Maryland's "tech tax" is dead.
The House of Delegates passed a bill yesterday evening repealing the new sales tax on computer services, wiping the unpopular levy from the books before it could ever go into effect.
"I'm looking forward to signing it," said Gov. Martin O'Malley, a Democrat, after the 93-44 vote. "We're repealing a tax that hits a lot of growing small businesses and entrepreneurial people, the very sort of creative people that we want to encourage to stay."
The repeal bill, which has already passed the Senate, replaces the computer tax with a combination of cuts and a three-year individual income tax surcharge on earnings of more than $1 million.
"I think it would have been a huge mistake to leave here without repealing that tax," said House Speaker Michael E. Busch, an Anne Arundel County Democrat. "The essence of the growing economy in Maryland ... really revolves around the success of the technological fields."
The extension of the state's sales tax to computer services such as Web design and database management has never been popular in the House, where it was accepted by lawmakers as a last-minute compromise during November's special session of the General Assembly.
Business groups argued that the tax, which would have gone into effect July 1, would have sparked an exodus of computer services firms from Maryland, a fear stoked by recruitment letters from Pennsylvania and Delaware that started appearing in some companies' mailboxes. Some firms said they were already talking to real estate brokers in neighboring states.
Although the Senate struggled for weeks to build a coalition around a repeal plan, the measure, approved by that chamber last week, sped through a House committee hearing and onto the floor within 24 hours.
"I urge you to kill this thing right here, right now on this floor," Del. Kumar P. Barve, the majority leader from Montgomery County, told his colleagues during last night's debate.
The House action caps a drastic about-face by Senate leaders and O'Malley, who just weeks earlier said it was unrealistic to try to repeal the new levy.
"There is no sin in saying you are wiser one day than you were before," Senate President Thomas V. Mike Miller said yesterday. "Although this seemed like a very viable option at the time, and I believe it could have worked well for the state, there were others who didn't want to take the risk of people moving jobs out of the state."
As he had on the first days of the General Assembly session in January, Tom Loveland, an Owings Mills entrepreneur and co-founder of a lobby group dedicated to the tax's repeal, watched the lengthy proceedings yesterday from the visitors' gallery.
Three months ago, Loveland and his BlackBerry were alone in the balcony, and he considered the chances of a tax repeal "extremely low." But yesterday afternoon, Loveland was flanked by two of four lobbyists hired by the Maryland Computer Services Association, and he was joined for a few minutes by O'Malley, dressed in blue jeans, who was also checking out the floor action.
"Things are a little different now, aren't they?" Loveland said of the governor's newfound support.
House leaders spent much of the day lining up votes, both in the Ways and Means Committee and later on the floor, and as the day neared a close, many were pleased to be on the eve of a repeal.
The computer tax "would have branded us as an anti-high-tech state, and I'm very happy we've repealed it," Barve said. "It's one thing to make a mistake, but it's a very important to be able to recognize that and correct it."
Barve said the repeal bill was "not a perfect solution" but a good compromise.
Under the legislation, the $200 million sales tax on computer services, scheduled to take effect July 1, is 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 expires after three years.
Those who will be subject to the tax earn on average $3 million a year and will pay an extra $17,000 a year under the surcharge, according to legislative analysts.
The bill also cuts $50 million from the state's $400 million Transportation Trust Fund for five years and directs the governor to trim an additional $50 million from his budget by July 1.
Democratic leaders employed a number of measures to sweeten the deal for delegates on the fence, including linking an additional $30 million for the Inter-county Connector, a long-awaited highway from Rockville to Laurel, to passage of the millionaires' tax.
In a repeat of last week's Senate debate, delegates rejected amendments proposed by Republicans and a Montgomery County Democrat, who tried to persuade colleagues to replace the millionaires' tax with reserves from the state's general fund. Montgomery is the state's wealthiest county and would be disproportionately affected by a high-earner's levy.
"We taxed our citizens in November," said Del. Charles E. Barkley, a Democrat from Montgomery County. "I do not believe we come back two months later and say, 'Whoops, we didn't do it right; we need to do it again.'"
But the House rejected Barkley's amendment. Other lawmakers said the state needs to maintain sizable reserves because of economic uncertainty.
Del. Anthony J. O'Donnell, the minority leader from Southern Maryland, proposed replacing the millionaires' tax with savings from elimination of 900 vacant state positions. He also suggested taking $50 million from the Maryland Automobile Insurance Fund, the state's insurer of last resort.
Del. Michael D. Smigiel Sr., an Eastern Shore Republican, warned that the new tax would cause high earners to leave Maryland.
"They're not just going to take this money and hand it over," Smigiel said. "If you punish those who are out there bringing in money for the state of Maryland ... our problems will be compounded."
But John Eckenrode, head of a Catonsville computer services firm and a co-founder of the Maryland Computer Services Association, called that argument "totally vacuous."
Eckenrode is one of roughly 6,000 Marylanders earning enough to be affected by the millionaires' tax, and he said he hopes his fellow high earners will decide the alternative levy is an "eminently fair trade-off" for eliminating the computer tax.
"How can somebody making a million dollars a year complain in the face of saving an industry that surely would have been incredibly hampered?" he said.
Sun reporter Laura Smitherman contributed to this article.
The 2008 General Assembly session ends tomorrow, but lawmakers still have some major issues to resolve:
Gov. Martin O'Malley's proposed settlement with Constellation Energy Group.
Restrictions on greenhouse gas emissions.
Maryland Auto Insurance Fund reform.
Ban on electronic bingo machines.
Public safety and DNA samples.
Special congressional election in the 4th District.