Tax and Run
Maryland's slapdash levy on computer services fails the smell test.

Friday, December 7, 2007

WHEN Maryland's General Assembly was considering whether to impose a sales tax on health clubs last month, scores of gym owners and personal trainers noisily demonstrated their muscle, and their ire, by doing pushups on the sidewalks and lawns outside the domed state capitol in Annapolis. When the legislature switched gears to weigh applying the tax on computer services instead, the only pushback came from a handful of polite lobbyists who meekly registered their opposition while remaining upright. Guess which group got slapped with the 6 percent tax.

Hey, said Annapolis insiders, explaining the 11th-hour levy on computer services, politics ain't for softies! True enough. But in squeezing $200 million-plus in annual revenue from computer programmers, systems integrators, hardware and software installers, repair firms and other specialists, Maryland lawmakers may have sacrificed sensible public policy on the altar of political expediency.

Faced with closing a deficit projected at $1.7 billion next year, Gov. Martin O'Malley (D) sensibly sought a variety of new funding sources in last month's special legislative session. One of them was taxing the sales of a handful of services -- health clubs, tanning salons, property management companies, massage therapists. That was a start, but only a start, at modernizing the state's anachronistic tax structure, which remains focused on taxing goods despite the economy's decades-long shift to services. Why not also apply the tax to parking facilities, tax preparers, exterminators, interior decorators, barbers, beauty parlors and so on?

That made sense to Del. James W. Gilchrist, a Montgomery County Democrat, who introduced a bill to make 32 services -- but not computer services firms -- subject to the sales tax. (The state currently taxes 39 of 168 services identified as taxable by the Federation of Tax Administrators.) Predictably, Mr. Gilchrist's measure went nowhere; it required much more political spine than lawmakers can muster. The state Senate proved that by caving in to health club owners and the other services the governor wanted to tax. But the senators did stick it to the computer services industry late one afternoon; they then voted on it late that same night without so much as a hearing on the topic. The House of Delegates swallowed hard, amended the bill so the tax would expire after five years, then also voted "yea."

Was there any logic to singling out computer services? Most states tend to go lightly on taxing information technology service firms' sales; one that imposed a tax not long ago, Florida, repealed it less than a year later. Maryland may now have put its own firms at a competitive disadvantage, especially against companies in Virginia, which has been generally loath to tax professional services. Another problem is how to collect the tax from Maryland companies that have out-of-state sales or from Maryland firms whose out-of-state offices may do the billing.

Lobbyists for the industry, who represent perhaps 100,000 of Maryland 2.5 million workers, argue that the tax will undercut the state's future as a magnet for high-tech talent and commerce and will harm one of its most promising avenues for economic development. They may have a point. But the larger point is that in taking such a slapdash approach to public policy, lawmakers didn't even bother to examine the question on its merits. They just taxed and ran.