Why is PA Tech Tax is bad for the Commonwealth?
The current administration in Harrisburg is trying to enact a new “Tech Tax” to fill a budget hole in PA. The tax would be levied on technology services such as programming, software services and many other related services (for a full list see here: http://www.pghtech.org/no-tech-tax-in-pa.aspx). Singling out the tech sector for increased taxation sends a bad message and will likely cause that sector to shrink. We need to ensure that the proposed tax hike on our tech sector does not make it through to the next budget.
In economic theory taxes levied on an economic sector industry have several roles. One role, of course, is to collect revenue for the government so that the government will be able to provide services we rely on, such as healthcare, education and transportation – providing those services responsibly is a good thing as long as they are equally funded by all sectors. Another role is to offset external costs caused by the entity that is taxed. For example, the government would target an industry for taxation if that industry would use a lot of state or natural resources, potentially cause pollution which the state would ultimately have to clean, or increase healthcare costs for the population by polluting or depleting natural resources. A rational administration would tax it to recover some of the externalities – although, looking at the gas drilling sector in PA, this is not happening. Another reason a sector would be singled out for taxing would be to attempt to shrink it, for example, if a state wanted to decrease smoking it would charge a high tax on cigarettes to nudge people away from that product. Some of the effects of taxes that are industry specific and locality specific are causing those industries to shrink or move elsewhere. In the case of cigarettes, some people would quit smoking and some people would go to a neighboring state to stock up on cheap smokes.
The tech industry is a net good for the state of PA. Tech companies usually compensate employees at higher rates than most other sectors, employees also get better benefits and are not going to be a burden on the other PA taxpayers. The tech industry vitalizes communities and whole areas of cities and generates jobs and growth. A thriving tech community attracts highly educated employees who generally are drivers of economic development as they consume other goods and services in that state. By choosing to single out that industry for taxation, PA will send the wrong message to the tech sector.
As an owner of a technology company, when I hear that we will be singled out for taxation over other industries, I know it means trouble. First I know I will not likely to be able to pass that tax to my customers because it’s not something companies are used to paying for. If I tell a client – we are now going to bill you another 6% tech tax they will have no idea what I am talking about and might look for another vendor. It’s hard enough to compete with overseas companies with much lower labor costs as it is. The uniqueness of this tax means I will have to cover the costs of the tax internally or to see if I can furnish those services from other states. If I cover the cost of the tax internally it means I will have less money for growth, to fund employee benefits or hire other employees. I am also a small business and trying to collect and to account for such tax is a very big administrative burden for me. Yes, many companies already in PA will find it hard to move to another state. But those companies that stay in PA will be less competitive than their out of state peers and the next effect will be loss of business in PA as business moves across state lines.
Another way to look at this tax is from the eyes of a new engineering graduate. Many of those graduates will go on to be tech founders and will try to look for a good place for their new startup. When those Penn or Drexel graduates will be looking for a place to get started they will see PA as a state that is hostile to the tech industry and receive that tech tax as signal loud and clear and just go somewhere else where they are more welcome and incentivized.
The tech tax simply does not make sense on any level. It is short sighted, counterproductive, and will hurt the Commonwealth. Please contact your state legislators to make sure they understand the impact.
To send a message to your representative please go to:
http://www.pghtech.org/no-tech-tax-in-pa.aspx
You can also find administration officials on LinkedIn and voice your opinion (please do so politely).
Author: Sagi E. Shkedy – owner and Principal of Simplicity Consulting, a technology company in PA.