I’m a Pittsburgher at heart. I was born and raised here. I graduated from the University of Pittsburgh. My career and business is built here. This region has emerged as a tech upstart over the past 5 years and I was elated to be a part of it on the ground floor. All I ever wanted was what’s best for my hometown. The feeling does not appear to be mutual. Moments after the NoWait acquisition appeared to be a launchpad for rust belt tech, the PA Tech Tax emerged in discussions on how to cut off our legs.
The tech industry is still bubbling over. There are more jobs than skilled applicants to fill them. This forced major players like Google, Apple, and Uber to move into town and recruit employees the moment they walk off of university campus. Professional recruiting began for me in my sophomore year of computer engineering school and it hasn’t let up since. It seems like a logical maneuver for the state to take a piece of this new and exotic pie, but it’s in fact crippling to the region.
An Economic Look At Apps
Apps are insanely expensive. The demand is so high for a select few skilled developers, that the price to create a mobile app is almost more than its products are worth. Labor is at an all-time high expense. SewnR Software Consulting is a 5 person startup. We basically boil down to 5 MacBooks huddled around two Ikea desks pushed together (Don’t feel too sorry for us. They’re the upgraded whiteboard standing desks.) It’d be hard to find a leaner operation anywhere. Our employees are compensated fair with the market and that makes company margins low. The profits on software development after costs and labor are minuscule compared to their business and intelligence development counterparts.
After a quick run through our 2016 company tax filings, if a suggested 7% tax on consulting and app development were implemented, it would cost far less to relocate our entire organization and members across the country than it would to stay here. An option I’ll be forced to consider in the future. This cost actually scales in a more harmful manner the smaller in size a tech shop is.
Indie developers are one-person companies in apps and games. Their resourceful innovation is a guiding light for the entire industry. If a solo operation releases an app in the App Store after paying fees to Apple, income tax, and tech tax; the app creator will see 30% to 40% of the profits generated by her software. It’s a cut that only makes sense for the lucky few that go viral in the gaming industry.
Another Winner Take All Economy
While emerging startups and indies will struggle to clear a new tax, those already established will be fine. If a percentage is added on to each developer’s product, those consulting firms with dozens or more developers will grumble about profit loss but remain unharmed. Clients will be relatively untouched because labor costs simply can’t go any higher. The new tax cannot be plainly passed on to customers and still produce profitable retail or entertainment apps. The companies that come out the cleanest are the big names you see across the strip district. Apple, Uber, and other California headquartered companies need not be concerned about the new Pennsylvania tax. Much like the advertising and e-commerce sectors, the handful of giants will reign supreme and stomp out those trying to move up the food chain, now that the state of Pennsylvania decided to join in the stomping it becomes much more efficient.
Where Do We Go From Here?
I won’t pretend to know what the best solution for the state is here. I’m certain it isn’t to pick on the new kid in town until he leaves. Stifling innovation and tech that began growing in the area a whole 3 to 4 years ago doesn’t feel like the winning play. It is the legislative equivalent of blowing your paycheck on an epic night at the bar, buying your friends shots, feeling great for a few hours, and leaving your 401k empty for another month. A great idea in the short term and a fatal one in the long term. The PA Tech Tax will be a contract killer of the startup an innovation culture in its region. The west coast has plenty of business and culture advantages, but it might gain an operating costs advantage as well if this new tax is implemented.