Maryland Tax Increases Begin to Hurt

January 14, 2008

Maryland Governor Martin O’Malley and legislative leaders are opposing the repeal of the 6 percent computer services tax which will take effect July 1. We’ve previously written about the tax, covering how it was added at the last minute in a back room, the problem of singling out for tax one industry that could very easily leave the state, and how confusing enforcement will be:

Nine states tax computer services, but litigation has arisen in several states over the difficulty of separating “computer services” from other types of services. The Maryland version covers web design, facilities management, custom computer programming, data center support, systems integration, installation, and maintenance, but not Internet access, computer training, and data entry.

That doesn’t shed too much light on the difference between services that will pay a 6 percent tax and services that will pay no tax, and there’s also ambiguity over whether Maryland residents hiring an out-of-state company will pay the tax or not.

State officials didn’t give much hope for repeal, according to the Baltimore Sun:

“I’m hoping it will not get repealed,” [Senate President Thomas V. Mike] Miller said at a live taping in Annapolis of WYPR host Marc Steiner’s radio show. “I’m going to work hard to make sure it’s not.”

O’Malley said he wouldn’t be pushing for the repeal, and House Speaker Michael Busch said he wouldn’t support one without consensus on an alternative source of revenue — likely from budget cuts, new taxes, or a combination of the two.

Not coincidentally, Governor O’Malley’s approval rating has plunged to 35 percent (President Bush is at 27 percent among Marylanders), with a majority of respondents opposing the $1.3 billion in tax increases, most of which took effect January 1. Some sample responses:

“I’m a blue-collar worker, man. I can’t afford all those taxes,” said Franklin Gregg, 57, a lifelong Baltimore resident who works at an auto parts retailer and said he used to approve of O’Malley’s work as mayor. Now, he said, he is thinking about leaving the state.[…]

Marguerite Bowman, 60, a registered Democrat and retired teaching assistant who lives on Kent Island in Queen Anne’s County, said she buys appliances and furniture in Delaware to save on sales tax and has even considered moving there to avoid high income taxes.

“I have thought about it several times,” she said. “If I’m buying an appliance, I got news for you, I’m going to Delaware. If I’m buying furniture, I’m going to Delaware. People do it all the time out here, and we do it because we don’t have to pay the sales tax.”[…]

Elizabeth Moran, 64, a retired office manager in the Rodgers Forge neighborhood of Baltimore County and a self-identified “conservative Democrat,” said she worried that the expansion of the sales tax to computer services presaged a slippery slope leading to the taxation of more services.

“My husband is an accountant, and this is eventually going to filter down to him, too,” Moran said. “When you have to pass taxes on to your clients, they don’t like it.”

We analyzed how the tax increases would harm Maryland’s competitive position here.

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