Computer tax repeal hinges on replacing ‘phantom’ revenue

Lawmakers reacted sympathetically to the strong case made at recent General Assembly committee hearings by the GBC and other business advocates who urged the repeal of the computer services tax. However, with less than three weeks remaining in the session, the ultimate outcome of the tax repeal effort remains in doubt.

While there is much agreement among lawmakers that the tax should be repealed, the prevailing consensus appears to be that a replacement source must be found for the $214 million in revenue to the state that the tax was estimated to generate.

The irony of this logic is frustrating. In effect, the repeal of the computer services tax is being held hostage because of phantom revenue that will likely not be realized. There is universal agreement among industry experts and economists that the $214 million revenue estimate is enormously overstated. If allowed to take effect on July 1, the computer tax would yield little, if any, revenue because IT businesses would take steps to avoid it by shifting computer services divisions elsewhere or by moving out of the state entirely.

One revenue replacement option that has recently been discussed would be to draw millions from the state’s Transportation Trust Fund. This is another source of frustration for the GBC. It seems bafflingly inconsistent to us. One week lawmakers are moving a bill to reduce greenhouse gases and find solutions to global warming, and the next week they’re suggesting an action that would promote more traffic congestion.

Maryland’s elected officials must resist the temptation to use the Transportation Trust Fund as the option of first resort to fill operating budget holes — something for which previous administrations have been consistently criticized. That’s why the GBC supports putting a fiscal “firewall” around the trust fund.

Meanwhile, Senate Bill 1004, introduced by Baltimore City Senator Verna Jones, D-44th, is viewed by some as a likely trade-off for repeal of the computer tax. The bill would raise the income tax rates for taxpayers earning $750,000 or more. The rate increases would expire after the 2012 tax year.

The GBC has serious concerns that this kind of income tax rate increase, combined with the accompanying “piggy-back” local income tax rate increase, could have its own substantial damaging impact on Maryland’s business climate. The GBC has recommended that legislators first consider additional cuts in the budget. Additionally, we have continued to advocate for substituting a 6 or 7-cent gas tax increase.

However, if the only option for getting the computer tax repealed is the income tax “poison pill,” the GBC would reluctantly support a temporary higher-earner income tax rate increase if it is limited to no more than three years. To view the GBC’s position statement on this issue, click here.

Arguably, it would be marginally preferable to impose a temporary income tax surcharge, similar to the one enacted during the economic downturn of the early 1990s, than to tax an entire growth industry out of the state.

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