Politics & Policy

Coming This Fall: Internet Taxes?

The threat is real.

Legislation in Congress to make the Internet tax ban permanent has strong bipartisan support, but that doesn’t mean it should be taken for granted. In fact, it recently hit a snag over the unrelated issue of how satellite TV is taxed, while there continue to be disputes over when grandfather clauses that allow some states to tax the Internet should finally be closed. Given the tight timeframe — the current moratorium is due to expire on November 1 — it’s possible that a slew of new Internet taxes could in fact arrive this fall.

The Internet has been a remarkable engine of economic growth and innovation over the past decade, in large part because it has operated as a free market without undue taxes or regulation.  A federal moratorium first put in place in 1998, and subsequently extended, has protected the Internet from access taxes and discriminatory or multiple taxation. That moratorium prevents state and local governments (with a handful of exceptions where taxes have been grandfathered in) from imposing a list of taxes and fees that would appear on the Internet portion of your cable and telephone bills.

If the moratorium is allowed to expire, states will likely impose new taxes on Internet access fees, bit-taxes on downloads, and perhaps even e-mail taxes. There would be unlimited potential for taxation, which would only impede the flow of commerce and information on the Internet and slow a great engine of economic growth.

An e-mail tax might seem like such a bad idea that a federal ban wouldn’t be needed. But that’s not a risk that ought to be taken. Moreover, state and local governments may rush to chaotically enact Internet taxes if and when the ban expires, anticipating that it will eventually be re-imposed and hoping to qualify for grandfather treatment. That’s hardly an environment for rational policy development.

And here’s where the policy stands: An initial contention over the definition of Internet access and the status of telephone and television service provided over IP networks has been resolved, and a permanent ban on Internet taxation now enjoys strong bipartisan support in Congress. It would seem that this is a rare tax issue that places many Democrats on the anti-tax side. But there are hold-ups. Some congressional members refuse to let go of grandfathered Internet taxes in their states, even though they have had nine years to replace this revenue. There’s also an effort to attach to legislation the wholly unrelated issue of how direct broadcast satellite (DBS) service, like DirecTV and Dish Network, is taxed relative to cable service. This is a poison-pill — an attempt to split the coalition pushing for a permanent ban.

There may be some cause for concern that some states are choosing winners and losers in the video marketplace by taxing these direct competitors differently. But there is no reason that the extension of the Internet tax moratorium should be held hostage to an extraneous issue that could easily find a home in a different legislative vehicle.

The Internet, protected from taxes, has been an enormous source of prosperity for American businesses and families. Allowing the moratorium on Internet taxes to expire (even temporarily) would be a gross public policy error.


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