re having this [national] debate now, about how to provide for small businesses. It’s harder here, because we’re a small state.”
Carney said he was surprised to hear that business had been down this summer.
“I’ve been hearing that the numbers at the beach were pretty strong,” he said.
But Carney said he thinks the changes to the State’s economic development agencies will benefit the area.
“I think tourism is going to thrive under our new arrangement,” he said, noting that tourism had been under the auspices of the Delaware Economic Development Office (DEDO), where it had “gotten lost” amidst big business. Now, he said, the State is looking to create partnerships with private enterprise, and that can benefit the area.
The State’s tourism office “has done good work under the old arrangement, where they were second-fiddle. I think they’ll thrive,” under the new one, he said. “This area sells itself — that big ocean and our wonderful beaches.”
The challenge, he said, “is at the local level, in terms of how we take care of sewage, traffic and those things that get in way of development. … The pieces are all connected. If we’re not driving growth in the other parts of the state, they’re not going to come here and spend.”
Mears: Building permit tax ‘a job-killer’
Mears said he was extremely concerned about a 2.5 percent “building permit transfer tax” that is due if buyers don’t wait at least a year after purchasing property to build on it. That 2.5 percent is split between the State and County — 1 percent to the State and 1.5 percent to the County. And it isn’t owed if a building permit isn’t obtained until at least 366 days after a lot was purchased, Mears said.
“It’s a job-killer,” Mears said.
“Really? It’s a state tax?” Carney asked about the tax, with obvious surprise.
Some of his customers, Mears said, have delayed building when they found out they will have to pay 2.5 percent above the cost of the house to get a building permit.
“Why should a lot owner have to wait a year to build? It is a self-defeating tax,” Mears said, adding that his customers whose visits and residence are delayed by the tax, “They don’t buy gas. They don’t go to Teddy’s store.”
Mears said the tax, which he has argued for years should be repealed and replaced with a 1/8-percent tax on all building permits, also opens the door for national companies to come into the area and develop tract homes with supplies and labor from out of state.
Traffic a concern for seasonal business
Evans noted that his bait-and-tackle business, like many in the area, is primarily a seasonal one.
“We do 80 percent of our business in 80 days, and every day is critical,” he said.
Those individual days can be impacted by rainy weather and traffic, especially on days when the numbers of people coming into the area and leaving it are especially high, Evans pointed out.
“On a rainy day, traffic backs up, and people turn around and go home,” he said of his location near the Indian River Inlet Bridge. “What are we going to do with the people who are here today when it rains?”
“We don’t want to kill the golden goose,” Carney acknowledged. “It’s not very pleasurable sitting in traffic. We’ve been talking about solutions to it for a while. [House Majority Leader Pete] Schwarzkopf has ideas.”
But, Carney said, as it stands now, “There’s not a lot of room to put them, unless we build something people don’t want, which is a bridge over the bays. We don’t have a solution today.”
Sen. Hocker said he would recommend lengthening the light cycles between the bridge and Lewes, to allow more north-south traffic to move, rather than stopping it even when there is no cross-traffic. Carney said he thought perhaps a meeting with DelDOT officials was in order to address that issue.
“Ocean City has just as much traffic,” Mears put in, saying that across that town, traffic lights turn green almost simultaneously, then red almost simultaneously, allowing more north-south flow while still letting people onto the highway from cross-streets.
Bennett: Farmland needs preserved
for future generations
Bennett, the sixth generation of his family working on the Frankford-area farm, said his biggest concern was preserving farmland.
“We need the resources for future generations in order to sustain this $1.3 billion industry. … The area has undergone tremendous change. There is a lot of development, and DelDOT projects threaten farmland,” he said.
Bennett noted that while he appreciates the State’s efforts in farmland preservation, including Century Farm recognition for family farms kept in operation for more than a century, such programs remain very important to agriculture in the state.
“I want to make sure we keep these programs and keep them well-funded,” he said. “It’s important for people to remember where our food comes from. We could use support from the state government.”
