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Technology industry: Pennsylvania governor’s proposed tech tax would cost jobs

By   /   May 23, 2017  /   News  /   No Comments

Pennsylvania Gov. Tom Wolf has proposed what’s been dubbed a tech tax to help balance the budget this year, but technology firms in the state are booting up an opposition campaign against a revenue plan they see as a job killer.

“If adopted, this tax will impact nearly every business in the Commonwealth,” says a post on the Pittsburgh Technology Council website. “Representing a $330 million tax increase on Pennsylvania’s technology sector, this is the highest business tax proposed this year by Governor Wolf.”

The proposal, which was part of Wolf’s budget package announced in February, would be a repeat of a computer services tax that was adopted in 1991 but repealed only six years later through bipartisan efforts, according to Brian Kennedy, the technology council’s senior vice president of operations and strategic programs.

“In Pennsylvania, the industry is mature and it’s really driving the growth of Pittsburgh,” Kennedy told Watchdog.org.

Wolf’s proposal would extend the state’s 6 percent sales and use tax to an array of technology services, including web hosting, applications software programming, software consulting, system design, hardware consulting and data processing.  In Allegheny County, a 1 percent local sales tax would bring the total tax to 7 percent.

“We’re surrounded by states that aren’t faring as well as Pennsylvania,” Kennedy said, adding that they would offer Pennsylvania tech companies financial incentives to relocate across the state border if the tax were to pass.

Kennedy is also optimistic state lawmakers can be educated about the tax and that they will keep it from being enacted. About 1,600 letters opposing the tax have been sent to legislators, he said.

“I have no doubt we’re going to defeat this,” Kennedy said.

Sharing his views is the House Speaker, MikeTurzai, R-Allegheny, who plans to run for governor. Turzai opposed the tech tax and Wolf’s other proposals to boost revenues, calling the tech tax a job killer.

“Pennsylvania has seen tremendous growth in the technology sector over the past two decades,” Turzai said earlier this month in a prepared statement. “These are good, family-sustaining jobs that could easily be moved out of state.”

But others say the tech tax may gain support from lawmakers looking for ways to close a revenue shortfall that may approach $3 billion by next year. The governor’s framing of the issue as closing “special-interest tax loopholes” for custom software and computer services – rather than a tax hike – could make it more palatable, according to Rep. Jeffrey Pyle, R-Ford City, who sits on the House Appropriations Committee.

“Sales tax collections have suffered a huge decline because of the advent of Internet shopping,” Pyle told Watchdog.org. And others have pointed out that a shift in the U.S. economy from manufacturing to services has caused challenges for state governments’ revenue streams.

“We’ve got to adjust to changing times if we are going to pump out all these services,” said Pyle, whose caucus remains opposed to raising taxes.

Those areas of the state that are more dependent on technology companies will be more reluctant to back the tech tax, he said, while state lawmakers representing other areas might be OK with it, he said.

In the case of technology-related taxation issues, the federal government may need to step in to give states direction and even the playing field, Pyle said.

“What needs to happen is we need a federal policy that addresses this through interstate commerce,” he said.

The  tech tax has tended to unite those in the technology industry, who view the growth of well-paying technology jobs in the state as key to transforming what had been considered a Rust Belt economy.

Paul Mathison,  who founded the technology consulting firm pjmathison, warns that computer services are the most mobile kind of business activity and that they could easily relocate elsewhere if the tax were imposed. States adjacent to Pennsylvania don’t have such a tax and would immediately become more competitive if it were adopted by elected officials in Harrisburg, Mathison said.

“If tech stakeholders’ voice is not loud and persistent enough, then, yes, lawmakers could support [the tech tax] in sufficient numbers to pass it,” he told Watchdog.org in an email.

Mathison also questioned the tech tax idea as a fairness issue and asks why elected leaders have not proposed extending the sales and use tax to other professions, such as legal services and accounting.

Caleb Abraham, the CEO and founder of Crafton-based SewnR, which does software consulting and app development, said he would consider relocating if the tax were adopted in the state. Employees who work on custom software earn six-figure incomes, making labor costs for such companies very high and profit margins slim, he said.

Abraham doesn’t see how his clients could afford an additional 7 percent sales tax. It would strangle an up-and-coming industry, according to Abraham, who runs a lean five-person operation.

“Commercial apps cannot get much more expansive,” he told Watchdog.org. “It’s already a high cost to create one [and] not necessarily a high profit to operate one. Targeting such a young enterprise is the issue.”

Even though well-known companies such as Apple and Google are expanding their presence in the state, the tech industry remains young, and the smaller firms will be hurt most by such a tax, Abraham said.

“It’s not yet like Silicon Valley,” he said.