Letter to MDGA Regarding the Proposed Budget Bill (January 26th, 2012)

Dear Senator Gladden, Delegates Rosenberg, Carter and Oakes, and the honorable chairs of the State Senate and House,

I am writing to you today as a resident of the 41st district to oppose the proposed bill titled “Budget Reconciliation and Financing Act of 2012”. Specifically, there are three things in this bill that I would like to draw attention to: increase in income taxes for high earners, taxation of digital goods and taxation of out of state Internet companies with affiliate relationships in the state.

1. Increase in income tax.

a. The O’Malley administration seeks to lower the maximum allowed exemption amounts and deductions for earners over $100,000, effectively raising their income tax rates. As past history has shown, raising taxes on higher end earners does not work. Specifically, the administration has tried imposing a surcharge on earners of over $1 million several years ago, which not only did not bring in more money but caused the state to lose revenue because people moved out of state (as per this WSJ article). Raising taxes on the high earners over $100,000 may have the same effect of driving people to live elsewhere.

b. Furthermore, people earning larger amounts of money generally do not report them via their personal returns. For example, the WSJ estimates around 2.86 million people in the US are millionaires in 2010, yet according to the IRS statistics for 2009 only about 286,000 personal returns with income over 1 million were processed. That means that only about 10% of high income earners actually report that via their personal returns. The rest goes through investments, trusts, corporations, foundations, etc. With higher income taxes in lower brackets, the same may happen with income being routed away from personal returns and into a variety of financial instruments, which may not be even taxable within the state. Anyone making over $100,000 can probably afford a creative CPA who can figure out ways to get around the higher taxes, and at the worse can afford to move out of state somewhere more friendly tax-wise.

c. Last, our economy is still doing pretty badly. Why raise taxes in a bad economy – are we trying to make people more poor on purpose?

2. Taxation of digital goods.

Another set of provisions that are concerning is taxation of digital goods. This provision will only serve to drive digital based business out of state. While I sympathize with local brick and mortar businesses that feel that online competition selling digital goods is not fair, taxation is not the main issue here. Rather, entire industries and business models are being upended by move to the digital realm and adding taxation to this will only serve to drive digital businesses that we need out of state and delay the inevitable changes. Instead of taxation, we should look at ways to modernize the tax system in the digital age, while providing a pathway for existing business to modernize and move online.

Furthermore, most of the larger companies that sell digital goods are not even based in the state and would not be affected. Examples are Amazon, Apple, the Wall Street Journal, etc. Ironically, the ones hit the hardest would be newspapers like our local Baltimore Sun that only recently begun to sell subscriptions.

Last, these provisions will create an unintended consequence of taxation of services – an approach that has been rejected in the past by the citizens and the General Assembly. For example, the proposed bill would tax “fabrication, printing, or production of tangible personal property OR A DIGITAL PRODUCT by special order”. By the currently language of the law it seems to include graphics design services for blogs, music creation and mixing, book writing and editing, and even writing articles for hire like newspapers. All of these are “created by special order” and are “digital products”. It sounds eerily similar to the proposed software services tax from several years ago. In today’s world where books, music and news are almost always produced and exchanged digitally, this would potentially impact harmfully many small business and freelancers that work in the music, publishing and news industries. It would create a strange exemption where something on tangible media would not be taxed which would make a book editor liable for taxes for emailing a manuscript to a client but not for burning it to a CD and mailing that.

3. Sales tax on Internet sellers with affiliate relationships.

Another provision that deserves criticism is trying to get around the nexus requirement established by the Supreme Court in Quill vs. ND by making affiliate relationships tie a vendor to the state. Every single state that has tried this law ended up losing money because out of state companies simply terminate affiliate relationships, resulting in thousands of lost jobs and closed businesses. Instead of doing this constitutionally questionable maneuver why not do what the Supreme Court itself said would be a solution – simplify the state sales tax system by joining the growing Multi state sales tax compact and lobbying Congress to change the law. This solution would enable the state to collect taxes not just from online businesses, but also from catalog companies and other similar out of state sellers.

Furthermore, there are online companies already based on other states that do act as affiliates for merchants and then cut deals with in state residences in a way that bypasses the proposed law.

4. Other ideas.

Instead of raising taxes, and stifling the rapidly developing digital world, how about cutting costs? For example, state employees currently get benefits no longer offered in the private sector. Why not bring those into parity? Another example, is going after the Homestead credit and those who abuse it. Baltimore City has recently done that after a Baltimore Sun story and is schedule to get millions. Another idea is having a state wide Inspector General office just like Baltimore City, which has already recovered millions for the city.

Additionally, another disgusting practice that has to stop is moving money from funds designated for specific things to the general fund. The proposed bill takes money collected from the gas tax and transfers it to the general fund. Instead of doing that, how about spending that money on fixing roads? Another example, is the money from slots which is supposed to go towards education. Instead, we currently have places like Baltimore City looking to borrow over 1.2 billion dollars to pay for school repairs while we, the citizens, were promised loads of money from slots for exactly that.

In closing, I would like to add that many of the younger citizens of the state like myself are much more familiar with technology that lawmakers and would be happy to educate your members. Perhaps, another idea would be to get some technology briefings to members of the General Assembly explaining a lot of these issues, and I am sure many technology savvy citizens and constituents would be happy to help.

Respectfully,
Yakov Shafranovich

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