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November 26, 2002, 8:30 a.m. Net Nonsense Internet taxation has again reared its ugly head.

ike Jason from Friday the 13th, Internet taxation is proving to be the boogieman you just can't kill. Once again it has reared its ugly head and is preparing to terrorize merchants, shoppers, and taxpayers throughout the nation.

The most recent unholy resurrection occurred two weeks ago at a meeting of lawmakers and tax officials in Chicago, where a proposal to "simplify" tax laws was endorsed. The proposal, known as the "Streamlined Sales Tax Project," would require participating states to establish uniform definitions for taxable goods and services, while maintaining a single statewide tax rate for each good.

What evil talisman has raised Internet taxes from its temporary grave? Massive deficits accumulating in states across the country brought on by a decade of decadent government spending. In fact, according to the Cato Institute's Fiscal Policy Report Card on America's Governors: 2002, states faced a combined budget gap of more than $40 billion in 2002. Rather than restraining their promiscuous spending, many governors have instead decided to attempt to tax their way out of debt.

This, of course, ignores historical budgetary evidence and sound economic theory. No government in modern economic history has ever taxed their way out of deficits and most economists agree that tax increases during an economic slowdown are fiscal suicide — yet here we go again.

In fact, when many states were faced with a similar situation in the early 1990s, those that cut taxes — rather than raising them — prospered the most during the economic boom of the 1990s.

The Michigan miracle is a prime example. Rather than raise taxes in a vain effort to erase the state's growing deficits and turn around its economic woes, Governor John Engler cut taxes more than 30 times over the decade. As a result, the state's massive deficits disappeared and the state enjoyed one of the largest economic growth periods in its history.

When the economic evidence becomes too overwhelming to ignore, the Internet tax proponents usually turn to the "fairness" issue — even though it has been as thoroughly debunked as the economic argument.

That's right — our selfless governors are simply attempting to level the playing field for small "mom-and-pop" and "brick-front" stores that must collect sales taxes while Internet companies currently do not. This argument holds that small hardware stores across the nation will go under — thrusting their salt-of-the-earth proprietors into the cold — because the Big Hardware Internet site is not forced to collect taxes and therefore has an unfair competitive advantage. In this case, class warfare is the last refuge of scoundrels.

This line of reasoning has been debunked numerous times, but for the sake of argument let's briefly review its more blatant fallacies:

The same argument was made about catalogue sales with no such dire consequences for local merchants.

In today's technological world anyone who can afford to operate a brick-front store can afford an Internet site to sell their goods "tax free."

Shipping and handling costs often offset any price advantage enjoyed by Internet retailers thanks to the absence of sales taxes.

Internet companies very often pay millions of dollars in telecommunications taxes that brick-front stores do not. Is that fair?

Furthermore, taxing Internet sales would place an enormous burden on Internet companies. Why should a company be forced by the government to become a tax collector for more than 30,000 tax jurisdictions across the country? How many mom-and-pop Internet sites will go out of business if that extraordinary expense is forced upon them? If that expense doesn't put them out of business, then the cost of defending themselves against countless lawsuits from state governments claiming they didn't collect a sufficient amount of taxes on their behalf surely will.

This is hardly an exhaustive list of why a "Streamlined Sales Tax Project" is a bad idea. Suffice it say, the case against Internet sales taxes is solid and well known.

What is important for taxpayers to concentrate on now is our inability to — once and for all — kill this insidious idea.

It is time to finally drive a stake through the heart of the Internet-tax movement. American taxpayers should contact their state and local officials and demand that they reject all Internet taxes. Only then will this specter haunt us no more.

— Eric V. Schlecht is director of congressional relations for the National Taxpayers Union.