The first steps of repeal of a controversial tax bill dubbed the “Tech TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. ” are underway in Massachusetts. The bill, which went into effect on July 31 of this year, extends the state sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. 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 taxA gas tax is commonly used to describe the variety of taxes levied on gasoline at both the federal and state levels, to provide funds for highway repair and maintenance, as well as for other government infrastructure projects. These taxes are levied in a few ways, including per-gallon excise taxes, excise taxes imposed on wholesalers, and general sales taxes that apply to the purchase of gasoline. es, tolls and other user feeA user fee is a charge imposed by the government for the primary purpose of covering the cost of providing a service, directly raising funds from the people who benefit from the particular public good or service being provided. A user fee is not a tax, though some taxes may be labeled as user fees or closely resemble them. s 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 baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. 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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