ANNAPOLIS — Lawmakers are sharply divided over a proposal that would jack up income tax rates on high-income earners as a means to repeal the controversial sales tax on computer services.
The measure introduced on Friday by Sen. Verna L. Jones would create new brackets for affluent Marylanders: a 5.5 percent rate on taxpayers earning $500,000 or more, 6 percent on those earning at least $750,000 and 6.5 percent on millionaires.
A fiscal note was not available as of Tuesday, but Jones (D-Dist. 44) of Baltimore said the bill would generate ‘‘a few hundred million dollars,” enough to replace the $200 million projected to be raised through the computer services tax.
‘‘As a member of the Budget and Taxation Committee, I felt compelled to put this on the table,” she said.
Montgomery County Executive Isiah Leggett (D) and Montgomery County Council President Michael J. Knapp (D-Dist. 2) of Germantown oppose the bill.
‘‘Replacing one marginal public policy decision with another does not advance our collective needs,” Leggett and Knapp said in a co-signed letter on Tuesday to county delegation leaders Sen. Rona E. Kramer (D-Dist. 14) of Olney and Del. Brian J. Feldman (D-Dist. 15) of Potomac. ‘‘Clearly, the decision to tax computer services created unintended consequences. This new proposal may as well.”
Leggett proposed his own restructuring of the income tax bracket during the special session. It included a top rate of 5.5 percent for anyone earning $1 million or more, a full percentage point lower than a proposal pushed by Gov. Martin O’Malley (D). Legislators passed a 5.5 percent top rate, but applied it to incomes of $500,000 or more.
The levy on computer services, which was included in a package of tax increases passed during the special session, has drawn heavy fire from businesses and technology professionals who say it will damage Maryland’s economy and may cause them to leave the state. A coalition of computer services companies has formed and several of Annapolis’ top lobbyists have been retained to push for the tax’s repeal.
‘‘We have been and remain in favor of any and all solutions that make the computer services tax go away,” said Thomas W. Loveland, co-founder of the Maryland Computer Services Association and CEO of Mind Over Machines, an Owings Mills IT firm.
Although some IT executives might face higher income tax payments as a result, Loveland said that’s preferable to the so-called ‘‘tech tax.”
‘‘They would rather take a haircut in the form of a slightly higher personal income tax ... than never have any hair again,” he said.
The Maryland Chamber of Commerce, however, opposes the measure because it would boost the tax liabilities for hundreds of small businesses.
If the bill passes, Maryland’s combined state and local income tax rates would be the third highest in the country, said William R. Burns, the chamber’s communications director.
‘‘That serves as a disincentive for job creators to locate or expand in Maryland and it makes it more difficult for Maryland companies to retain and attract the highly skilled workers they need,” he said.
Robert O.C. Worcester, president of Maryland Business for Responsive Government, is also no fan of Jones’ idea.
‘‘Many of these legislators are delusional with regard to the economic short term, near term and long term for this state,” he said.
Even companies whose business is tied to the federal government can cross the river to Virginia, he said. ‘‘Nobody really has to be here.”
Both Senate President Thomas V. Mike Miller Jr. (D-Dist. 27) of Chesapeake Beach and House Speaker Michael E. Busch (D-Dist. 30) of Annapolis have said they won’t consider a repeal without a replacement revenue stream.
Jones’ measure, which will be heard today in the Senate Budget and Taxation Committee, faces long odds because lawmakers are averse to passing more tax increases, said Chairman Ulysses Currie (D-Dist. 25) of Forestville.
‘‘Any tax now would be very difficult to get passed,” he said. ‘‘We were only able to pass the ones we passed by just the slimmest of margins, 24 votes.”
Higher income tax brackets are not ideal, but it may be the only way to reverse the tech tax and grow the IT sector, said Sen. Robert J. Garagiola (D-Dist. 15) of Germantown. ‘‘To me, this is an industry we should be fostering in our state.”
The higher brackets would sunset in 2013.
Some of Garagiola’s colleagues from Montgomery County argue that higher income tax rates will disproportionately affect their constituents.
But it’s unknown whether the state will generate the revenue projected from the computer services tax, especially if businesses move elsewhere, said Sen. Nancy J. King (D-Dist. 39) of Germantown.
And there’s some doubt whether the Jones’ bill will raise as much as some think it will.
‘‘I don’t see how this particular plan gets us to $200 million,” said Neil Bergsman, director of the Maryland Budget and Tax Policy Institute.
Using statistics from the Comptroller’s Office, he made a rough estimate that the tax increase would raise about $75 million.
Staff Writers Sean R. Sedam, Janel Davis and Douglas Tallman contributed to this report.
