Politics & Policy

Internet Grinches

Online sales taxes are back in play.

Many Americans shopped online this holiday season, but consumer cheer may soon be dampened. The reason is Internet taxes. After a five-year moratorium, Congress is now debating whether to ban these taxes permanently or open the door to tax increases. Democrats, of course, are leading the charge for the latter.

The growth of the Internet over the past decade has been one of the great social transformations of our times. It has changed the face of retail business and personal communication. But as the medium has matured, state and local governments have begun jealously eyeing the pot.

In addition to the perennial gripes about the difficulty in collecting sales tax online, states are now lobbying for permission to begin taxing access — that is, adding a fee to monthly bills for AOL or broadband.

The Internet Tax Non-Discrimination Act, sponsored by Rep. Chris Cox (R., Calif.) and Rep. Ron Wyden (D., Ore.), would place a permanent ban on these taxes. And until recently, this measure looked like a solid bet. It passed the House in September without a hitch and the Senate was expected to sign off before the clock ran out on the previous moratorium earlier this month. But when the bill reached the Senate, lobbyists insisted that it would deny the states a crucial source of revenue.

Leading the pack were California’s Democratic senator Diane Feinstein and a handful of other ex-governors. “I love my high-tech companies,” Feinstein said, “but the cities and counties are where the people are, and they need police and fire and emergency services.”

But at a time when the much-ballyhooed digital divide has faded from memory, the nation’s poor are the ones who will be hit hardest by the tax-everything-that-moves mentality afflicting Senate Democrats.

Republican senators Lamar Alexander (Tenn.) and George Voinovich (Ohio) have joined the chorus, claiming that forbidding states to gather revenue from the Internet amounts to an “unfunded mandate.” Their wimp-out has consisted of arguing for a two-year extension on the moratorium instead of a permanent provision.

This is big business for the states. But before they go further they’d be advised to look at Europe where EU taxes have had a deleterious effect on Internet behavior.

Earlier this month, state representatives met in Chicago to discuss the “Streamlined Sales Tax Project” with the goal of “harmonizing” their tax policies. Similar behavior in the private sphere is called illegal price fixing and such a policy could have disastrous repercussions. States could effectively tax transactions outside of their jurisdictions and raise taxes across the board.

The frequent defense of those against a permanent ban is that, as voice and more sophisticated communications move to the net, access providers are getting an unfair pass on the taxes that attach to telephone services. Florida and Kentucky have already been preparing to tax digital access when it is “bundled” with phone service. But tax proponents are also hoping to use the animus against failed Internet ventures and the general climate of mistrust for business to argue against any “special” breaks for the Internet.

Despite the Internet’s many successes, online sales of books, bathing suits, and blenders are still around 1 percent of total retail sales — a paltry figure. Broadband access, meanwhile, is just getting off its feet. If the states really want to draw more revenue, they might start by letting the economy continue its natural rebound instead of strapping it down with new taxes.

— Sonia Arrison is director of Technology Studies at the California-based Pacific Research Institute. She can be reached at sarrison@pacificresearch.org.

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