Friday, March 14, 2008

Tax repeal bid hits snag, but foes rally on

Executives ramp up pressure in Annapolis after one tech-tax proposal is voted down in Senate

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J. Adam Fenster/The Gazette
Tom Loveland (left), Mind Over Machines CEO and Maryland Computer Services Association co-founder, waits to listen to delegates and executives testify in a packed hearing on the proposed computer services tax before the House Ways and Means Committee in Annapolis.
ANNAPOLIS — More than 200 Maryland business executives packed two hearings Wednesday to lobby for the repeal of a controversial 6 percent sales tax on computer services that the state plans to enact in July.

But their efforts hit a roadblock when the Senate on Wednesday voted down one proposal to repeal the tax and impose more budget cuts. Legislators are still working on other alternatives, such as a plan to raise personal income taxes.

However, repeal supporters gained a key ally on Thursday when Gov. Martin O’Malley [D] publicly said he hoped legislators will repeal the tax and find an alternative revenue source before the end of the session on April 7. O’Malley signed the bill that included the tech tax and previously had said he did not support a repeal.

The change was great news and showed that business executives’ efforts to speak out in the preceding months are appreciated, said Julie Coons, CEO of the Tech Council of Maryland.

‘‘We’re so appreciative of the governor’s leadership on this issue,” said Coons, who plans to meet with O’Malley today to further discuss a possible repeal. ‘‘We’re very gratified that the voices of our members have been heard.... We still have work to do, but this looks very promising.”

The executives — many of whom said they would have to trim employee benefits, lay off employees or even move from Maryland if the tax was not repealed — also rallied on Wednesday outside the politicians’ offices in the state capital. They held signs and chanted slogans such as ‘‘Ax the tax.”

The issue is among the top legislative priorities of business groups such as the Maryland Chamber of Commerce, Montgomery County Chamber of Commerce, Tech Council of Maryland and Hispanic Chamber of Commerce of Montgomery County.

John Eckenrode, president of Catonsville computer services company CPSI, told the Senate Budget and Taxation Committee that he’s already had large corporate clients tell him they won’t pay the extra 6 percent. Most computer firms, especially those that contract with the federal government, operate on very thin profit margins, he said.

‘‘We’re looking at a 90 percent cut in profitability starting in July,” said Eckenrode, co-founder with Thomas Loveland of the Maryland Computer Services Association, a group formed late last year to lobby for tech concerns. ‘‘We are in desperate trouble in our business.”

Many corporate executives are being courted by officials in Virginia, Delaware and other surrounding states to move. Pennsylvania repealed its computer services tax after six years in 1997, while Virginia also does not have such a tax. Delaware’s gross receipts tax for computer services is less than one percent, while Washington, D.C., has a 5.75 percent tax on only a few of the computer services in Maryland’s law.

Andrew Fraser, co-founder of Kensington Internet services business Sandglass Systems, said during another hearing held simultaneously by the House Ways and Means Committee that he doesn’t want to consider moving the company to Virginia or another state. But he has to look at what makes business sense, especially when competitors in Virginia and other states won’t have to contend with the tax.

‘‘It just doesn’t make sense for the state to do this,” said Fraser, a board member of the Greater Bethesda-Chevy Chase Chamber of Commerce and former board president of the Greater Silver Spring Chamber of Commerce.

Tax needed to closebudget deficit, officials say

Maryland officials say the tax is needed to help close a budget deficit, as Maryland is constitutionally mandated to balance the state budget. The tax is expected to rake in about $200 million annually — a figure many executives question when flight and diversion of tech services to India and other places are factored.

There are more than a dozen bills to repeal the tax, with some calling for an increase in other areas, such as gasoline and alcohol taxes. Hundreds of millions of dollars have already been cut from the state budget, and slow tax receipts are expected to force another $330 million in budget cuts.

Some legislators balked at adding another tax to replace the tech tax. Republicans have pushed for further budget cuts.

‘‘I still think we can repeal this tax without raising [other] taxes,” said Sen. David R. Brinkley [R-Dist. 4] of New Market, who proposed the amendment to repeal the tax that was voted down by the Senate on Wednesday. Some who opposed that proposal said the plan to draw from the state’s general fund and make further budget cuts would still leave the state with a budget deficit.

Several business executives said they supported increasing the gasoline tax. So does the Maryland chamber, said Kathleen T. Snyder, president and CEO of that group.

Rhoda Arzt, head of Rockville tech company Trilogy Technical Services, said she would rather see personal income taxes be raised than this tech tax be enacted. A bill filed by Sen. Verna Jones (D-Dist. 44) of Baltimore calls for raising income tax rates among higher brackets to make up the difference.

‘‘It will be difficult to compete with this [tech] tax,” Arzt said.

With key officials such as Sen. President Thomas V. Mike Miller Jr. (D-Dist. 27) of Chesapeake Beach opposing a repeal, barring a sound alternative to make up the revenue, supporters of the repeal admit it will be an uphill battle. Miller has said he supports exempting pre-existing and government contracts.

Still, executives vow to continue working against the tax in the hopes that officials will see things their way by the end of the regular session April 7.

Changes pushedon reporting bill

Maryland executives voiced support on Wednesday for modifications to another bill that would require new corporate income tax reporting regulations that they say would be highly costly and time-consuming.

The tougher requirements were passed almost unnoticed during the legislature’s special session late last year, when that body created the Maryland Business Tax Reform Commission to review the state’s corporate tax structure. The commission was formed after legislators agreed not to pass a controversial ‘‘combined reporting” proposal, under which companies would total their combined profits from all entities and then pay a portion to Maryland based on factors such as how much property, payroll and revenues were reported in the state.

The changes to the bill would significantly decrease the number of companies that would be subject to the new reporting requirements, as well as simplify what was required, officials said.

The modifications make the bill more agreeable, said Barbara Henry, a board member of the Montgomery County Chamber of Commerce and executive with Silver Spring broadcasting company Discovery Communications. She was one of numerous business people to voice support for the changes during a hearing before the Senate budget committee.

‘‘We don’t want to be burdened by an overwhelming amount of paperwork,” Henry said.