Report: Patrick's 'Big Data' Tax Undercuts State's Competitiveness

Gov. Deval Patrick says improving the state’s competitiveness is a cornerstone of his tax code overhaul but a new report from a business-backed group asserts that a tax on “Big Data” proposed by the governor represents a setback for the state’s tech industry and overall business climate.

“The proposed tax on computer and data processing and custom software targets industries that drive innovation, productivity, and economic growth and makes locating or expanding in Massachusetts that much more expensive and unattractive for all businesses seeking to compete in the 21st century,” the Massachusetts Taxpayers Foundation wrote in a report issued Tuesday as House leaders continued to rewrite Patrick’s tax and spending plans.

The report likened the tax to a “Pandora’s box” that raises problems for virtually all Massachusetts businesses. Only a few states have a tax similar to the “unclear and complex” levy proposed by Patrick, which would hit everything from designing a custom website to health care diagnostics on mobile devices, cloud computing, data storage, computer programming and software installation, the report said.

Separately, Associated Industries of Massachusetts, another business group, ripped the proposed tax this week, saying it hits technology tools businesses use to reduce costs, and asserting, “Targeting taxes on the tools of efficiency will throw sands in the gears of an economy already struggling to build up steam.”

According to Patrick’s budget, which includes the tax proposal, the governor hopes to raise $265 million by taxing “custom modifications to software and other computer services.” The administration says 29 states tax modifications to “canned programs” and 14 states tax custom programs.

“With the migration of software first to the ‘web’ and now to the ‘cloud,’ the line between software (currently taxable) and computer services (not taxable) is becoming untenable, and making these distinctions is difficult for DOR and taxpayers,” the administration wrote in a slide show summarizing its proposed tax.

The governor’s tax proposal does not include in its definition of computer and data processing services downloaded books, music, videos or ringtones or computer facilities management services.

Patrick aides defended the governor’s plan by using a fairness argument.

“Contrary to the Mass Taxpayer Foundation’s assertion, the Governor’s proposal brings our tax code into line with the ever growing role technology plays in our economy by drawing very clear lines in the taxation of computer services,” Alex Zaroulis, spokesperson for the Executive Office for Administration and Finance, said in a statement. “The proposal clarifies treatment of transactions that combine both software, which are currently taxable, and computer services, which are currently not taxable. The Governor’s proposal makes our tax system fairer by making sure that business taxes are paid not just by established or declining industries, but also newer, growing ones.”

In his budget, Patrick has proposed a long list of tax code changes, anchored around an income tax hike and a sales tax reduction, which would in totality generate $1.9 billion in new revenue the governor wants to spend on education and transportation.

While it was not part of his 2010 re-election campaign, when Patrick and Lt. Gov. Timothy Murray said they had no plans to raise taxes, the governor’s tax and investment proposal has become a major focus of the governor’s second term. Charles Baker, the 2010 Republican nominee for governor, speculated just before the 2010 election that Patrick would propose an income tax hike, which Patrick did in January. During the campaign Patrick did not rule out raising taxes in his second term and Patrick and Murray credited a blended approach to budget problems - spending cuts, tax hikes and the use of stabilization fund and federal stimulus funds - for spreading the responsibility for closing revenue and spending gaps.

Critics of the governor’s pending tax plan say higher taxes will act as a drag on an already fitful economy, while supporters of higher taxes argue the state must address the longstanding underfunding of its transportation system and inadequate public infrastructure.

Patrick says his plan, if adopted, would put the state on a faster track toward economic growth by boldly addressing infrastructure needs and longstanding problems in the state’s education system, including achievement gaps and uneven access to early education.

“The Patrick-Murray Administration’s proposal creates growth and opportunity through long-term investments in education, transportation and innovation funded by making our tax system simpler and fairer for businesses and working families,” Zaroulis said.

Citing Forbes Magazine and CNBC rankings, the MTF report asserts that Massachusetts already has the second highest business costs in the country. The report also cites a Greater Boston Chamber of Commerce report that the state’s tax burden on businesses is the fifth highest in the country, and claims that Massachusetts ranks “near the bottom for its difficult regulatory climate.”

In addition to citing concerns that application of the proposed tax is dicey due to the evolving nature of technology, the MTF report cautions that the sales tax on computer services will hurt the growing number of companies that rely heavily on remote servers to store and save data and would add to health care costs by adding to the cost of developing electronic health and medical records.

Officials from Associated Industries of Massachusetts indicated earlier this week on their business insider blog that they felt debate over the governor’s plan to raise the income tax had “obscured the fact that the plan also includes more than $500 million in new business taxes.”

In addition to taking issue with Patrick’s plan to “tax cloud computing,” AIM protested a plan to increase taxes on security corporations and utilities by $83 million and to reverse an agreement not to penalize companies for making investments after so-called combined reporting reforms were enacted in 2008.

Patrick administration officials said the business tax burden in Massachusetts ranked 37th in a study conducted by the Council on State Taxation and estimated businesses would see a net $490 million benefit under the governor’s overall tax proposal, with the sales tax falling from the 13th highest to the 36th highest - Patrick has proposed raising the income tax from 5.25 percent to 6.25 percent and lowering the sales tax from 6.25 percent to 4.5 percent.