Friday, Nov. 23, 2007

New tax plan draws scorn and praise

Levy on computer services decried

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Executives this week cast both brickbats and laurels at Maryland’s new package of business taxes and programs, with several singling out a new state sales tax on computer services for criticism.

The tax was ill-conceived and hastily adopted, say some, who warn it will put Maryland companies at a competitive disadvantage and send the wrong message about the state’s business climate.

‘‘It was a quick fix, with no understanding of the broader implications,” said Marshall Micheals, president of Corporate Network Services, a Poolesville information technology business.

But executives praised other portions of the tax package signed into law this week by Gov. Martin O’Malley (D) following a three-week special legislative session convened to help close an estimated $1.5 billion budget deficit. Among the more well-received proposals is one to help small businesses provide medical insurance to workers.

Expanding the sales tax to computer businesses handicaps those companies when they compete against those in states that don’t have such a tax, Micheals said.

The tax, which takes effect in July, will net about $200 million annually, according to a legislative report. That was apparently too much for many lawmakers to pass up, said Karen Syrylo, a tax consultant for the Maryland Chamber of Commerce.

‘‘It seemed they were looking for that amount to fill a hole,” Syrylo said. ‘‘But some believe that number [$200 million] is too high.”

The proposal was not part of O’Malley’s original plan but was inserted by a Senate committee that did not schedule a hearing for computer company representatives to publicly testify.

‘‘It was a big surprise,” said Georgette W. ‘‘Gigi” Godwin, Montgomery County Chamber of Commerce president and CEO. ‘‘Where was the public comment? We’re concerned about the disproportionate impact on small businesses. This raises new uncertainties about the state’s business climate.”

It was confusing when one day legislators talked about taxing landscapers, another day accountants and then finally ended up choosing computer services, said Marilyn Balcombe, president and CEO of the Gaithersburg-Germantown Chamber of Commerce.

‘‘I can’t imagine how the general public could have any meaningful input when those of us who were getting hourly updates could hardly keep track,” she said.

Substantial portions of the new taxes will go to programs such as higher education and medical insurance for small businesses, O’Malley said in a statement. The state tax system was also made more progressive and will result in a tax cut for middle-income families, he said. State spending growth will also be cut by $550 million.

Health insuranceprogram praised

Business leaders tended to like a new subsidy program to help small businesses offer medical insurance coverage for employees. Eligible companies must meet certain requirements, such as having from two to nine employees and a wellness program.

‘‘I think it’s a start,” Balcombe said. ‘‘But we will need to have a good look at the final bill and see how it affects our members. As long as there aren’t too many hurdles to getting the subsidy, it will increase the number of companies providing health care.”

The chamber has advocated for association insurance pools that allow smaller groups to combine employees and negotiate better rates, she said.

Combined reporting dead — for now

Lawmakers’ rejection of a proposal known as ‘‘combined reporting,” which relates to filing state income taxes, was a good sign, Syrylo said. Proponents say that measure is designed to close a loophole that allows multistate corporations to avoid paying taxes by transferring profits to out-of-state subsidiaries.

But it’s not really a loophole, as some companies would have paid less under combined reporting, Syrylo said. And many business executives believe the system would pose enforcement problems and generate relatively little new revenue, Balcombe said.

However, combined reporting is a ‘‘well-established policy to simplify taxes,” Johanna Neumann, a policy advocate for Maryland Public Interest Research Group, said in a statement. More than 40 businesses have joined a coalition supporting combined reporting, she said.

‘‘Corporate tax loopholes will likely gape even wider in coming years as a result of this special session,” Neumann said.

The Greater Brunswick Area Chamber of Commerce sent a letter to state legislators supporting combined reporting, according to minutes of a recent meeting posted on its Internet site. Numerous other chambers opposed the measure.

Combined reporting could resurface, as a Maryland commission will form to review the state’s business tax structure and make recommendations to the governor by late 2011. Members will include representatives from the Maryland Chamber of Commerce, state offices and the Maryland Municipal League.

More questionsover computer tax

The new computer tax will apply to businesses that offer facilities management, custom computer programming, system integration, installation and maintenance. But it will not cover Internet access, computer training, data entry and telecommunications.

It would help somewhat from a competitive standpoint if out-of-state companies that do business in Maryland are subject to the tax, Micheals said. Officials in the Senate committee that introduced the computer tax proposal could not be reached for comment on that.

In general, the sales tax is applied to any company that sends employees into the state to meet with clients or provide services, Syrylo said. But there are stickier questions, such as what happens if several companies partner on a program, she said.

‘‘It can cause administrative nightmares,” Syrylo said. In some states, such as Pennsylvania and Florida, similar laws have been repealed, she said.

Higher taxeson income and sales

Other adopted measures include rises in the corporate income tax rate from 7 percent to 8.25 percent and the sales tax rate from 5 percent to 6 percent, which take effect in January. A proposal to increase the hotel tax was not approved.

The higher corporate income tax rate could hurt the state’s ability to attract new corporations, Syrylo said. Virginia at 6 percent and North Carolina at 6.9 percent will feature substantially lower rates starting next year. Those states also have lower sales tax rates.

‘‘Virginia and North Carolina are the two states that we compete with the most for new businesses,” Syrylo said.

The sales tax hike is a concern because businesses pay about 40 percent of the sales tax, purchasing office furniture, supplies and other items, she said. All total, businesses received an additional $800 million in taxes annually, Syrylo estimated.

‘‘It could have been worse,” she said. ‘‘But we are concerned about the impact on businesses when taken cumulatively.”