Massachusetts Targets Tech Sector for Revenue
With a pool of tech-focused firms and a slew of graduates from top-notch universities like MIT and Harvard, it’s no surprise that Massachusetts is home to a flourishing tech economy. What is surprising, however, are recent tax hikes targeting this sector of the economy, which is recognized as the state’s saving grace amid high unemployment rates and languid economic growth.
Legislation passed last month—referred to as the “tech tax”—levies a 6.25 percent tax on software sales and services in order to raise the required funds to pay for roads in need of repair. The legislature expects the tax to raise $161 million in revenue, but many disagree with that estimate.
Since the language of the law is vague enough to capture innumerable technology services that businesses regularly buy and sell, private sector leaders predict the tax will not only increase uncertainty and confusion for business in the state, but will likely rake in at least three times more money than needed to fix the roads–all at tech companies’ expense.
Tech-focused firms in Massachusetts are already feeling the heat. Peter Winston, CEO of the Massachusetts-based business Integrated Computer Solution (ICS) “specifically sought out Massachusetts as the location to start his business in 1987,” but is now looking to slow hiring practices or move out of state.
Six percent is a high tax rate and Winston says that “if [the business] can’t pass it on, if [the business] can’t swallow it somehow, it dramatically kills [the business’] profits.” But, what really concerns business leadership is the uncertainty generated by the tax.
Not only are companies scrambling to determine how the tax will impact their bottom lines, but tech firms are now forced to pull back on hiring and investment practices. According to Winston, ICS is “seeing where the wind blows” for now, but “without the uncertainty, [he] would be one notch more bullish.”
Implementing the tax is another point of confusion. Since companies are responsible for ensuring customers pay the taxes—and are held liable if customers fail to pay—small and large businesses alike are forced to spend resources trying to determine how to charge the tax on the various services they provide.
The Information Technology and Innovation Foundation’s (ITIF) New State Economy Index consistently ranks Massachusetts number one for its competitive, innovative, and tech-centered economy. The state has long relied upon the burgeoning high-tech industry for its economic well-being. In fact, Governor Deval Patrick, recognized the Massachusetts innovation economy as “one of the reasons why [the state is] growing jobs faster than most other states” and why Massachusetts’ economy kept churning as other states’ economies suffered post-Great Recession.
However, according to ITIF, states like Delaware, Washington, California and Maryland are closing in on the lead spot. Given the importance of the tech sector to the state’s economic health, Chris Anderson, president of the Massachusetts High Tech Council wonders “why would [Massachusetts] want to blunt that edge, and let other states get ahead of us?” And that’s a good question.
Hiking taxes on the tech industry—responsible for much of the states’ economic growth—certainly won’t do Massachusetts any favors. High taxes have been found to increase costs and chill business activity and investments. An increasingly global economy means that U.S. companies have more options than ever to move business to other states and even overseas to escape higher costs. If these companies leave the state, they will take the entrepreneurial activity, technology and innovation–the areas where the U.S. has a competitive advantage–with them.
As ALEC’s Rich States, Poor States study has demonstrated for years, states that spend less and tax less create policy environments that encourage entrepreneurial business practices, innovation and investment—resulting in higher growth rates. States like Massachusetts seeking to promote tech-focused economic growth must limit taxes on the high-tech industry in order to allow the private sector to invest and innovate.