TCS Daily

James K. Glassman sits down with Rep. Chris Cox

By James K. Glassman - May 29, 2000 12:00 AM

When you think about tech-friendly politicians, the first name that usually comes to mind is Rep. Chris Cox (R-CA). Cox was the co-author, with Senator Ron Wyden (D-OR), of 1998's Internet Tax Freedom Act, which created a three-year moratorium on new, multiple, or discriminatory taxes on online transactions. Prior to that landmark law, Cox succeeded in over-riding a Clinton veto with his Securities Litigation Reform Act, which protected high-tech firms from bogus lawsuits. TCS host James K. Glassman recently spoke to Congressman Chris Cox about his Internet tax moratorium, which expires in 2001, and other tech topics.

Glassman: Hello, Chris, how are you?

Congressman Cox: I'm doing fine.

Glassman: Congressman, you deserve most of the credit for keeping the Internet safe from new taxes. But your Net tax moratorium ends next year. What is going to happen after that?

Congressman Cox: The House of Representatives recently passed a five-year extension of that moratorium. Now, that was the result of legislative compromise because my original co-sponsor for the Internet Tax Freedom Act, Senator Ron Wyden of Oregon, and I introduced legislation earlier this session, entitled "The Internet Non-discrimination Act," that would have made the existing moratorium permanent. That legislation was given a hearing and a legislative mark-up in the Judiciary Committee, and as consequence of that mark-up, it was reported favorably to the floor. But the significant modification made in Committee was that instead of a permanent moratorium, we now have a five-year extension.

Glassman: Now, that's what the House has done. What do you think is going to happen in the Senate?

Congressman Cox: The Senate Committee with jurisdiction is the Commerce Committee, chaired by Senator John McCain. He has already had hearings on this, in fact, Governor Leavitt of Utah and I were the lead-off panelists in his hearings this year. Governor Leavitt and I strongly disagree on this, of course, and we do so in a friendly manner, but we have very different views. He presented the case for expanded state power to tax the Internet, expanded power that would be accomplished by a new act of Congress and I made the case for an extension, if not a permanent imposition of the existing moratorium. On that Committee, we are on a knife-edge in terms of votes and there are at least two Republicans, Slade Gorton of Washington and Kay Bailey Hutchison of Texas, whose support we'll need to win in order to get the bill reported out of Committee. Presently, it's stuck there. If we are unsuccessful in springing this bill from Committee, the other alternative is to bring it up directly on the floor and, of course, the rather flexible procedures of the Senate permit that to occur in a number of ways.

Glassman: It's hard to believe that Slade Gorton from the state of Washington, which has its fairly large on-line retailer, would not be in favor of this. Why does he oppose it? And why do Republicans oppose it?

Congressman Cox: I think there is a misperception. That misperception is founded on the notion that the current moratorium prevents the collection of sales taxes or use taxes on online transactions. In fact, the opposite is true. The Internet Tax Freedom Act as you know does not in any way inhibit the collection of sales taxes or use taxes. Rather, it prevents taxes that discriminate against the Internet. It prevents multiple taxes, that is, two jurisdictions taxing the same commerce. And it prevents technologically targeted taxes, such as the "bit tax" conjured up in Europe and later resuscitated by the United Nations.

We want to make sure that there are no taxes imposed on online commerce that don't have an analog in the off-line world. We don't want to penalize the Internet. But this is not well understood in the media and perhaps in part as a result of that, in the Senate and in the Congress. Even our Presidential candidates have said on a number of occasions, such things as, "I support an extension of the existing moratorium on Internet sales taxes."

Glassman: Let's just clarify that a little bit further. On the sales tax question, the Supreme Court has said for a long time that states can't force remote sellers to collect taxes for them. But many state and local officials want Congress to give them that authority. In other words, New York can't force Amazon to collect taxes on New York customers. Do you think Congress should vote within the next five years to give states much clearer authority to be able to collect taxes remotely or set up some kind of system to allow them to do it?

Congressman Cox: No. I strongly oppose that.

