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Technology Brief #38

Maryland’s New Tax – A Significant Step Forward in Digital Policy-Making

February 6, 2021

By Scout Burchill

Summary:

On Friday, February 12th the Maryland State Senate overrode Governor Hogan’s veto to become the first state in the nation to impose a tax on digital advertising revenue. Even though the new law is already being challenged in the courts, its passage reflects the dire need to plug gaping holes in state and local budgets due to pandemic losses as well as enact innovative new approaches to taxing and regulating big tech companies that have continued to rake in record profits over the past year.

Maryland’s Digital Advertising Gross Revenues Tax would impose a 2.5% tax on advertising revenue made by selling digital advertising within the state for companies that make over $100 million a year globally from digital advertising revenues. This tax rate increases to 5% for companies making between $1 billion and $5 billion, 7.5% for companies making between $5 billion and $15 billion and finally 10% for those companies making more that $15 billion, essentially targeting Google and Facebook. The new tax is expected to generate $250 million after the first year, which will be set aside for Maryland’s education system.

Critics, predominantly made up of big tech and advertising industry interest groups, claim that the cost of these new taxes will simply be passed on to local businesses who end up being forced to pay higher rates for advertising services in Maryland. They also question whether Maryland can tax companies and activities that operate outside the state. Strong legal pushback is expected and already underway as the Maryland model may present a framework for other states going forward. Connecticut and Indiana have already proposed similar measures.

Analysis:

Many eyes will be on Maryland over the next year eager to see what will come of the state’s efforts to redirect a percentage of Big Tech’s ever-growing profits to prop up local communities in the face of ballooning budget deficits. Whatever the outcome may be, this new legislation is a significant step in the implementation of digital policy and governance in the United States and highlights two trends that have been emerging in the tech policy world that will be outlined below.

Firstly, it is undeniable that the tides have decisively turned against the laissez faire approach the federal government has taken to regulating the technology industry. This long-time negligence is now resulting in a flurry of new efforts to regulate and tax Big Tech giants at state levels. There is a growing sentiment, compounded by the pandemic, that companies like Facebook and Google are not paying their ‘fair share’ relative to their massive profits and oversized influence on the economy and society. Bill Ferguson, a Democratic state senator who championed Maryland’s new tax law captures this growing sentiment well in a recent Facebook post (Ironic, right?), “At a time when Maryland’s budget is being impacted in unforeseen and astronomical ways due to COVID-19, Maryland families and businesses can foot the bill, or big tech can start paying their fair share.”

The federal government’s lack of vision and political will to address these issues over the past years has created a vacuum that states are now attempting to fill on their own, especially in regards to regulating and taxing these companies. Florida Governor Ron DeSantis’ recent proposal to punish the censorship of tech companies is another example to this trend. The details of DeSantis’s proposal are vague and verge on the incoherent, but the proposal itself is evidence of this growing trend. It’s hard to imagine, but the end result may be a splintering of the nation’s digital sphere into separate fiefdoms with regulation and taxation deriving from state levels. Whether this is even feasible as a potential business model for tech companies is another question. A more probable outcome is that these state initiatives will end up being the testing grounds that pave the way for a more coherent national policy initiative, something akin to how Romneycare in Massachusetts created the model for Obamacare on a national level.

The second point is that these developments within the United States mirror many of the trends that have been emerging globally in the governance of tech and the digital sphere. The online world is increasingly splintering and territorializing as nations around the world impose their own moderation, taxation and regulation regimes in the digital sphere.

This trend is illustrated well by the fact that Maryland is not the first place to enact this tax policy. France and Austria already tax digital advertising revenue. In fact, European policy makers have been pioneering different approaches and taking on governance problems posed by big tech companies for a couple years now. Even though Maryland lawmaker Bill Ferguson credits an Op-Ed in The New York Times by Paul Romer as the source of inspiration behind the new bill, his colleague, Senator James Rosapepe offered his own explanation to the New York Times that reveals insight into a train of thought emerging globally in tech policy. He told the Times, “I don’t think the issue’s any different in Maryland than it is in California, India, France or Spain…Given that they’re so profitable, they ought to be paying taxes.”

For decades the United States’ greatest ‘exports’ have been the influence and power of tech giants like Facebook and Google, which have revolutionized the world and life itself, but now the United States may be looking abroad to ‘import’ policies that address the economic and social harms that these companies have wrought. In countries all over the world there are ongoing experiments, both good and bad, that aim to reign in the power of Big Tech companies and reshape the digital sphere.

A great example currently underway is happening in Australia. A new law proposed there would require companies like Facebook and Google to pay news organizations for content. The law is a response to Big Tech companies monopolizing advertising revenues which has caused funding for good journalism to be siphoned away toward clickbait and other less reputable sources of information. Healthy democracies are dependent on good information and many critics of Big Tech platforms argue that the built-in incentives of these platforms exacerbate polarization, misinformation and sensationalist news coverage, while eradicating the traditional sources of funding for news organizations. The law will enable the embattled news industry to bargain with tech platforms for the use of their work. The world will be watching to see how events unfold.

While individual states may become experimental testing grounds for larger nation-wide tech and digital policy initiatives, American policy makers should not lose sight of innovative policy attempts being implemented abroad. The United States may have unleashed the beast, but it is not alone in figuring out ways to tame it.

Bold American policy initiatives have languished in recent decades. The United States’ botched coronavirus response coupled with years of elite failures from the Iraq War to the 2008 financial crisis have sown distrust and cynicism in many Americans’ views of their government. But from failure perhaps a sense of humility can take root. A recent report by the Pew Research Center reveals that in the midst of the pandemic a majority of Americans, and especially younger Americans, believe they can learn a fair amount about policy issues from other countries.

As the Biden Administration looks to rebuild a sense of trust and pride in our government institutions at home as well as restore ties with new and traditional allies abroad, tech and digital policy may emerge as a fruitful domain. By looking within, at pioneering states in the union, as well as outwards to foreign governments and allies, the Biden Administration will be better equipped to craft tech policies that address the societal and economic harms of Big Tech while also promoting democratic ideals, economic rights, and open spaces for free expression.

Resistance Resources on Tech Policy:

https://www.internetgovernance.org/

https://www.humanetech.com/

https://www.economicliberties.us/big-tech-monopolies/

Sources:

NYT on Maryland Digital Ads Tax

https://www.nytimes.com/2021/02/12/technology/maryland-digital-ads-tax.html

Tech Groups’ Lawsuits against MD Digital Ad Tax

https://arstechnica.com/tech-policy/2021/02/tech-groups-sue-maryland-to-block-new-digital-ad-tax-from-going-into-effect/

Op-Ed Referenced as Inspiration for MD Digital Ad Tax

https://www.nytimes.com/2019/05/06/opinion/tax-facebook-google.html

Australia’s New Digital Publishing Law

https://www.nytimes.com/2021/02/17/technology/facebook-google-australia-news.html

Pew Research Report

https://www.pewresearch.org/fact-tank/2021/01/14/americans-say-u-s-can-learn-a-lot-from-other-countries-on-handling-the-coronavirus-outbreak-other-issues/?utm_content=buffer6bdce&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer

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