Politics & Policy

Hands Off!

There will never be a right time to tax the Internet.

Finally, a victory for the taxpayer–at least a partial one.

Last week, the Senate approved compromise legislation crafted by Senator John McCain of Arizona (yes, McCain was on the side of the angels), to extend the ban on Internet taxes for four years, through 2008. President Bush and Senator George Allen of Virginia, who gets four stars for his unwavering support of keeping cyberspace tax free, wanted a permanent ban on Internet taxes, but a four-year extension keeps Internet users at arms length from the IRS and local tax collectors for at least the foreseeable future.

The fight for a tax-free zone on the Internet was tougher than it should have been, because a handful of Republican senators wanted to empower states and cities to tax access to the Internet at their discretion. Freshman Senator Lamar Alexander of Tennessee, also former governor of that state, led the crusade on behalf of states, localities, and brigades of special interest groups who receive the largesse of local governments all desperately wanting to tap this new cash cow of the Internet.

Sen. Alexander’s Internet-access tax proposal would have done real damage to the U.S. economy just as it’s recovering from the tech implosion in 2000-01.

Back in 1998, Congress declared the Internet a Tax Free Zone by establishing a moratorium on such Internet-access charges. An “access charge” is the government’s euphemistic way of describing a new tax. The idea was to prevent the government from killing this new consumer technology. By all accounts, this 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.

E-commerce is the new frontier of business enterprise. As Grover Norquist and I also wrote last week, 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. Meanwhile, the telecommunications sector 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. The extension of the tax ban will facilitate that infrastructure investment.

Opponents of the ban on Internet taxes always had it wrong. They argued that this policy unfairly deprives state and local governments who need the money to fund vital public services. Sen. Alexander has 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 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.

Republicans and many pro-growth Democrats have done a service to taxpayers by extending the no-tax zone on the Internet, and the GOP dodged a political bullet. It would have made little sense for Republicans to run for reelection as the party that initiated the nation’s first-ever tax on the 74 percent of American households that use the Internet.

But the victory for the Internet and for taxpayers last week only further postpones the bigger fight over whether Internet access and purchases should ever be taxed. Here is why the self-evident answer to that question is no. The expansion of the e-commerce world offers a one-time opportunity to erect a massive, global free-trade zone, in which government regulations, fees, and levies are banned. What could be more liberating? Government power will shrink, as the information superhighway is further democratized over the next 20 years to reach every business and household in the world. This is precisely why so many advocates of big government want to tap into the power of the information-age economy, before it renders them irrelevant.

So kudos to John McCain, George Allen, and the White House for clearing away roadblocks to our future in cyberspace. It is also worth applauding Democrats like Ron Wyden of Oregon who fought valiantly to keep politicians’ paws off the Internet. As Wyden put it during the Senate debate: “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.” How sad that many Republicans in the Senate need to be lectured by Ron Wyden on the destructive impact of new taxes.

The House earlier this year passed a permanent ban on Internet taxes. When the Senate takes up the issue of making the Bush tax cuts permanent, it should add the Internet-tax moratorium to the mix. An Internet tax won’t make any more sense five or ten years from now than it does today.

Stephen Moore is president of the Club for Growth and a senior fellow at the Cato Institute.

Stephen Moore is the chairman of the Committee to Unleash Prosperity.  

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