Much respected fiscal analyst Michael Widmer has issued a severe critique of the portion of Governor Patrick’s tax proposal that would expand the sales tax to include transactions in the computer software and data processing fields, calling the proposal a “Pandora’s Box”, making the point that this new levy will undercut the “competitiveness of the state.”

Widmer breaks his argument into four parts. The first is that the State of Massachusetts, on balance, is not business competitive as far as taxes go, and this levy will make that situation worse.

Companies of all sizes rely on technology to improve and grow, and taxing it would add to their costs of doing business. Massachusetts already has the second highest business costs in the country, behind only Hawaii.The state’s tax burden on businesses is the fifth highest in the country, according to the January 2013 report from the Greater Boston Chamber of Commerce. The state also ranks near the bottom for its difficult regulatory climate. Since so few other states have a similar tax, it would be one more factor that makes Massachusetts the most expensive place in the 48 contiguous states to run a business.

On balance I have less empathy for that argument than his others. The cost structure of the Commonwealth can be fairly criticized, but until someone decides that Massachusetts will do less in terms services then the overall tax burden must be shared equitably, which might mean extending the sales tax to some items currently not covered.

His second argument catches my attention, and may in fact have some merit. Widmer argues that the definitions of the computer services involved are unclear, and will lead to tax assessments being made on a subjective basis.

The tax is unclear and complex. Computer services and data processing are abstract and hard to define, making the boundaries of this tax blurry and uncertain. At a minimum, the Governor’s proposal would tax an enormous swath of technological tools and services such as custom-designed websites, cloud computing, data storage, computer
programming, and software installation. The current proposal uses nearly a dozen vague categories to describe computer and data processing. With such a nebulous definition, the application of this tax will be almost entirely subject to interpretations that can vary widely from person-to-person, business to-business, and state-to-state. For example, compare how Texas and Connecticut treat computer and data processing: Texas includes word processing, data entry, payroll and business accounting data, data search and storage, preparing payroll checks, and preparing W-2 forms. Connecticut covers storing and filing digital information, consulting services, and feasibility services.

I have not read the specific language but would give this point to Widmer. The language must be as clear and specific as is possible to avoid the types of potential problems highlighted by Widmer. But to be fair any legislative language can be tightened and improved. I am sure the Legislature could do so here.

Widmer’s third point is that the new industry phenomena known as “Big Data” would be impacted negatively just as Massachusetts is trying to make our State a “Big Data” hub, creating jobs and economic opportunity.

The tax targets cutting-edge innovation and has a particularly costly impact on Big Data, the burgeoning technological field that the Governor hopes will be a significant driver of the state’s economy.Big Data refers to enormous data sets that companies analyze to understand their customers better and make important scientific advances in fields such as weather forecasting, molecular modeling, and genetic sequencing. This sector relies heavily on
remote servers to store and save the data, which can only be accessed through the “cloud”—all functions that would be subject to the sales tax under the Governor’s proposal.The proposed tax would send a strongly negative message to the very industry the state is trying to attract and stymie growth at those Big Data companies already based in
Massachusetts, which the Governor’s office estimates employ more than 12,000 residents.

I am going to give that point to Widmer too, although I question whether the impacts would be as potentially severe as he outlines. An incubator period might be worth a look for an industry with so much upside potential to provide jobs and economic development to the State. It is certainly worth a discussion in the Legislature.

The fourth point is that the proposal would impose a tax on the development of electronic medical records, a major goal in the delivery of health care. On this one I come down squarely with Widmer. Health care software and records will need to be exempted, in my opinion, because we cannot be adding even a little expense to our health care system.

Governor Patrick responded to the criticism with the State House News Service:

Patrick said he disagreed that the tax change would make Massachusetts less competitive. “These are companies that are dealing nationally and the majority of states treat these matters exactly as we have proposed. Again, this is not something I proposed lightly, but it’s not like it’s an outlier by any means,” he said.

The Massachusetts Taxpayers Foundation has advocated for additional revenues for transportation, but I think it fair to say that the business backed group does not support the full package of $1.9 billion of revenue increases advocated by Governor Patrick. Widmer has given the Legislature some more to think about. I hope to have him on my radio show in the very near future.