Governor Backs Repeal of Tax

By John Wagner
Washington Post Staff Writer
Friday, March 14, 2008

Gov. Martin O'Malley added his voice yesterday to those calling for a repeal of Maryland's new tax on computer services, saying he would like to see legislators agree on another source of revenue before adjourning next month.

"The more we look at it and the more we look at the potential downsides of the computer tax, the more convinced I become that we should look for some alternative," O'Malley (D) told reporters.

The only alternative O'Malley mentioned was increasing income tax rates for high-end earners. Aides and lawmakers said other options are being studied, including increasing a fee paid by businesses that file an annual report with the state.

Lawmakers adopted the computer tax during November's special session, called by O'Malley to bolster the state's long-term finances. The levy, which is projected to raise $200 million a year, was not among O'Malley's proposals for the session, and yesterday he said it appeared "out of left field."

The 6 percent tax, which takes effect July 1, applies to an array of services, including custom software programming, data processing and visits from computer experts. The tax would expire after five years.

With about three weeks remaining in the legislative session, momentum to repeal the tax has grown substantially. Lawmakers have suggested competing plans to compensate for the revenue that would be lost.

In January, at the outset of the session, O'Malley said he did not favor repealing the tax. But he said yesterday that he has come to appreciate the strength of the state's technology sector. "It's an advantage we want to grow, not an advantage to weigh down," O'Malley said.

The proposal for new revenue that has generated the most discussion recently would temporarily add two brackets to Maryland's income tax structure, in which the top marginal rate is now 5.5 percent

The bill, introduced by Sen. Verna L. Jones (D-Baltimore), would apply rates of 6 percent to taxable income of $750,000 to $1 million and 6.5 percent to taxable income more than $1 million. The surcharge, which would expire after 2012, would raise about $175 million a year, legislative analysts said.

O'Malley expressed support for the concept, saying he had proposed "more progressive" changes to the state's income tax brackets than were adopted by lawmakers during the special session.

Senate President Thomas V. Mike Miller Jr. (D-Calvert), however, questioned whether there was support to pass Jones's bill, suggesting that lawmakers might be more inclined to make changes to the tax to make it less onerous.

"I think there's more of a will to tweak it," Miller said. "Rather than throw the baby out with the bath water, let's try to make it work first."

Miller cited "extreme sensitivity" to passing other tax increases after lawmakers at a special session approved $1.4 billion in annual tax increases as part of a broader budget package.

House Speaker Michael E. Busch (D-Anne Arundel) said any repeal or alteration of the computer services tax should start in the Senate, given that senators added the idea to the budget package during the special session.

House Majority Leader Kumar Barve (D-Montgomery) said he sensed a growing interest among his colleagues to repeal the tax and protect "high-tech businesses." Barve said lawmakers are looking at a number of scenarios beyond replacing the computer tax with a surcharge on high-end earners.

"There are lots and lots of combinations are permutations," he said. "It's not an either-or situation."

Among the ideas under review by the governor's office is raising the fee on businesses required to file annual reports with the State Department of Assessments and Taxation. A bill filed last year that sought to increase the fee to $1,000 from $300 would have raised about $105 million a year, legislative analysts said.

Miller said O'Malley has also floated the idea of repealing a trade-in exemption to the vehicle-titling tax that was adopted during the special session. Lawmakers passed the measure to lessen the impact of raising the titling tax to 6 percent from 5 percent.

On Wednesday, the Senate rejected a Republican-sponsored plan to make room in the budget for repealing the computer services tax by tapping $114 million in unallocated funds and directing O'Malley to cut an additional $100 million.

Yesterday, Sen. Robert A. Zirkin (D-Baltimore County) introduced a bill to delay implementation of the computer sales tax. If a referendum on legalizing slots passes in November, the tax would be repealed altogether.

Zirkin said revenue lost from the computer tax could be made up by cutting transportation projects. "Taking care of the information superhighway is infinitely more important right now than building any new highways," he said.

Staff writer Philip Rucker contributed to this report.

© 2008 The Washington Post Company