Glassman: But one thing - I don't want to interrupt you, Congressman, but what you're saying is that that law of course still applies to online sellers as well as the catalog sellers.

Congressman Cox: Yes. The Supreme Court's rules in this area are based upon the Constitution, specifically, Article 1, Section 8. The purpose of the Interstate Commerce clause is to prevent the tyranny of the parochial, to prevent also the levying of so many repetitive burdens on commerce that it gets bogged down. In the United States there are over 30,000 taxing jurisdictions that could lay claim to a piece of the Net if we didn't prevent it by federal law. And for that reason, it is very important that we don't have a variety of competing claims to levying sales and use taxes on the Internet.

Glassman: But right now, your current moratorium says in effect, as far as remote sales taxes are concerned, that online sales are treated the same way that catalog sales are treated right now.

Congressman Cox: That's exactly right. And it is important to point out that the Supreme Court's decision is premised on the notion that every state in America with a sales tax also has a use tax. A use tax is a mirror image and the constant companion of the sales tax. It is the same amount; that is, the same rate. It is collected on the same transaction at the same time. The only difference between a sales tax and a use tax is that the sales tax is collected by the seller and the use tax is collected from the purchaser. Because in the typical transaction, the purchaser is in the jurisdiction of the state that wishes to tax and the remote seller is not. The use tax is the solution to this problem. A state can tax its own citizens.

In a sense, the Supreme Court's decision in this area is a variant of the very deeply-held American principle of no taxation without representation. States should be free to tax their own citizens, but not -- for this purpose -- foreigners, that is, residents of foreign states within the Union.

Glassman: Of course, states don't have very much success in implementing their use taxes.

Congressman Cox: There are two reasons that states don't have success in implementing the use tax. The first is that, individuals are not as efficient tax collectors as businesses. There are more individuals, they are decentralized, of course, by definition, and record keeping is not always the individual's forte, whereas that's a burden of business on a daily basis in order to exist. Second and more importantly, the individual citizens of the state make it well known to the governors and legislatures that they do not wish to be subjected to the use tax. And for that reason, because of the political pain involved for the governors and the legislators where they do enforce it, states are collecting the use tax only from businesses and not individuals, with rare exceptions.

Glassman: What do you think of the idea that for example, in Washington state would be taxed on its sales all over the country but only in Washington state -- only by the home state, and in that way there will be competition among states to have the lowest tax on the seller.

Congressman Cox: In a certain sense that is the system we already have. The state of Washington has within its jurisdiction to tax the residents of its state, the citizens of its state, and all persons within the state and corporations, of course, for this purpose are persons. If Washington state wishes to adopt a tax system such as that, they are free to do. They don't need federal legislation.

Glassman: Okay. One other tax issue and that is the 3 percent federal tax, which is now on phone bills, that was created to fund the Spanish-American War. Have you talked to President McKinley to suggest a way to resolve that issue?


Congressman Cox: I haven't talked to President McKinley about it, but I did yesterday make a speech on the floor of the House of Representatives where I invoked the memory and the very words of the sponsor of the tax, a representative Dingley, not John Dingle -

Glassman: Not John Dingle.

Congressman Cox: John Dingley. Dingle, of course, the dean of the House currently has been around a long time, but not that long. And this was 1898 when Representative Dingley was a member of the Ways and Means Committee. He announced on the floor of the House when he was describing his bill, the Spanish-American War Revenue Act that, of course, these were all war taxes. These were temporary exactions and when the necessities and exigencies of war had passed and the expenses were paid, of course, they would be repealed. And today, I am happy to say, that we are making good -- finally -- 102 years later on that promise.

Glassman: So the House passed the repeal... and so it now goes on to the Senate. Do you expect it to be passed by the Senate?

Congressman Cox: I do expect it to be passed by the Senate. The only difficulty might be if it gets weighted down with other controversial measures because repeal of the Spanish-American War Tax is so popular.

Glassman: Now, as a general rule, do you think it's a good idea to use phone bills as a way to collect taxes?

