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Silicon Valley, Calif., home of America's high-tech industry, symbolizes our nation's future as we enter the 21st Century. A single technological breakthrough--the development of the computer--has led to the emergence of hundreds of new 'high tech' companies, many of them publicly-traded, in an area south of San Francisco.
"Being in Silicon Valley over the last decade feels like being in France during the Renaissance or the Industrial Revolution, where there are all these brilliant people, all this energy," explains David Marquardt, one of Silicon Valley's most successful venture capitalists. Some financiers snickered when Marquardt sank $1 million into a software company operated by a novice 24-year-old. Today, that company is Microsoft Corp., a $1 billion enterprise (Investors Daily, 12 June, 1990).
Silicon Valley is full of young multi-millionaires like Marquardt and Microsoft co-founder William Gates. Some of the most successful high-tech companies were started by creative geniuses, some eccentric, working out of basements or garages. Whether big or small, all of Silicon Valley's high tech entrepreneurs share a vision of the future, and an economic climate that encourages risk-taking and commercial success. In a nation grown accustomed to mediocrity, Silicon Valley is a spectacular, welcome exception.
Imagine then, the opposite: an economic climate that discourages high-tech entrepreneurship and risk-taking, and you have Michigan. Recent action by the State Tax commission would make Michigan the first state to impose a tax on all computer software. such a move would have a devastating economic effect on Michigan's nascent high-tech industry. Computer firms are highly dependent on software, and a tax would drive away, rather than atract, high-tech industries.
The Tax Commission launched its "Say No To High Tech" campaign last October, when it unilaterally ruled that computer software be reported and taxed as intangible personal property. Historically, computer software has been considered intangible intellectual property not subject to a property tax. There are two basic types of software--design software that's custom-developed for a particular business or industry, and so-called canned software, sold commercially at retail outlets. The Tax Commission would tax both design and canned software as tangible personal property. Madison Heights Assessor Terence Haran has already moved to enforce the commission's decision.
Tax Commission Chairman Robert Vandermark defends the panel's action by noting that Michigan's personal property tax law says all property is taxable unless it enjoys an exemption. Unfortunately, this reasoning opens a Pandora's box regarding other intellectual property. Should books, for example, be taxed, or articles, whether published or unpublished? How about music or other forms of artistic expression? They are, like software, a form of intellectual property.
Supreme courts in Connecticut and Kansas have held that software is intangible and not subject to personal property tax. The Arizona Court of Appeals ruled that "computer software is intangible property and as such should be excluded in determining the value of computer equipment for taxation purposes." These court decisions have no binding legal effect, but they shed light on the tax policy of states in competition with Michigan for business development. To ignore them is to ignore the economic incentives put in place by other states, incentives that out high tech industry will respond to if the Tax Commission's decision is allowed to stand. The end result can only mean fewer high tech firms, and fewer jobs for Michigan.
Perhaps the ultimate solution is abolition of the personal property tax, not its extension to the area of computer software. Michigan has the highest tax structure in the Midwest, and one of the worst in the nation. What is needed is not more taxes, as liberals argue, or no new taxes, as some conservatives do, but a reduction in taxes for our state.
Silicon Valley was not created through government largesse paid for with higher taxes. The entrepreneurial geniuses of this high tech mecca do not rely on government grants for their market share. They thrive due to a laissez-faire creative environment that welcomes creative genius, and an economic climate that rewards entrepreneurship, risk-taking and commercial success. If Michigan is truly to enter the high tech age, it could learn more from the likes of David Marquardt and William Gates, and the Silicon Valley from which they sprung.
The Mackinac Center for Public Policy is a nonprofit research and educational institute that advances the principles of free markets and limited government. Through our research and education programs, we challenge government overreach and advocate for a free-market approach to public policy that frees people to realize their potential and dreams.
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