Killing the golden goose

An unforgivable breakdown in the checks and balances embedded in the Maryland General Assembly’s way of doing business led to a counter-productive expansion of the state’s new 6 percent sales tax to computer services.

It is supposed to raise $200 million — a fairy-tale number that won’t prove anywhere near accurate. This was the final piece in the tax-increase⁄budget-balancing puzzle Gov. Martin O’Malley and lawmakers needed to complete their work last November.

Of course, if O’Malley & Co. had simply worried about eliminating the state’s long-running structural deficit they wouldn’t have approved this extra tax levy.

But the governor and his legislative allies were determined to embark on costly health care initiatives, increased aid to higher education, more transportation projects and more money for K-12 public education.

They were short about $200 million — the precise number provided by the Department of Legislative Services for a tax on computer services.

No extensive hearings were held. Debate was minimal. Votes on the tax were rushed through so legislators could go home.

The IT industry was caught unaware. This tax was imposed without warning.

Now it’s becoming clear it was the wrong service to tax. This tax is going to hurt small business owners. It’s going to hurt consumers. It already is chasing jobs out of Maryland.

Trying to collect this tax will be an ongoing nightmare for Comptroller Peter Franchot. If he strictly enforces the law, he’ll accelerate the exodus of IT firms from Maryland. If he loosely interprets the law, he will collect only a fraction of the legislature’s $200 million tax guesstimate.

Senate President Mike Miller has circled the wagons. He’s in a defensive mood. He knows the public is furious over the raft of new taxes legislators imposed. He’s unwilling to acknowledge that this particular levy — the creation of a Senate committee — was a mistake.

Legislative ignorance about the importance of Maryland’s information technology industry isn’t new. For years, lawmakers have rejected IT tax credits that could have made Maryland Silicon Valley East. Legislators and the governor even resisted making Maryland a big-time player in supporting biotechnology.

Yet computational and information technology are booming in this state, especially near federal government offices. Information technology provides high-paying jobs for people with limited skills. These jobs are clean and green.

But now, computer services will cost an additional 6 percent, which will make Maryland companies providing these services non-competitive. Their rivals in Virginia, Delaware, Pennsylvania and elsewhere just gained a 6 percent edge in bidding on contracts.

Try stripping away 6 percent from a company’s margin. For many smaller companies, that could send them hurtling toward insolvency. No wonder firms already are making plans to move their jobs and locations to other states.

What lawmakers forgot is that information technology is the most mobile industry that exists. Maryland IT services firms have been trying to match the low, low prices of offshore competitors in India and the Ukraine. This new tax will shut local firms out of huge numbers of business opportunities.

Miller and other lawmakers want this problem to go away. It won’t. If left unaddressed during the current legislative session, the damage done to this sector of the Maryland economy could be immense. The damage done to Maryland’s business image will be long lasting.

The problem is that O’Malley and legislators don’t want to do the heavy lifting of finding a substitute $200 million to balance this year’s budget. It shouldn’t be that difficult, though. Most years, the legislature cuts the governor’s budget by $100 million to $200 million anyway.

Besides, O’Malley soon could be making big cuts in existing programs because Maryland’s economy is getting wobbly. Sales tax figures from late last year were ‘‘surprisingly weak,” according to the comptroller’s office. It is time to slow the growth of government.

This may mean a further reduction in local aid, less money for higher education, a smaller — or no — pay raise for state workers and higher state user fees. All of these steps may be necessary. Elimination of the sales tax on computer services should be included in this package, too.

If legislators want to stimulate solid job development in Maryland, they should encourage the IT industry to expand and move to this state. The signal they are sending is dangerously myopic. Chasing good-paying jobs from Maryland is about the dumbest thing a state politician can do.

Barry Rascovar is a longtime State House columnist and a communications consultant in the Baltimore area. His e-mail address is: brascovar@ hotmail.com.