Legislators took a first step yesterday toward repealing Maryland's new computer services tax and replacing it with an income tax surcharge on millionaires, the most significant victory yet for business groups warning that the levy could destroy the state's high-tech economy.
The Senate Budget and Taxation Committee voted 10-5 for the repeal plan, which also calls for cuts to transportation funding and to other state programs. Senate President Thomas V. Mike Miller praised the committee members for a "courageous vote" but predicted a "much more" contentious hearing before the tax-weary lawmakers in the full Senate.
"Everyone knows that by casting a vote" for any tax increase "they'll get nine pieces of direct mail" from opponents in the next election, Miller said.
Under the bill backed by Gov. Martin O'Malley, the $200 million sales tax on computer services, scheduled to take effect July 1, would be scrapped and replaced with about $110 million in annual revenue generated by a new income tax bracket of 6.25 percent for earnings above $1 million. The income tax increase would expire after three years.
The bill would also cut $50 million from the state's $400 million Transportation Trust Fund for five years and direct the governor to trim an additional $50 million from his budget by July 1.
The bill now goes to the full Senate for consideration. The House of Delegates has not yet taken up a computer services tax repeal proposal.
"We couldn't be more appreciative," said Julie Coons, chief executive officer of the Tech Council of Maryland, which has been one of several business groups whose lobbying has won over O'Malley and other top Democrats.
House Speaker Michael E. Busch called the bill the "best compromise that can come about, and we'll make every effort in the House to conform to it."
Since coming up with the tax-repeal proposal during a closed-door meeting with top lawmakers last week, O'Malley and Miller have been personally lobbying legislators for votes. Passage in the Budget and Taxation Committee was seen as a crucial hurdle because the 15-member panel has four Republicans, plus three Democrats from Montgomery County -- the state's wealthiest jurisdiction, where an income tax increase on the rich is unpopular.
Sen. Nancy J. King of Montgomery voted for the bill, as did Sen. Bobby A. Zirkin of Baltimore County. Both had said they hoped the "tech tax" could be repealed without additional tax increases. Zirkin was one of the few outspoken opponents of the computer services tax when it was slipped in during the final days of last year's special legislative session.
Sen. Donald F. Munson, a Washington County Republican, was the only GOP member to vote for the bill. He said he did so in part because he hoped the O'Malley administration would help persuade the House to reverse significant budget cuts to a higher education center in Hagerstown.
While no lawmakers spoke in favor the computer tax, some members of the Senate's tax committee argued for using budget cuts alone to compensate for its repeal, saying that the millionaires levy was effectively a tax against hundreds of small business owners who file personal income taxes rather than corporate income taxes.
"I just don't see how, at a time when we're unwilling or unable to move forward with the computer services tax, that we should move forward with another tax on small businesses," said Sen. Richard Madaleno, a Montgomery County Democrat who voted against the bill.
Warren Descheneaux, the General Assembly's top fiscal adviser, told the panel that the income tax increase would affect about 6,000 Marylanders with average annual incomes of $3 million. He said he did not know how many of those filers are businesses that pay personal rather than corporate income tax because they are operating as sole proprietorships or as "S" class corporations.
Earlier yesterday, after a Board of Public Works meeting, O'Malley said it "isn't unreasonable to ask those patriotic citizens to pay an extra percentage" on incomes over $1 million.
Lawmakers struck down an amendment proposed by Madaleno to scrap the millionaires' tax and instead take $150 million from the transportation fund.
Joseph C. Bryce, O'Malley's chief legislative aide, asked senators to resist that approach, saying the state's transportation needs were severe and could only withstand a small cut without affecting "nuts and bolts maintenance" and "system preservation."
AAA Mid-Atlantic spokeswoman Ragina C. Averella said in a statement that the $50 million annual cut would jeopardize the state's ability to maintain its roads and to cope with traffic congestion.
"While we recognize the financial crisis facing state legislators, hopefully, [legislators] will realize that raiding an already neglected Transportation Trust Fund is not the answer," Averella said. "Funding our state's transportation system is a critical need and we urge them to vote against this bill."
gadi.dechter@baltsun.com
Sun reporters Bradley Olson and Timothy Wheeler contributed to this article.