“Agriculture is not just the state’s top industry but part of its way of life,” Carney said. “We appreciate your taking up the challenge.
“The problem is when we have fiscal challenges. We have designated money for that purpose, and we’ve done a good job compared to other states. We need to try to make it more profitable for farmers so they can stay in business.”
Carney also noted his planned farm tour last week, stating, “Tourism and agriculture can work together.”
“Like the others,” Bennett agreed, “we are dependent on people.”
Restaurants juggling minimum-wage and healthcare costs
Neville told Carney that, between the year-round Cottage Café and the seasonal Bethany Boathouse operations, his business cuts more than 150 paychecks per week at the season’s height, employing many younger people and retirees looking for income.
He, too, said business had been down this summer at the Cottage Café, about 4 to 5 percent, while the Boathouse’s business had been up a little.
“The seasons have extended,” he noted, while winter business was dependent on retirees being willing to go out to eat — which can be impacted by problems with traffic and roads.
“We run on a very small margin,” he explained, about 4 to 5 percent. “And we’re concerned about the minimum wage and healthcare.”
“In some ways,” he said, healthcare mandates hurt his team members, because their schedules have to be kept under 30 hours per week to avoid qualifying them for expensive health benefits. On the other side of the equation, he noted, it also hurts the employee who wants to work 35 hours a week, but not 40, because in order for that employee’s benefits to be covered by their productivity for the business, that employee has to work at least 40 hours.
The minimum wage, he said, was problematic, because so many of his younger workers are getting their first job experiences with him, but they don’t always have the same need for a full income that an older worker may have, because many of them are living at home with their parents.
“There can’t just be a minimum wage for everything,” Neville said. “The kids living at home don’t need it.”
“I believe if people are working, they shouldn’t be in poverty,” Carney said. “But I have teenagers… I think there should be some sub-minimum wage for that.”
“Healthcare is the biggest issue facing the country,” the governor added. “I spent six years in Congress, and the thing burying budgets is healthcare, Medicare/Medicaid. Medicaid is 55 percent for low-income, 35 percent for the disabled, 12 percent for long-term care for people who have exhausted all their assets,” he noted.
“Our cost per elderly person is among the highest in the country,” he said. “We have to flatten those costs.”
“You have to shift some of that cost to your employees,” Carney acknowledged, saying the average pay-in for employees is now 20 percent or more. “That’s going to have to happen if we are going to address this without increasing costs on the other side.”
Carney noted that Delaware had hoped early in the implementation of the Affordable Care Act to combine its insurance exchange with Maryland.
“When it went into effect, we thought it made more sense to combine it with other people,” he said. “For Maryland, it didn’t make sense, because they didn’t want our higher-cost people in their pool.”
Carney noted that people use the most healthcare at the end of their lives, which puts both the state and the immediate area in a particularly difficult position, since so many people are retiring to the area.
“The No. 1 thing I can do to make it successful is reduce healthcare costs,” he said.
Kammerer noted the tremendous growth of SoDel Concepts, from a single Bethany-area restaurant headed by the late Matt Haley that served 30 dinners its first night to a company with 10 restaurants, a catering division and more — serving 47,000 dinners last week.
“All those issues affect us,” he said, noting that SoDel had added 300 jobs in the last two years.
“The drivers of that job growth are going to be small businesses,” Carney observed.
“We’re at point now where everything affects us,” Kammerer said, “traffic, healthcare, the minimum wage. … I love growth, and the reason I’m in the business now is to provide opportunity. I want them to get a job, get promoted, buy a house, get bait and tackle. I want less obstacles for them.”
But, Kammerer told Carney, “There are some fringe elements in your party who have unrealistic ideas on the minimum wage.”
Speaking to the opportunities his business provides, he said, “We have three chefs now who learned how to cook in prison. Matt learned how to cook in prison. One of those chefs started as a dishwasher, and this year he had a dish on the cover of Delaware Today.”
Another of those three chefs, he said, was recently named a “rising star” in the culinary world, after having spent five years in prison at the James T. Vaughn Correctional Center near Smyrna.
