The Tech Tax Squeeze

If those who cannot remember the past are condemned to repeat it, then a number of legislators should be looking over their shoulders, wondering whether their time in office is near an end. That’s what happened in 1990, when the state expanded the sales tax to cover all manner of services — from lawyering to dog-walking — and voters erupted in anger, ousting Democratic incumbents and propelling a Republican to the governorship. The same may happen in 2014.

Free-spending politicians are revenue-hungry, constantly seeking new and uncomplaining sources of revenue. And so one can imagine the chortles of delight that must have greeted the idea of extending the sales tax to cover computer services. After all, tech was doing well — rapidly growing and highly profitable. Surely they wouldn’t mind a paltry 6.25 percent. Even better, the industry had a reputation for being politically naive. The mistake of 1990, the argument would have gone, was in going after lawyers. Law firms are key funders for political campaigns; soaking them for more proved a problem. Techies, on the other hand, are generally disengaged from politics. Heck, many of them don’t even have real offices. They might squawk, but they could be safely ignored.

At first that calculus seemed right. Earlier this year, Governor Deval Patrick proposed a host of new taxes, including expanding the sales tax, as part of his plan to spend $1.9 billion on transportation and education. The Legislature pushed back. Unlike Patrick — in his last term and worried about a legacy, not a reelection — lawmakers were wary of asking for too much. Much to Patrick’s dismay (and over his veto), they cut down the package. Still, the sales tax on computer services remained. At the beginning of August, it took effect.

And people are getting upset.

The law itself is a confusingly written mess. If I create a new piece of code for your computer, that’s taxable. But if I re-write your Windows registry because it was corrupted by a virus, apparently that’s not. (As one blogger intimated, expect, as a result, to see a sudden spurt of malware-related issues.) Then, too, the idea of going after tech to improve our roads and bridges is odd. If there’s one group of folks that don’t make much use of transportation, it’s software writers. Their products don’t ship by truck, a number work from home, and when they do travel many would sooner don spandex and a bike helmet than take a car.

Poorly crafted laws can be fixed, however. The problem with this tax is that it threatens to undermine the Bay State’s economy. Only three other states tax high-tech services the way Massachusetts now does (Hawaii, New Mexico, and South Dakota — none of them tech powerhouses) and the new tax now puts us at a competitive disadvantage to everyone else. Moreover, high tech is — of all businesses — one of the most easily mobile. Relocating out of the state to a friendlier clime is simple, and already states such as Florida, seeing an opening from this latest effort to revive the Taxachusetts label, are making appeals.

The Massachusetts High Technology Council and the Massachusetts Taxpayers Foundation have now joined forces to push for repeal. Their plan is to put a referendum on next year’s ballot, and — to prove how serious they are — they’ve engaged heavyweight lobbying firm Rasky Baerlein to manage the process. My guess is that early polls will show repeal has a lot of popular support, particularly as voters start to figure that this new tax is just the nose under the camel’s tent — first comes high tech, but pretty soon, greedy political eyes will alight on everyone else. One can easily see this become a defining issue of next year’s campaign.

In the interim, perhaps cooler heads will prevail. The mere threat of a ballot question has been used before to force action. A 2012 ballot push to change how teachers are evaluated pressured unions to agree to a legislative solution. The “right to repair” question, also in 2012, caused both sides to come up with a compromise. That may happen this time around. It’s either that or watch as 1990 plays out once again.