Congressman Cox: But of course not. The reason the telephone tax was imposed in the first place was that in the waning years of the 19th century, the telephone was a luxury. This was the quintessential luxury tax. It did raise some tax policy questions at the time, such as, discrimination vis-a-vis the telegraph, which was in more common usage. One of the proposals, in fact, was that the telephone tax be one penny on every fifteen cents of telephone revenue as against a one-penny tax on every telegraph transmission. And some people saw this as discrimination against the telegraph. Eventually it was worked out.

The problems that are raised by taxing information in the information age far outweigh any benefit. Furthermore, the telephone is anything but a luxury. Lastly, for most people in America, the telephone is still the means of access to the Internet. At a time when we are talking about bridging the Digital Divide, it is ironic that we impose special exactions that target Internet access.

Glassman: In the vote for Permanent Normal Trade Relations with China, 164 Republicans joined just 73 Democrats in trying to give China permanent normal trading status. Now, you have been a very sharp critic of the Communist regime in China, yet you voted for PNTR. Why?

Congressman Cox: This was essentially a dispute between labor unions and those who believe that trade does not differently divide up the pie but rather makes the pie larger. President Clinton already has reached an agreement with the People's Republic of China, an Executive agreement that did not require Senate ratification earlier this year. That agreement essentially completed what was necessary for the People's Republic of China to join the World Trade Organization. The PRC would be joining the WTO regardless of how Congress voted. The vote on PNTR therefore was simply focused on whether or not we would be discriminated against by China in seeking access to their markets because they have already cut a deal with the European nations as well as virtually every other member of the WTO.

Finally, I only agreed to vote for that legislation when my own legislation was added to it, and that is, a requirement that each year, the Congress have a human rights review, such as we have had for a quarter of a century under Jackson-Vanik, and that that human rights review be an extended one. Under Jackson-Vanik, the only human right enumerated was immigration. Under my legislation, now the Congress will focus each year in mandatory hearings modeled after the Humphrey-Hawkins Act on freedom of expression, freedom of conscience, the rights of political prisoners, freedom from arbitrary arrest and detention and exile, freedom from forced abortion, and so on. All of these things are now made explicit in a statute and that is a big step forward for human rights at the same time that we are tapping into the opportunities of the market opening entry of the PRC to the WTO.

Glassman: Let me ask you two more quick questions. Another issue, where you have succeeded in attracting bipartisan support is the area of legal reform. You are the author of the law to limit so-called strike suits against high-tech firms. What is next on your agenda in terms of legal reforms?

Congressman Cox: I am campaigning very hard for Governor Bush. He is the first nominee of a major party in American history to make civil justice reform a major part of his platform. The issues that I've brought successfully to the floor of the House of Representatives in 1995 are part of his platform. He has made a success of this in Texas.

Glassman: And you think tort reform will help high-tech companies specifically?

Congressman Cox: Well, there isn't much question that growth companies are viewed as targets of opportunity by certain breeds of unethical lawyers. And the raiding of the employees' wealth and shareholders' wealth and consumer interest by the trial bar is something that once and for all must be put to a stop.

Glassman: And finally, what do you think is the most important thing that Congress and the President can do to encourage the continued growth of the Internet economy?

Congressman Cox: Resist the impulse to help it through taxes, regulations and subsidies. In particular, the latter is a threat. Every time government wishes to help, it embraces the object of its desire with subsidies. Those subsidies always necessitate some taxes. Witness the E-rate program. The Gore tax was imposed through Executive fiat in order to fund Al Gore's love affair with Internet hook-ups, but the E-rate itself a drag on the growth of the Internet economy.

Glassman: And, would you also extend that warning to companies that frequently, including new economy companies that appeal to government for help in competing with their competitors?

Congressman Cox: I haven't any illusions in this respect. As one who believes in the market and the virtues of healthy competition, I know that every tough competitor is looking for an honest advantage. If government is willing to provide such advantages in discriminatory fashion, then competitors will take advantage. I think it will fall on deaf ears to tell people to turn down government subsidies. That argument should be addressed to politicians.

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