Thursday, November 08, 2007

This Maryland Tax Doesn't Compute

Maryland faces a looming budget deficit in the $1.5 billion range, and Governor Martin O'Malley called the legislature, heavily controlled by the Democrats, into a special sesion to try to deal with deficit. A day or so ago, completely out of the blue, the Maryland Senate Budget and Taxation Committee proposed for the first time to apply the state sales tax to computer services.

This is surely a stupid idea that doesn't compute.Under the Senate Committee proposal, computer services would be lumped with landscaping services and arcades to take the new 6% sales tax hit. Computer services include computer facilities mangaement, computer programming, systems integration, computer disaster recovery, and hardware and software installation and maintenance.

Several points need to be made here about what is going on in the Maryland special session:

First, there has not been enough serious hard-nosed discussion by the Governor and General Assembly concerning meaningful spending cuts to reduce the budget deficit. Before considering widespread and significant tax increases of the kind now being considered, the Governor and legislators should show a heretofore lacking seriousness about controlling spending. In their minds, the burden of closing the deficit predominantly falls on the tax side.

Second, the way in which the proposed new tax on computing services popped up out of the blue illustrates the pitfalls of trying to develop rational tax and budget policy on the fly during a hasty special session. There have been no hearings on the impact of taxing computer servcies for the first time. Or for lumping them with landscaping and arcade services, while dropping tanning salons, massage therapy, and health clubs from the proposed expanded tax net.

Third, assuming simply for the sake of argument that the application of the sales tax is going to be expanded, targeting computer services doesn't make sense. Computer services play the --not "a"-- but "the" key role in the information economy. The types of services that would be impacted by the new tax are integral to the installation and maintenance of high-speed broadband networks upon which so much of today's information economy depends. By virtue of their importance in enabling the efficent and less costly delivery of other goods and services, computing services have a positive multiplier effect on the economy at large.

Computer services constitute a segment of its economic base that Maryland should want to promote, not discourage, especially if the state wishes to compete with its neighbors such as Virginia, which have become world-class information economy hubs. The new tax will cause computer services firms, especially small ones that wish to grow, to consider moving to Northern Virginia or Pennsylvania, which don't tax such services.

Perhaps it might make sense, assuming taxes must be raised at all, to tax arcades or tanning salons. But taxing computer services doesn't make sense.If Maryland's legislators take the time necessary to develop sound budget policy, they will realize that this is one tax that doesn't compute!