The extent to which taxes drive economic behavior is a topic of some debate among economic development theoreticians. Some, like myself, believe that, all other things being equal, higher taxes discourage corporations and affluent individuals from investing in, or moving to, a state or region. Others believe that all other things never are equal, and that the effect of taxes are negligible.
We may be getting a real-world experiment, with Virginia and Maryland in the petrie dish.
The experiment will originate from actions on the northern side of the Potomac. The Maryland state Senate, to quote the Associated Press, “is weighing the option of using an income tax increase for people making more than $750,000 a year to replace the computer tax that was approved in the November special session.”
Senators from Montgomery County (who are Democrats, incidentally) say the higher income tax will disproportionately affect taxpayers in the county, which is the state’s wealthiest. Their fear: Wealthy taxpayers may move to Virginia. An alliance of Montgomery Democrats and the state’s Republicans may be sufficient to quash the proposal, however. If they are successful, we’ll never know for sure whether an increase in the state income tax — from 5.5 percent to 6 percent for those earning more than $750,000 a year, and 6.5 percent for those earning more than $1-million — would induce a measurable number of rich Marylanders to forsake their terrapin-hood and embrace the cavalier life of Virginia. (Virginia’s top income tax rate is 5.75 percent.)
But we still may get our social-scientific lab experiment. If the income-tax hike fails, that presumably leaves the computer tax in place. Maryland’s Information Technology industry bitterly fought the measure, which added computer support services, data center support, custom programming, consulting, and disaster recovery services to the list of activities covered by the state’s 6 percent sales tax. (See article in Information Week.) If that tax stays in effect, it is but a short hop, skip and jump to Northern Virginia.
If the tax does drive business behavior, we can predict a growing number of announcements by Maryland-based businesses that they are locating their server farms, data centers and other operations in Northern Virginia. Stay tuned…
Update: Here’s a sample of what Maryland will subject itself to if it keeps the sales tax on computers. In an open letter addressed to Maryland tech firms, dated march 14, Sen. Ken Cuccinelli, R-Fairfax, wrote:
I would like to take this opportunity to personally invite you to relocate your business to the Commonwealth of Virginia. Virginia has consistently been rated one of the most business friendly states in the nation in independent assessments, including receiving Forbes Magazine’s top-ranking for the last two years. Here in the Commonwealth, we believe that business is the lifeblood of the economy and I am personally committed to making sure we remain welcoming to business owners. …
As you consider your best options for the health of your business, please consider bringing your expertise to the Commonwealth of Virginia. Right here in Fairfax County, we have space in the high-tech Dulles Corridor that is calling your name. I would love to hear from you and connect you with resources for business owners here in Virginia.
