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Senate votes to repeal computer services tax

The Baltimore Sun

The Maryland Senate voted last night to repeal the computer services tax and replace it with a combination of cuts and an income tax surcharge on millionaires.

The 30-17 vote sends the repeal bill, backed by Gov. Martin O'Malley, to the House of Delegates. House Speaker Michael E. Busch said passage in the Senate - where the "tech tax" was born - was the "biggest hurdle" to scrapping the unpopular levy. He predicted that even tax-weary delegates would support a temporary tax on millionaires.

"I think we're going to be fine," Busch said. "A lot of time, both houses will mirror each other."

The bill would scrap sales tax on computer services (expected to generate about $200 million a year) and instead impose a three-year surcharge on personal earnings exceeding $1 million. The surcharge, which would affect about 6,000 Marylanders, would create a tax bracket of 6.25 percent and generate about $110 million a year, according to fiscal estimates.

The bill would also cut $50 million annually from the state's $400 million Transportation Trust Fund for the next five years and direct the governor to trim an additional $50 million from his budget by July 1, the date the computer tax is scheduled to take effect.

Despite Busch's optimism, some House lawmakers are gearing up for a tough floor fight and say they will not act as a rubber stamp for the Senate.

"Where this sits is very unclear, and it's even unclear within the Ways and Means Committee," where the repeal bill will be heard, said Del. Brian J. Feldman, a Democrat and the chairman of the Montgomery County delegation .

The state's wealthiest county is a hotbed of opposition to the computer tax, but it also stands to be hit hardest by a high-earners' tax.

"A majority of the Montgomery County delegation have a lot of concerns," said Feldman, who said he hopes lawmakers will consider making deeper cuts in O'Malley's spending programs before raising taxes.

"Maybe this isn't the time for new initiatives," he said.

Del. Christopher B. Shank said House Republicans consider the computer tax "hastily enacted and ill advised" but would not support the Democratic majority's alternative tax on millionaires.

"Their solution is to impose yet another tax is not necessary on a segment of the economy that can easily leave the state, find tax accountants and other tax avoidance strategies," said Shank, a Western Maryland Republican. "It sends yet another message about Maryland's negative business climate at an extremely bad time."

Republicans tried unsuccessfully yesterday afternoon to change the proposal on the Senate floor, offering amendment after amendment to replace the tax on millionaires with a variety of additional cuts in a budget that has been trimmed $1 billion since O'Malley took office.

Sen. David R. Brinkley, the minority leader from Frederick and Carroll counties, tried to replace the income tax surcharge with trims from state funds dedicated to transportation, the environment, health care and higher education. He also proposed using part of the Maryland Auto Insurance Fund's surplus.

"There are alternatives to raising the income tax yet again," said Brinkley, who also tried to make the case for using more of the state's general fund reserves.

Democratic leaders said current economic conditions made that a dangerous proposal. They said the wealthiest Marylanders ought to accept a temporary tax hit rather than see a cut to programs benefiting the poor and the environment.

"If I were a millionaire in the state of Maryland, I would want a state that takes care of poor people," said Sen. Thomas M. Middleton, chairman of the Finance Committee. "I would want to protect the Chesapeake Bay."

The average millionaire in Maryland earns $3 million a year and would pay an extra $17,000 a year under the surcharge, according to legislative analysts.

Before the Senate vote yesterday, O'Malley, long a backer of more-progressive income taxes, characterized the tax on millionaires as a test of patriotism. "I do not think it's unfair, nor is it unreasonable, to ask these patriotic neighbors of ours to contribute an additional three-quarters of a percent to defending our state and keeping us strong in these tough times," he said.

State Comptroller Peter Franchot, who has said the computer services tax would be difficult to enforce, congratulated O'Malley and the Senate leadership for persuading legislators to change course.

"I commend Governor O'Malley and the legislative leaders for their responsive and responsible action," Franchot said in a statement. "We are sending the correct message that we intend to grow this critical industry and remain a national leader in the life sciences and technology sectors."

Repeal of the computer services tax would be a major victory for business groups that warned the levy could destroy Maryland's high-tech industry. But the proposed alternative has received a cold reception from some business interests who lobbied hard for a repeal.

The Maryland Chamber of Commerce opposes increasing the income tax, and the Greater Baltimore Committee yesterday criticized the legislature for dipping into the transportation fund.

Sun reporter Laura Smitherman contributed to this article.

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