Anthony J. O’Donnell and Christopher B. Shank
2008-05-06 07:00:00.0
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BALTIMORE -

Recent coverage of the repeal of the computer services tax in Maryland is reminiscent of George Orwell’s “1984.” Some of the same legislators who argued strenuously in favor of the tax during the legislative special session are now hailed as heroes of the repeal effort. As a few issues have been confused and distorted, we would like to take this opportunity to clarify some facts from our perspective.

The expansion of the Maryland sales tax to include computer services was first enacted during the November special session. It was added to the already historic tax increases in, literally, the dark of night in a Senate committee, with no discussion or input from the public or members of the industry.

This game of tax hokey pokey had been going on for several days, as various industries were in, and then out. Ultimately, the tech services industry became the loser in this game. At that time, the Republicans argued how damaging this tax would be to the burgeoning tech industry in Maryland, and to the state’s economy. We also pointed out the singular unfairness of the process that led to this tax’s inclusion in the package being strenuously pushed by Gov. Martin O’Malley and the Democratic leadership.

We offered an amendment to strip the tech tax from the package, which failed. The General Assembly went on to pass the largest tax increase in Maryland history. Once again, the Republican members argued and voted against these taxes, proposing as an alternative specific instructions in the rate of growth in spending to address the looming deficit.

From the beginning of the 2008 legislative session, the Republican caucus made it one of the top priorities to repeal the tax on computer services. When the budget was being considered, we once again proposed very specific reductions in the rate of growth in spending that would have allowed a repeal of the tax without need for additional taxes, and once again the amendment was defeated.

Gov. O’Malley and the Democratic leadership chose to ignore all of the alternatives presented by the Republican caucus, and, after finally succumbing to public pressure, replaced the tech tax with another tax, this time the so-called millionaire’s tax. This backfilling was  entirely unnecessary. Maryland needs to cut spending, not raise more revenue.

One final item, Maryland Republicans offered an amendment that would have repealed the computer services tax without backfilling with another tax, by making sensible reductions in the rate of growth in spending, and one final time, that alternative was rejected.

The repeal of the tax on computer services, while removing a burdensome tax on an industry Maryland ought to be encouraging, cannot be lauded as a victory without examining the effect of this new tax.

The increased income tax is likely to have an equally damaging effect on Maryland’s economy. Many of the individuals who qualify for this increased tax are actually small businesses who file as Subchapter S corporations, so once again a tax has been imposed that will damage small business.

The recent experience of California serves as a cautionary tale of the type of effect this new tax will have. When California imposed a high-income tax several years ago, 5,000 of the state’s 25,000 highest-income earners left the state. By depending on such a narrow sector of the tax base for so much of its revenue, California quickly went into a $7 billion deficit, largely attributable to the new tax.

Just like the tech tax, this new burden provides a disincentive for these high-income families to reside in Maryland and to contribute to our state’s economy and state coffers. Clearly, the decision of the few of these highest-income earners to leave Maryland in search of greener pastures would have a huge effect on our state’s finances, which are already unstable.

Anthony J. O’Donnell, R-29C, is the House minority leader and Christopher B. Shank, R-2B, is the House minority whip. Reach them at 410-841-3401.