“He learned to cook at the food bank,” Kammerer noted, adding that the chef had also recently put in an offer to buy a house.
“All I ask is for government just to try not to have obstacles,” he told Carney.
Kammerer said healthcare was a double-edged sword for him, as he wants his employees to have it, but the rising costs can be an issue.
“I can handle that,” he said, “but it has to be manageable. I need to know what’s coming.”
He said the company had been able to plan ahead for new rules on overtime for workers paid between $20,000 and $40,000 per year, switching some positions from salaried to hourly early, so they would be paid overtime. That change was one they’d had enough warning about to get ahead of it, he said.
Kammerer, too, said the increased alcohol tax was proving a problem to his business.
“My liquor distributor said he didn’t know prices yet.”
Retail taxes, workers’ comp rates discussed
Gerry Hocker, the third generation of his family in the local grocery business, said one of his current concerns is the amount of paperwork he now has to do for the business under new regulations.
“I can’t pass that cost on to the consumer,” he said.
“Large businesses can’t grow until small businesses grow,” he added. “And at some point fees can’t keep getting passed on to small business.
“The gross receipts tax is temporary, but it has been temporary a long time.”
Addressing the issue of the gross receipts tax paid by businesses, versus a sales tax paid by the consumer, Carney said, “Nobody wants to pay more taxes, but as long as it’s fair and people felt we were doing something on spending side...” He noted the cuts to education funding that were made in this year’s state budget.
“We had to do something there,” he said, noting also that a 2 percent sales tax had been suggested.
“We have a sales tax of a sort — hidden, in that it is paid by the business,” Carney said of the gross receipts tax. “Businesses hate it because it’s not income-based. You have it whether you’re making a profit or not.”
Carney and Sen. Hocker noted that during the governor’s town hall meetings earlier in the year, many in attendance at the meetings in Seaford and Rehoboth had said they were in favor of a sales tax. Carney, however, said he doesn’t favor a sales tax, instead preferring to keep taxes “broad and low.”
With a steady tax at a low rate, he said, tax revenue grows a little as the economy grows. He said he considered it a bad idea to increase transfer taxes, as he had been looking for stability in revenue when drafting his budget. “When the economy goes south, transfer tax goes off the table,” he said.
“It’s all about choices, how we can get the best framework so we can be competitive with Maryland,” Carney said, noting that businesses upstate had been seeing incentives offered to move “a mile down the road,” over the state line to Pennsylvania, where income tax is low but real estate taxes are higher.
With some businesses having employees split between sites on both sides of that state line, he said, Delaware officials want to encourage businesses to move all their workers into Delaware.
“We can do little things and screw things up,” Carney warned of tweaks to taxes and such. “We have to be careful.”
Wilgus, part of the third generation of his family in the insurance business, asked about a task force aimed at trying to get more insurers into Delaware and its insurance exchange.
“The theory was the marketplace would bring in companies, and they would compete and that would reduce prices,” Carney said.
Wilgus said his customers were also being hit hard by workers’ compensation insurance rates, which are changed each year in December and approved in March, only to be instituted retroactively to December.
“The contractor rates really go up,” he said. “And it happens in the middle of the policy, retroactive to Dec. 1.”
Wilgus said he believed the new rates shouldn’t go into effect until an individual policy came up for renewal.
Carney noted that there’s a rating bureau involved in setting prices for workers’ compensation insurance, which involves legal and other associated costs. He said addressing the issue would need to involve the state insurance commissioner.
The Aug. 16 meeting near Bethany was one of several small-business roundtables Carney held in recent weeks, hosted by state legislators who each invited a small group of businesspeople from their districts to address their concerns and ideas with the governor.
The Delaware Division of Small Business, Development & Tourism helps new businesses get started, and both existing and new businesses can get help with growth plans, grants, loans, workforce training, tax credits and more. Officials noted that 96 percent of Delaware businesses are small businesses, employing 50 or fewer people. For more information, call (302) 739-4271.