Other states show that ‘tech tax’ doesn’t work

WHILE Oklahoma's $878 million budget shortfall is a problem, the biggest challenge of this year’s session may be keeping lawmakers from making things even worse.

Rep. Jason Murphey, a Guthrie Republican who heads the House Government Modernization Committee, warned last week that lawmakers are considering a new tax on information technology services in Oklahoma. Legislators need to “realize the great harm that the pending services tax on technology is about to create,” Murphey said.

He pointed out that those who doubt it need only look at outcomes in other states that tried similar taxes.

In 2013, Massachusetts officials expected to generate $160 million per year by applying that state’s 6.25 percent sales tax to 10 categories of computer and software services. Partly because of the law’s vague wording, business officials soon predicted the true impact would reach $500 million annually. Tech companies quickly threatened to leave the state.

At that time, researchers at the Massachusetts Taxpayers Foundation found 40 states did not apply sales tax to computer design systems at all, and four other states that did tax those services did so at a lower rate. Two states that taxed tech services also offered significant incentives to high-tech businesses to offset the tax’s impact.

Business officials quickly began a petition effort to force a public vote to repeal the tax. Deval Patrick, the Democrat who was governor at the time, initially defended the tax, but soon reversed course. After meeting with tech leaders, Patrick called the tax a “serious blot” on the state’s reputation. Instead of waiting for voters to repeal the tax, Massachusetts lawmakers did it themselves. The repeal passed the state Senate 38-0 and the House 156-1.

In 2007, Maryland lawmakers voted to apply a 6 percent state sales tax to computer services, including data storage, hardware and software installation and technical support. As in Massachusetts, critics noted the Maryland law was vague, and that technological advances made it difficult to define something as simple as a “computer” since many phones would qualify. Local companies said the tax could force them to relocate, and Virginia officials actually began citing the tax in recruitment pitches to Maryland firms.

Maryland officials ultimately repealed the tax before it took effect. Keep in mind, that repeal occurred in a state that raised taxes 40 times during Democrat Martin O’Malley's time as governor. Yet even in Maryland, the “tech tax” was considered too destructive to preserve.

Similarly, Pennsylvania adopted a “tech tax” in 1991 and repealed it by 1997.

Murphey warns the tax proposal under discussion in the Legislature may be even broader than the one repealed in Massachusetts, potentially applying even to “the entering of data into a computer.”

The experience in Massachusetts “shows that trying to put a services tax on information services is a Pandora’s Box of unanticipated outcomes that cause absolute havoc on many areas of the private sector,” Murphey says.

Indeed. If politicians in some of the nation’s most liberal tax-and-spend states concluded a “tech tax” was economically devastating, that’s a clear sign Oklahoma lawmakers should do the same.