In Tight Budget Year, Legislators Argue Over How to Make Up Projected $200 Million in Revenue
By John Wagner
Washington Post Staff Writer
Thursday, March 13, 2008
The Maryland Senate rejected a budget amendment yesterday that supporters said would have made it possible to repeal the state's new tax on computer services.
The 26 to 19 defeat of the Republican-sponsored measure did not end efforts to abolish the controversial tax this session. But it underscored a lack of consensus over how to make up lost revenue if the tax is repealed.
The tax, which passed with little debate during a special session in November, is projected to yield about $200 million a year for the state.
The amendment, introduced by Sen. David R. Brinkley (R-Frederick), called for tapping $114 million in unallocated funds and directing Gov. Martin O'Malley (D) to cut $100 million from the coming year's budget to offset the effect of repealing the tax.
"Many in this room have stated how bad this tax is," Brinkley told his colleagues during debate on the Senate floor. "This is the best way to go about repealing it."
Brinkley's proposal received support from all 14 Republicans in the chamber, as well as five Democrats, including two from Montgomery County, Sens. Rona E. Kramer and Jennie M. Forehand.
But the amendment was panned even by some advocates of repealing the tax, who argued that the proposal would not compensate for lost revenue beyond the coming fiscal year. Under current law, the computer services tax is to be imposed for five years.
"This does not solve the problem," said Sen. Robert J. Garagiola (D-Montgomery), the lead sponsor of one of several bills on the issue that were the subject of hearings yesterday in Senate and House committees.
During the hearings, technology company representatives argued that the tax would significantly harm a flourishing industry and prompt some companies to leave Maryland.
The 6 percent tax, which is scheduled to take effect July 1, would be assessed on a wide range of services, including custom software design, data processing and visits from repair squads.
Others argued during Senate floor debate that tapping unallocated funds could leave the state in a precarious financial position. If the economy remains sluggish, tax revenue might fall short of projections next year.
Lawmakers are in the process of cutting more than $300 million from O'Malley's proposed $15 billion general fund budget. Sen. Ulysses Currie (D-Prince George's) said an additional $100 million in cuts would probably force O'Malley to cut higher education funding, which would lead to significant tuition increases in the fall.
Another scenario for repealing the computer services tax would require passage of a bill that would impose a surcharge on high-income earners.
During the special session, lawmakers raised Maryland's top marginal income tax rate from 4.75 percent to 5.5 percent.
A bill introduced this session by Sen. Verna L. Jones (D-Baltimore) would apply rates of 6 percent to taxable income between $750,000 and $1 million and 6.5 percent to taxable income more than $1 million. The surcharge, which would expire after 2012, would raise roughly $175 million a year, according to legislative analysts.
The prospects for that proposal are unclear. Many lawmakers are wary of backing another tax increase after voting for multiple increases during the special session, called by O'Malley to address the state's long-term finances.
Leading Montgomery officials lobbied during the special session to keep the top marginal income rates from rising any more than they did. And this week, County Executive Isiah Leggett (D) and Council President Michael Knapp (D-Upcounty) sent a letter to Montgomery lawmakers indicating they remain opposed.
"Replacing one marginal public policy decision with another does not advance our collective needs," the letter said. "Clearly, the decision to tax computer services created unintended consequences. This new proposal may as well."
The idea of an income tax surcharge was embraced yesterday, however, by representatives of the Maryland Computer Services Association, a fledgling organization of technology firms that have banded together to fight for repeal of the tax.
If it would facilitate repeal of the computer services tax, "frankly, I would rather pay another three or four thousand dollars in my personal income tax," Rhoda Arzt, owner of Rockville-based Trilogy Technical Services, told a Senate budget panel yesterday.
Arzt and other representatives of the group told senators they would consider moving their business out of state if the computer services tax takes effect.
"I want to live in Maryland," Arzt aid.
Karin E. Weifenbach of P.K.W. Associates, based in Anne Arundel County, said her business might be forced to cut employee benefits, including health care, to continue operating in Maryland.
John Eckenrode, president of Catonsville-based CPSI, said some customers have told him that they would be unwilling to pay the tax, which would force his company to absorb the cost to continue serving them.
"Senators, we are in desperate trouble in our business," Eckenrode said.
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