O'Malley Discusses Deal to Kill Computer Services Tax

By John Wagner and Philip Rucker
Washington Post Staff Writers
Thursday, March 27, 2008

Gov. Martin O'Malley (D) has floated a compromise that would allow for the repeal of the state's new tax on computer services by imposing a surcharge on the income of millionaires, diverting some funding for transportation projects and requiring additional budget cuts in state agencies.

The proposals, which were shared at a closed meeting with legislative leaders Tuesday and described by several participants yesterday, are an attempt to resolve one of the most difficult issues pending before the General Assembly's April 7 adjournment.

Momentum has swelled in recent weeks to repeal the new tax, which was enacted in a special session in the fall and is projected to yield more than $200 million a year for the state once it takes effect July 1. But lawmakers have not agreed on how to compensate for the lost revenue. Divisions run particularly deep in Montgomery County, where officials have been cool to both the "tech tax" and alternatives to replace it.

As Montgomery County Executive Isiah Leggett (D) put it yesterday: "How do you select your poison?"

Under the scenario offered by O'Malley, the state would recoup about $100 million a year by imposing a surcharge on those reporting personal income of more than $1 million. Those filers would pay a top marginal rate of 6.25 percent instead of the current 5.5 percent.

The new rate would affect about 0.2 percent of filers statewide, about 40 percent of whom live in Montgomery, the state comptroller's office said.

The proposal amounts to a scaled-back version of a bill stalled in the Senate that would raise rates on those with taxable income of more than $750,000 a year.

O'Malley has also suggested diverting $50 million from new funding of about $450 million a year approved during the special session for transportation projects. Some lawmakers have suggested diverting as much as $200 million a year, a move opposed by many legislators in the increasingly traffic-snarled Washington region and by House Speaker Michael E. Busch (D-Anne Arundel).

O'Malley would compensate for the rest of the lost revenue through budget cuts, said participants at the Tuesday meeting, who spoke on the condition of anonymity because O'Malley was not making formal proposals. O'Malley aides said he remains open to other ideas that gain traction in the closing days of the session.

"The governor supports the repeal of the computer services tax and has been talking to the legislature about some combination of additional resources and cuts to make up for the $200 million hole," said O'Malley spokesman Rick Abbruzzese. He said O'Malley advocated a "more progressive" overhaul of the state's income tax structure during the special session called in the fall to address the state's long-term financial problems.

The proposal to apply the state's 6 percent sales tax to computer services was not among the ideas O'Malley advanced. The levy was added to a tax package by the Senate and remained in the final version of the bill sent to the governor, much to the surprise of many in the information technology industry.

Montgomery officials have been among the leading voices calling for the repeal of the tax, which would apply to a wide range of services, including custom software design and data processing.

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