Computer Services Tax Repeal

Maryland Governor Martin O’Malley has now come out in favor of repeal of the state’s ill-conceived 6% sales tax on computer services performed in Maryland. This tax, scheduled to take effect this July, would be a blow to the state’s hopes to a leader in attracting high-tech industries, especially small business entrepreneurs.

Free State Foundation experts have been early and frequent critics of this tax, which was enacted hastily without public deliberation. For example, Free State Foundation Senior Fellow Cecilia Januszkiewicz, in a commentary entitled “Random Acts of Taxation” published in the Baltimore Examiner on January 21, 2008, explained in detail why the tax “a mistake, and it must be corrected.” Her commentary stated:

“In a random act of taxation, the General Assembly grievously wounded Maryland’s efforts to rival Silicon Valley as a technology magnet. From a lengthy menu of services that are not currently subject to the Maryland sales tax, the Senate Budget and Taxation Committee during the 2007 special session recommended that computer services be subjected to Maryland’s 6 percent sales tax. Now, how will state officials convince technology leaders that Maryland, one of the few states to tax computer services, is a welcoming environment for their businesses when they have increased the cost of those services? The impact of the computer services tax will not be limited to technology companies. It will extend to companies that rely significantly on technology in operating their businesses, precisely the kind of businesses states recruit for their high-wage jobs. Maryland businesses with offices in several states will opt to locate their most sophisticated operations and jobs outside Maryland to avoid the tax. Selecting a non-Maryland location will now yield a 6 percent price advantage.”

And I submitted testimony to the pertinent Maryland House and Senate committees urging repeal. In my testimony, I stated that “[t]he repeal of the tax would correct an error that, if uncorrected, will cost the State significantly more revenue than it hopes to receive from the tax.” This is because:

“Unlike many other business sectors, technology services, including the computer services that are subject to the tax, are highly portable. Already many technology businesses have reported that nearby States are luring their businesses. It is likely that many of these businesses will relocate to avoid the arbitrary 6% surcharge on their services. When these businesses leave the State, they will take with them thousands of jobs. And they will take with them Maryland’s understandable desire to develop a reputation as a technology magnet.”

And there have been other FSF commentaries and blogs to the same effect.

Governor O’Malley’s recognition that the computer services tax --that “random act of taxation”—should be repealed is a positive step. Unfortunately, he wants to make up the supposed loss of revenue by increasing taxes elsewhere. After taking one positive step, the governor should take another: He should recognize that even after last autumn’s special session of the Maryland General Assembly called to address the so-called structural deficit, Maryland lawmakers are still proposing healthy increases in the state expenditures. The Governor (and the General Assembly) should look to reduce state expenditures before looking for more taxes to increase.