In Major Shift, Patrick Backs Tech Tax Repeal

Gov. Deval Patrick on Tuesday said he no longer supports a controversial sales tax on software design services, calling it a “serious blot” on the state’s reputation that should be repealed and replaced with another source of new revenue to support transportation investments.

The decision by the governor to seek a repeal and replacement of the computer services sales tax comes amid a fierce and organized push from the business community and some lawmakers to get the Legislature to reconsider the tax. In the face of opposition, lawmakers earlier this summer made the new tax a cornerstone of their $500 million tax package aimed at financing transportation and infrastructure spending and budget initiatives.

As the state struggles to add jobs and with unemployment rising, Patrick last week hosted a summit in his office with legislative and tech sector leaders to discuss concerns over the new tax’s impact on the business climate, and some business leaders left the meeting saying there was no commitment from those in the room to revisit the tax.

After an event Tuesday at Worcester Technical High School, Patrick told reporters he would be working with the Legislature and business leaders to identify a new source of revenue to replace the $161 million counted on in the budget from the new sales tax.

“We had a really good meeting last week and I think that that meeting was useful for some of the folks that were thinking about whether the solution was a narrower interpretation. And I think that the consensus in the room probably was that replacing with something was the better way to go. And I think the hard part now is to figure out what to replace it with,” Patrick said, according to a transcript of his remarks provided by his office.

House Speaker Robert DeLeo and Senate President Therese Murray could not immediately be reached for comment, but issued a joint statement after last week’s meeting in Patrick’s office saying they would continue the conversation with lawmakers in both branches.

If legislative leaders are serious about replacing the software services tax revenue with another source of funding, DeLeo and Murray would have to reopen a debate on taxes that dominated the first seven months of the year on Beacon Hill and led to a major rift with the governor, who had sought $1.9 billion in new taxes.

Though Patrick suggested there is still some question about the impact of the tax on technology companies, he said damage to the state’s reputation is a real threat.

The Massachusetts Taxpayers Foundation released a report this week identifying the tech tax as the broadest and highest tax on software services in the country and asserting that the levy jeopardizes the state’s competitive edge for business development.

“I think it’s a serious blot on our reputation as an innovation center. And we’ve worked really, really hard, together with many of the people who were in that room to raise our profile and to earn our reputation as an innovation hub and we should be concerned about anything that blemishes that,” Patrick told reporters.

Asked to clarify his position on the tax, Patrick said, “Do I still support? I’ve vetoed this, remember. So, no. The question is what do we replace it with?”

Patrick actually first proposed the sales tax on computer and software design services in his $1.9 billion tax reform plan filed in January to finance transportation. Though the Legislature did approve the final tax bill by overriding Patrick’s veto, the governor said at the time that he rejected the proposal because it was too small and revenue relied upon from tolls could not be guaranteed after 2017.

House and Senate Republicans on Monday filed legislationto repeal the tech tax that mirrors a proposal being pushed by the Massachusetts Taxpayers Foundation and other business groups to put a question on the 2014 ballot repealing the tax if the Legislature fails to act.

Senate Minority Leader Bruce Tarr and House Minority Leader Brad Jones said replacing the revenue was “unnecessary,” but suggested it could be found through savings-minded government reforms, future gaming revenues, the legalization of online gaming or other mechanisms that don't require raising taxes.

Tarr even suggested he would be open to tapping into the state's main reserve fund as an "insurance policy" against future economic growth if necessary to win support for repeal.

A number of Democratic lawmakers have also endorsed repeal or expressed concerns about the new tax, including Sen. Karen Spilka who filed similar repeal legislation in the Senate.