Politics & Policy

Net Nonsense

Lamar! wants to tax the Internet!

This week the Senate will begin debate on legislation that will extend the now-expired moratorium on Internet taxation. The Internet Tax Non-Discrimination Act (S.150) eliminates taxes on Internet access and double-taxation of a product or service bought over the Internet. In addition, it will prohibit jurisdictions that recently began taxing Internet access from continuing to do so. Sen. George Allen of Virginia is the lead sponsor of this wise legislation and President Bush again strongly endorsed it this week.

Unfortunately, GOP Senator Lamar Alexander plans to offer an amendment that will authorize states and localities to tax the Internet. Alexander’s plan would allow state legislators and city councils to establish a local tollbooth for accessing the information superhighway. This law would reverse the ban on Internet taxation that has existed virtually since the Internet was first invented. For his effort on behalf of the National Governors Association and other organizations, Alexander is making a real name for himself as the senator that wants to allow the Internet to be taxed.

This new Internet-access tax could do real damage to the U.S. economy, which is finally starting to get its feet back under itself from the tech implosion of 2000-01. In this nascent recovery, growth is again being propelled by technology and knowledge-based industries. At the very heart of this critical debate is the question of whether the Internet should be treated as a tax- and regulation-free form of commerce, or should be converted into a new cash cow for government officials to fund favored programs.

Sen. John McCain and others have decided to stop Lamar and his small band of tax-the-Internet cronies, and have introduced a compromise to address all of the legitimate concerns outlined by the state and local groups regarding their existing tax base for telecommunication services. The McCain compromise will extend the expired moratorium on Internet-access taxes for four years, phase out taxes on Digital Subscriber Lines (“DSL”) that states had illegally started to collect, and address concerns about the treatment of Voice Over Internet Protocol (VOIP). The compromise will bring the necessary votes to finally pass an Internet-tax moratorium out of the Senate.

In 1998, Congress wisely declared the Internet a tax-free zone by establishing a moratorium on Internet-access charges. An “access charge” is just the government’s polite way of adopting a new tax. 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.

Opponents of the ban on Internet taxes believe that this policy deprives state and local governments who need the money to fund vital public services. Lamar Alexander has absurdly labeled the federal ban on the Internet-access taxes an “unfunded mandate on states.” But an unfunded mandate is a requirement by the federal government for the states and localities to spend money. This policy doesn’t even deny states and cities a traditional revenue source. Most important, the growth of the Internet and the information economy has been an enormous net positive fiscal development for the states. In the 1990s, as the Internet economy soared, state and local revenues grew at a rate three times the pace of inflation. By the end of the 1990s states and local government coffers were overflowing; it wasn’t until the tech bubble burst that government revenues sank.

The proposal by Senator Alexander, along with co-sponsors Kay Bailey Hutchinson and George Voinovich, to allow fees levied on Internet usage seems maddeningly misguided politically given that in just six months voters will decide on which party controls the U.S. House, the Senate, and of course the White House. It makes little sense for Republicans to run for re-election as the party that initiated the nation’s first ever tax on the 74 percent of American households who use the Internet. That’s particularly true because these taxes–already contemplated by some states and city hall [city halls?]–could be financially infuriating. The fees could cost families up to $150 a year.

What is needed from the Republican Congress is not a reversal of this no-tax policy, but rather a wholesale extension of it. First, the Internet-tax moratorium should be made permanent. Second, all forms of Internet access, whether dial up or wireless, should be immunized from state, local, and federal taxation. While the Sen. McCain’s compromise does not meet all these criteria, it brings us a lot closer to the ultimate goal.

We have both spent years trying to persuade Republicans that for both economic and political reasons they must never break their commitment to fighting against financially burdensome and unfair taxes. The liberating opportunity now exists to create through the growth of the Internet economy a massive, global, free-trade zone. Senator Alexander’s amendment lays the groundwork not just for taxing Internet access, but also Internet purchases, which would become a cash machine for governments. States and localities have already doubled their tax collections over the past 12 years, even without tapping into the new frontier of the digital economy.

Ironically, even some liberal Democrats are questioning the wisdom of taxing the Internet. “Under [Alexander’s] proposal, the consumer would be taxed every time they send an email, every time they read their local newspaper or check a bank statement online,” says Oregon Senator Ron Wyden. How strange to hear liberal Democrats lecturing a Republican senator on the evils of higher taxes. Thankfully Senate Republicans and a handful of Democrats plan to keep the information superhighway toll free and side with taxpayers and the tech economy in this debate.

–Stephen Moore is president of the Club for Growth. Grover Norquist is President of Americans for Tax Reform.

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