Computer Services Tax

Senate Approves Repeal of New Levy

By John Wagner
Washington Post Staff Writer
Friday, April 4, 2008

The Maryland Senate voted 30 to 17 last night to repeal the state's new tax on computer services and offset the lost revenue with a three-year surcharge on the income of millionaires as well as cuts to transportation projects and state agencies.

With the House of Delegates expected to follow suit in coming days, the action almost guaranteed that Maryland's "tech tax" would come off the books before it was to take effect in July. Outcry over the tax, which was passed in a special session in the fall, indicated to lawmakers that the levy would undercut Maryland's burgeoning information technology sector and lead firms to relocate.

Debate on the Senate floor focused on whether the legislature was replacing one misguided tax with another. The surcharge is expected to affect about 6,000 Maryland residents, or about 0.2 percent of filers, who would be asked to pay an average of $17,000 a year more in income taxes. More than 40 percent of the qualifying taxpayers live in Montgomery County.

Two of the eight Senate Democrats from Montgomery, Rona E. Kramer and Richard S. Madaleno Jr., joined most Republicans in the chamber in trying to defeat the bill.

Senate Minority Whip Allan H. Kittleman (R-Howard) accused supporters of engaging in "class warfare" and emphasized that many small businesses pay taxes through their owners' personal tax returns. "Let's not say, 'Let's sock it to the rich,' " Kittleman said. "It's bad policy."

Supporters of the bill, modeled on a plan floated by Gov. Martin O'Malley (D), argued that it was far better than any repeal alternatives put forward in recent weeks. The Democrat-led chamber voted down five Republican-led attempts to achieve the repeal without a tax increase, including a measure that would have delayed spending on the expansion of subsidized health care.

"We're trying to protect people with incomes of over 1 million [dollars] a year at the expense of poor people," said Sen. Thomas M. Middleton (D-Charles).

Senate President Thomas V. Mike Miller Jr. (D) said that his colleagues were losing sight of what the repeal bill would accomplish. The "tech tax" is projected to generate more than $200 million a year in revenue for the state before it expires in five years. "What we're doing in this bill is repealing 1 billion [dollars] in taxes," Miller said.

The surcharge on millionaires is projected to raise an average of $110 million a year before it expires in three years. The bill also calls for cutting $50 million a year from transportation projects for five years and directs O'Malley to come up with $50 million in savings from state agencies by July 1.

O'Malley told reporters yesterday that he thinks the surcharge is fair. "We're not going to be shy about asking our fellow citizens who make more than a million dollars a year to pay an additional three-quarters percent," he said.

Under the bill, the state would apply a 6.25 percent rate to taxable income of more than $1 million. The state's top marginal rate was raised during the fall special session from 4.75 to 5.5 percent.

In 2005, 6,150 of the state's 2.6 million filers reported personal taxable income of more than $1 million, according to the comptroller's office. Of those, 2,535, or 41 percent, resided in Montgomery. The second-highest total was in Baltimore County, which had 1,011 filers reporting more than $1 million.

Several Montgomery lawmakers have expressed ambivalence about moving forward with the surcharge on millionaires. For the coming three years, millionaires in Maryland would be taxed at among the highest rates in the country when state and county income taxes are taken into account.

Maryland is one of 14 states that also collects county-level income taxes, according the Tax Foundation. A flat rate of up to 3.2 percent is imposed in Montgomery and Howard counties. Prince George's imposes a 3.1 percent income tax, but a proposal is pending to raise it to 3.2 percent.

The computer services tax surfaced during the three-week special session called last fall by O'Malley to address the state's long-term finances. Lawmakers raised taxes by $1.4 billion a year during the session and voted to slow spending growth by several hundred million dollars.

The 6 percent "tech tax" was not included in O'Malley's revenue proposals. It was initiated by a Senate panel and would apply to a range of services, including custom software design and data processing.

For much of the 90-day regular session, which began in mid-January, O'Malley, Miller and House Speaker Michael E. Busch (D-Anne Arundel) said the tax was unlikely to be repealed, given continuing revenue challenges and an uncertain economic outlook.

O'Malley reversed course last month, saying he had come to appreciate the strength of the state's technology sector, which he called "an advantage we want to grow, not an advantage to weigh down." Busch said this week that the compromise floated by O'Malley makes sense.

The bill has prompted fierce lobbying by business and technology groups, which expressed hope that the repeal bill will pass before Monday's scheduled adjournment.

Repeal alternatives offered yesterday by Senate Minority Leader David R. Brinkley (R-Frederick) included one that would have cut $150 million a year in transportation funding rather than the $50 million proposed by O'Malley.

Brinkley also unsuccessfully pushed an amendment that would have used reserve funds as an alternative to raising taxes on millionaires. Democrats said that the money is needed to weather an economic downturn that could leave the state with less revenue than anticipated in the coming year.

Staff writer Philip Rucker contributed to this report.

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