Gary Hufbauer is the Reginald Jones Senior Fellow at the Peterson Institute for International Economics.
A seminal thinker and world-renowned expert on international trade, commerce, and taxation, for the past...
The first steps of repeal of a controversial tax bill dubbed the “Tech Tax” are underway in Massachusetts. The bill, which went into effect on July 31 of this year, extends the state sales tax of 6.25 percent to include computer services and modifications. Attorney General Martha Coakley approved an initiative that would get the issue on the November 2014 ballot if they obtain the required signatures; although it might not have to wait that long because both Democratic and GOP lawmakers are working on a plan to get this removed soon.
Technology business owners and the Massachusetts Taxpayers Foundation raised questions about the competitiveness of the technology industry in Massachusetts with the implementation of the bill. This bill gives Massachusetts the highest taxes on the computer services industry in the country. Only three other states—New Mexico, Hawaii, and South Dakota—extend their full sales tax to include computer services. Connecticut taxes them at a reduced of 1 percent rate. In addition, they argue that unlike the other states technology makes up a large portion of the state’s economy, thus this tax has a greater effect than it would on any other states. In addition technology is an especially mobile industry and could easily move to a lower tax state such as northern neighbor New Hampshire (which ranked 7th in our 2013 State Business Tax Climate Index).
This policy change had some very troubling components. For starters, it was included in a brief section of a transportation bill, and was never given a public hearing. We’ve argued elsewhere that transportation funding ought to come from gas taxes, tolls and other user fees where possible to connect the users of roads with the costs of them. But perhaps more disturbingly, the bill went into effect just seven days after originally passed, allowing little time for tech companies to adjust for the change. Finally, there doesn’t seem to be a public policy rationale for including just computer services and modifications in the sales tax base and not expanding the base comprehensively to other services. Larger scale base expansion could allow Massachusetts to bring its sales tax rate down overall on all goods and services—and politicians could avoid criticisms of “singling out” just one industry.
We have seen this targeted taxation of computer services before in Maryland. In 2007, the legislature developed a plan to expand the sales tax to a range of “luxury” services, which prompted over 200 lobbyists from those respective industries to descend on Annapolis. In the end, the only business activity that ended up being included in the sales tax expansion was the computer services industry. When the computer industry realized this, they sent their own lobbyists and the tax was removed from that industry as well, before it had the chance to go into effect.
It is difficult to begin taxing services. Plans such as the Maryland one often face the same demise because if you give one group an exception then they all want an exception. Given the past result in Maryland, the tech tax may have the same fate. Regardless, expanding the sales tax base comprehensively to services is important, even if it is hard.
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