State Tech Taxes Face Pushback
As technology continues to advance and expand more states are trying to figure out how to tax these products and services. While the debate over taxing internet purchases has taken most of the headlines states have considered expanding existing or placing new taxes technological services such as software upgrades, network design, and cloud computing.
In an article for Stateline, the Tax Foundation explains that “only 10 states (Connecticut, New Mexico, Hawaii, South Dakota, Mississippi, Missouri, Nebraska, Tennessee, Texas and West Virginia) and the District of Columbia tax all writing or updating of software. Only New Mexico, Hawaii and South Dakota levy their general sales taxes on all software services.”
In a new Research & Commentary, Heartland Senior Policy Advisor Matthew Glans examining state technological service taxes explains that, “Recent efforts to implement these taxes have brought on a massive pushback from industry leaders, and two high-profile tech service taxes—in Maryland and Massachusetts—were rolled back only a year after implementation. Michigan is likewise considering rolling back its tax on cloud computing after several high-tech firms threatened to leave the state.”
Imposing taxes on technological services restricts the potential of one of the few remaining growth industries is likely to drive tech businesses and entrepreneurs to more tax-friendly states.
This week's edition of The Leaflet features research and commentary addressing tech services taxes, sales tax holidays, credit unions, seat time, ethanol and how prescription drugs may be affected by Obamacare.
Director of Government Relations
The Heartland Institute
Research & Commentary: Technological Services Taxes
A recent report from the Bay Area Council Economic Institute found the high-tech sector has grown three times more rapidly than the private sector as a whole since 2004. According to the European Information Technology Observatory (EITO), the high-tech industry has been one of the main forces driving international economic growth. International spending for IT and telecommunications is expected to increase by 5.1 percent in 2013, reaching as high as 2.7 trillion Euros. The growth rate of the U.S. high-tech sector is expected to be 6.5 percent in 2013.
Several states are proposing new taxes on technological services such as software upgrades, network design, and cloud computing. These taxes would impede further growth in the industry.
The appeal of such a tax is obvious: Millions of dollars in new tax revenue could help balance the budgets of states that have yet to recover from the economic downturn. Such a tax, however, places a burden on tech services that is not applied to other products or services. Sales taxes work best when they are applied at a low rate and to a wide base; placing a discriminatory tax on a single industry, as the tech service tax does, serves only to reduce the size of an industry while increasing the cost consumers pay for these services.
Taxes on these services can affect nearly every industry, since virtually all businesses utilize outside companies for software and cloud-computing services to meet their individual needs. The tax will increase the cost of expansion, development, and modernization for nearly all industries, ranging from high-tech biotechnology companies to job-creating manufacturing and retail firms.
According to the nonpartisan Tax Foundation, only 10 states currently tax all writing or updating of software, and three impose their regular sales taxes on all software services. Recent efforts to implement these taxes have brought on a massive pushback from industry leaders, and two high-profile tech service taxes—in Maryland and Massachusetts—were rolled back only a year after implementation. Michigan is likewise considering rolling back its tax on cloud computing after several high-tech firms threatened to leave the state.
Technology companies are strongly attracted to states with a well-educated population from which they can draw talented programmers and developers and a tax system that allows them to make a profit and grow their businesses. Imposing taxes on technological services restricts the potential of one of the few remaining growth industries and drives companies and talent to more tax-friendly states. Lawmakers should implement tax policies that encourage new businesses to enter the state, not drive them away.
Research & Commentary: Sales Tax Holidays
Budget & Tax
Sales tax holidays have become a popular tool for state and local governments hoping to encourage certain types of consumer activity. During a sales tax holiday, state and/or local sales taxes are temporarily exempted or lowered for certain kinds of products. The most common sales tax holidays are applied to school supplies, children’s products, and energy-efficient products and appliances. According to the Tax Foundation, 17 states will hold a sales tax holiday in 2013, two fewer states than the peak number reached in 2010.
Despite their popularity with legislators and some consumers, sales tax holidays are not sound tax policy. Tax holidays attempt to mask the wider problems in a sales tax system by giving consumers temporary relief rather than fixing the actual problem.
In this Research & Commentary, Matthew Glans argues that a state that has a competitive sales tax system does not need sales tax holidays. “State legislators should focus on creating a permanent, less-complicated sales tax system that benefits consumers with lower rates, instead of using a temporary tax gimmick that benefits only a small number of companies.”
Dispute Rising Over Credit Union Tax Exemption
Finance, Insurance, and Real Estate
Tom Gantert, senior capitol correspondent for Michigan Capitol Confidential writes in The Heartlander about recent developments in the debate over the tax-exempt status of credit unions. Gantert discusses how the issue recently came up as part of a possible overhaul of the federal tax code by the Senate Finance Committee. Gantert found that the bill containing the rules is likely to emerge in February or March. In the article, Gantert speaks with representative from both sides of the debate, credit unions and the banking industry.
Research & Commentary: Seat Time
Seat time requirements encourage schools to pass students to the next grade regardless of their retention of the material taught, in order to keep students with peers of the same age group and promote the child’s self-esteem. While some students end up passing classes without actually learning the material, gifted students are forced to waste valuable time because they must wait until the end of the school year to move on to more advanced studies. Thirty-six states have recognized the problems caused by seat time policies and now give districts and schools the autonomy to grant students’ academic credit based on academic proficiency instead of the amount of time spent in a classroom.
Heartland Institute Research Fellow Kellie Slappey suggests one way states could solve these problems is through expanded digital learning. Slappey says digital learning, “involves competency-based learning where students progress once they show mastery of a concept. Seat time policies hinder the expansion and operation of digital learning by valuing time spent on a subject rather than actual knowledge acquired.”
Research & Commentary: Ethanol and Ohio
Compared to most states, Ohio is a very large consumer of gasoline. Although the state does not require gasoline be blended with renewable fuel, ethanol is still frequently blended with the state’s motor gasoline in compliance with the federal Renewable Fuel Standard (RFS). Unfortunately, gasoline with 15 percent ethanol content by volume, or E15, has been shown to damage engines, disable dashboard indicators, and void vehicle warranties. The ethanol industry says such preferences are needed to level the playing field with oil subsidies.
In that case, the proper legislative response, according to the Cato Institute’s Jerry Taylor and Peter Van Doren, should be to “eliminate the objectionable subsidy, not impose a countervailing subsidy.”
If You Like Your Drugs, Can You Keep Them?
Benjamin Domenech points out in Heartland’s weekly health care e-newsletter, Consumer Power Reports that, “One of the major sources of concern for those within Obamacare’s new exchange plans is a simple, problematic question: If you like your prescription drugs, can you keep them?” As Scott Gottlieb a resident fellow at the American Enterprise Institute outlines it could be a real problem for many people, “Simply put, many drugs may not be covered at all, and the costs patients incur by buying them with cash won’t count against out of pocket caps. This has repercussions for drug makers with big portfolios of specialty and primary care drugs (more on that later). But most of all, it has implications for patients.”
School Reform News
The December issue of School Reform News reports the U.S. Department of Education has said states can drop their own student achievement tests in favor of piloting national Common Core tests in spring 2014. This means a potential loss of three years of information on student achievement, because the old state tests aren’t comparable to the pilot tests, and the pilot tests won’t be comparable to the new Common Core tests.
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