Thursday, Jan. 24, 2008

Gasoline, alcohol may be on tax hit list

Lawmakers seek replacement revenues to repeal computer services tax

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Two combustibles — gasoline and alcohol — are being targeted for tax increases by legislators who want to repeal the new 6 percent state sales tax on computer services adopted late last year in a special session.

Two bills to repeal the technology tax — the top legislative priority of business groups such as the Hispanic Chamber of Commerce of Montgomery County and the Tech Council of Maryland — were among the first to be filed shortly after the legislature’s regular 2008 session opened this month.

Sen. Jennie M. Forehand (D-Dist. 17) of Rockville, who filed one of the bills, said last week she would lobby for an increase in the state tax on beer, wine and spirits to partly offset the estimated $200 million annually that officials have said would be gained from the computer services tax. Three Republican senators filed the other tax-repeal bill.

State taxes on alcohol have not been raised since at least the 1970s, Forehand said. Maryland has some of the lowest alcohol taxes in the nation, and just a slight increase in those taxes will raise about $56 million annually, she said.

‘‘We will need to piece together a list of things to make up for the revenue if the computer services tax is repealed,” Forehand said. ‘‘At the very least, we need to tweak the bill and not have it as broad as it is now.”

Maryland’s tax on beer of 9 cents per gallon was tied for fifth lowest among the 50 states and Washington, D.C., according to a survey taken about a year ago by the Washington anti-tax group Tax Foundation. Maryland’s tax on wine and spirits ranked 11th and tied for fourth lowest, respectively.

Sen. Robert J. Garagiola (D-Dist. 15) of Germantown said Thursday he plans to file a bill — probably by late this week — to repeal the computer tax and increase the gasoline tax by 3 to 4 cents per gallon effective in July, with a second 3- to 4-cent rise in July 2009. The measure would also shift part of the overall sales tax increase that was dedicated to the Transportation Trust Fund back to the state General Fund and then replace the transportation revenue with the increased gas tax revenues.

Garagiola noted that raising alcohol taxes wouldn’t come close to making up the revenue that would be generated by the computer tax. His plan would not only cover that amount but provide a little extra for the transportation fund for road projects, bridges and mass transit, he said. Because the computer services tax is slated to end in five years, there would also be a hefty amount for the transportation fund after those five years, he said.

Forehand said she would like to look at other options than increasing the gas tax. ‘‘With gasoline prices already increasing, the timing of increasing the gas tax will hit people too hard,” she said. ‘‘That would be the last thing I would want to tax.”

Garagiola acknowledged that raising the gas tax will be challenging in the present environment, with prices around $3 per gallon. He is willing to consider other alternatives, but he hasn’t heard too many others proposed.

Julie Coons, CEO of the Tech Council of Maryland who recently met with Garagiola about the matter, said his bill is ‘‘an excellent example of offering a solution to the problem.”

‘‘We applaud his efforts and support the bill,” Coons said. ‘‘We anticipate there will be other bills and additional ideas on solutions. We look forward to working together with legislators to find a way to repeal this onerous measure, which truly limits Maryland’s future as a technology-led economy.”

Garagiola and Forehand said many rank-and-file legislators support repealing the computer tax, which is slated to begin July 1. ‘‘Many of my colleagues want to repeal the computer services tax, but the problem is finding an alternative,” Garagiola said.

However, Gov. Martin O’Malley (D) and Senate President Thomas V. Mike Miller Jr. (D-Dist. 27) of Chesapeake Beach have said recently that they don’t support repealing the computer tax. But Garagiola said he is confident that if legislators present a sound alternative with broad support, top leaders will consider it.

Considering a move

If the tax remains, business executives such as John Eckenrode, president of Catonsville computer services company CPSI, say they will consider moving their companies out of the state.

The tax would be devastating when much of the work those companies do is already high-volume and low-margin, said Eckenrode, who is also president of the Washington chapter of the National Association of Computer Consulting Businesses.

“If the comptroller’s office issues a broad interpretation of the computer tax bill, our profit will be reduced by over 90 percent and we’ll be forced to reduce staff, cut salaries or move out of Maryland to stay in business,“ he said.

If the tax is not repealed outright, it needs to be amended to authorize reseller exemptions to eliminate the adverse effect of multiple layers of sales taxes, plus exempt existing federal contracts, Eckenrode said.

Without those exemptions, margins for small firms such as CPSI will be greatly reduced because prime contractors won’t pay the sales tax and will force subcontractors to reduce prices and pay the sales tax, he said.

There is also the competition factor, Eckenrode said. Maryland’s computer services industry is in “fierce competition“ from companies in neighboring states such as Virginia, as well as overseas in India, China and Eastern Europe, he said.

“Computer services work can easily be done out of state or overseas via the Internet over high-speed networks,“ Eckenrode said. “Jobs in Maryland will be lost, and future job growth will be reduced as work is moved out of state or overseas.“

The tax will prove to be “an empty source of funds for the state as the competitive forces will soon wipe out much of the revenue base now thought to become a tax base,“ said Jorge Restrepo, president of the Hispanic Chamber of Commerce of Montgomery County.

This report originally appeared in The Business Gazette.