Md. tech tax repeal OK'd in Senate

Fri, Apr 4 2008, 16:12 GMT
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ANNAPOLIS, Md. (AP) - A repeal of Maryland's widely dreaded computer services tax was approved by the Maryland Senate on Thursday, after Democrats squashed Republican efforts to prevent a new surcharge on wealthy Marylanders from helping to take its place.

Legislation to wipe out the so-called tech tax, which passed on a 30-17 Senate vote, still needs approval from the House of Delegates, where Speaker Michael Busch has indicated he believes the bill is a good compromise.

The repeal legislation would make up for $200 million that the tech tax was expected to generate by creating a new 6.25 percent tax on people with incomes higher than $1 million a year. That would raise about $110 million. Other money to balance out the effect of a repeal would come from a $50 million cut to transportation and additional cuts to be determined by July 1.

The surcharge on the wealthy would affect about 6,000 people in the state, and it would be in effect for three years.

Sen. Alex Mooney, R-Frederick, questioned whether the tax would chase wealthy Maryland residents out of the state. He asked Sen. Ulysses Currie, D-Prince George's, if that concern had been raised when the new tax was considered.

"It's only for three years, and we felt that with the housing market now, it would take them three years to sell the house and they might want to stay," Currie said.

The formula to repeal the tax was proposed by Gov. Martin O'Malley, who pushed unsuccessfully during November's special legislative session for a higher tax on the state's wealthiest residents.

The tech tax is an extension of Maryland's 6 percent sales tax to computer services.

Sen. David Brinkley, R-Frederick, tried to amend the repeal measure in several ways to make up the $200 million budget hole without putting the additional tax on the rich.

He first proposed a much bigger cut to the transportation fund, but the idea was shot down after Currie argued that the state is facing $40 billion in unmet transportation needs.

Brinkley also tried to amend the bill so that the proposed tax on the wealthy would be absorbed by the state's fund balance. Lawmakers are aiming to have nearly $1 billion on hand with the state's Rainy Day Fund and general fund balance, in case a sagging economy worsens and revenue estimates drop.

"Well, what happens if we get another writedown and all these people that perhaps would pay this tax don't pay it or leave the state? I'll leave that question for you," Brinkley said.

Currie countered that the state needs the extra money in case the Maryland experiences another budget writedown similar to last month's, when the state ended up with $333 million less than expected.

Brinkley also proposed using extra money from the Maryland Auto Insurance Fund, an insurer of last resort, which has about $170 million in it.

"The message here is there are alternatives to raising the income tax yet again," Brinkley said, referring to a restructuring of the state's income tax during the special session that raised tax rates for higher-income Marylanders.

But Sen. Thomas "Mac" Middleton, the Senate Finance Committee chairman, said his committee has studied the MAIF fund. He said most members concluded it shouldn't be drained down, because it would "create a significant exposure" to MAIF customers and other Maryland drivers.

"Taking this is a bad idea," Middleton said. "There are attorney generals' opinions that have already been sought after and gotten that (say) you can't do it ... You'd be subjecting yourself to court challenge."

Sen. Allan Kittleman, R-Howard, argued against the surcharge on the wealthy, saying that about a quarter of the 6,000 people affected are small business owners.

"If you want to vote for a higher tax, OK, vote for a higher tax. But let's not say, 'Let's soak it to the rich,'" Kittleman said. "It's not just the rich. It's the small business people, and it's the people who use the services of the small business people. It's bad policy."

But Senate President Thomas V. Mike Miller, D-Calvert, said that if the repeal measure passed, it would actually amount to a $700 million tax repeal. That's because the tech tax would have raised $1 billion over five years, while the surcharge on the wealthy would raise $300 million over three years.

"We're backfilling with only $300 million in taxes," Miller said. "It's a $700 million tax cut that this bill is all about. You understand that? That's what it's all about ... The math is very simple."

The computer services tax, which was passed during the November's swift-moving special session to help address a $1.7 billion structural deficit, prompted the state's information technology industry to launch a huge lobbying blitz against it.