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A Tax-Ban No Brainer
Congress should keep the Internet-tax ban in place.


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Stephen Moore

Today the House of Representatives will vote to extend the ban on Internet taxation through November of 2007. Keeping cyberspace tax free has long been a goal of anti-big-government and pro-technology forces in Washington. This bill, led by Chris Cox in the House and John McCain and George Allen in the Senate has significant opposition from tax-eater lobbying groups on Capitol Hill, especially state and local governments who hope that the World Wide Web will be their next great cash cow. The Senate enacted the bill earlier this week; the House should follow suit, and keep the Internet-tax ban in place.

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President Bush strongly supports this legislation. So, if the House does its job, next week this pro-taxpayer legislation will be the law of the land.

The new law will mean no taxes on Internet access, unless you use dial up and pay the telephone tax (which should be eliminated as well). It also means no tax on Internet sales. In other words, the Internet will be a genuine tax-, regulation-, and tariff-free zone.

A tax on the Internet would do real damage to the U.S. economy. Economic growth in recent years has been propelled by the technology sector, which has made a big-time rally after the implosion of 2000-01, when the NASDAQ fell from 5,000 to 1,500.

The argument against the ban on the Internet tax is that states and localities need the money and that Internet purchases are eroding the tax base of city hall and state governments. This is preposterous. The states and localities are now awash in cash. For example, my home state of Virginia has a $1 billion state-tax surplus. The same rosy fiscal picture is true in local governments across the nation. A new Cato Institute study finds that states and localities have already doubled their tax collections over the past twelve years, even without tapping into the new frontier of the digital economy. Governors and mayors should now be aggressively cutting taxes, not finding sneaky new ways to add to their coffers.

The policy that Congress is about to adopt is simply a continuation of the federal law that has been in place for the past six years. Since 1998 Congress has wisely declared the Internet a tax-free zone by establishing a moratorium on Internet-access charges. An “access charge” is essentially a toll on using the Internet. The idea was to prevent the government from causing infant crib death of this new consumer technology. After all, as Justice John Marshall once observed, “the power to tax is the power to destroy.” By all accounts, the Internet-tax moratorium has been a resounding success. In 1985, about one in six American families and businesses had access to the web; now, three in four do.

Moreover, e-commerce is the new frontier of business enterprise. International Data Corporation recently estimated that the Internet economy in 2003 reached $2.8 trillion. In the U.S. alone, e-commerce accounted for $500 billion in business activity and employed 2.3 million Americans. The Internet sector of the economy is growing at 12 percent per year compounded. E-commerce, in short, is to the early 21st century what the steam engine was to early-20th-century economic development. Meanwhile, the telecommunications sector of the economy now stands ready to invest billions to upgrade the nation’s communications networks and make high-speed (or broadband) Internet access available to all American homes and small businesses, as it is for large corporations today.

All of this is to say, if ever a public policy has worked precisely as hoped, it is the Internet-tax moratorium.

Moreover, if the Republicans in Congress really wants to keep tax relief a centerpiece of their domestic agenda, keeping the IRS and state tax collectors away from the Internet is critical. By some estimates, a tax on Internet access could cost families up to $150 a year. If purchases on the Internet were also taxed, these costs could double or triple.

There is only one problem with the bill that Congress will vote on today. It does not make the Internet a tax-free zone permanently. Also, it seems that if we want a regime of “tax fairness” and a level playing field, all forms of Internet access, whether dial-up or wireless, should be immunized from state, local, and federal taxation. While Sen. McCain’s compromise does not meet all of these criteria, it brings us a lot closer to the ultimate goal.

Congress today has a chance to ring the bell for liberty. The opportunity now exists to create, through the growth of the Internet economy, a massive global free-trade zone. Opponents of the Internet-tax ban argue that this bill will only put added pressure on all levels of government to lower taxes on “bricks and mortar” businesses. That’s absolutely true–but I suspect most Americans would regard this as an added benefit of the Internet-tax ban.

Stephen Moore is president of the Club for Growth.



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