TCS Daily

Numbers Don't Lie in Net Tax Debate

By James Freeman - June 12, 2000 12:00 AM

Are online sales hurting state and local governments? Many of America's Governors say yes. In fact, it's the central message of the campaign for new sales taxes on the Internet: online shoppers are getting a free ride, depriving America's state and local governments of needed revenue. The standard tactic is to warn that the loss of tax revenue due to e-commerce will starve police and fire departments, putting us all in danger.

It's an interesting argument, and it's completely unsupported by the facts. Recently the US Commerce Department released its estimates for state and local government revenues in 2000. Is Commerce forecasting a sharp decline in tax collections? Not quite. The department's Bureau of Economic Analysis estimates that state and local governments will run - not a deficit - but a combined surplus this year of $60 billion. So if e-commerce hurts government's ability to provide necessary services, we're still waiting to see the victims.

This year's estimated surplus of $60 billion follows a $51 billion surplus in 1999. Not only is government surviving the increase in online shopping, it's actually collecting more money. Commerce estimates an increase in state and local revenues of $45 billion this year, for a grand total of almost $1.2 trillion in funding for state and local governments. Government is consuming more than 11% of our economy, before we count Federal taxes!

But it's not enough for state and local politicians. Right now, they're lobbying Congress to gain new powers denied them by the Constitution. Too often, media reports suggest that the Internet is getting some kind of special treatment because states can't force a remote website to collect their sales taxes for them. In fact, the Constitution says that individual states can't regulate interstate commerce. That's why mail order companies have never had to keep track of the rates in every one of America's 30,000 tax jurisdictions and collect taxes for them. It's not an Internet thing.

The framers of the Constitution recognized that if every state and locality could enforce its own rules on cross-country transactions, the burden on businesses would be intolerable. Just to make it crystal clear, the Supreme Court has explicitly stated that states can't force out-of-state sellers to collect their sales taxes. Now many governors are promising that if Washington will give them new powers, they'll make a new sales tax system that wouldn't be too burdensome. Please.

Recently, the House passed HR 3709, a five-year extension of the Cox-Wyden Internet tax moratorium. This bill prohibits new, multiple and discriminatory taxation on the Internet. Banning "multiple" taxation means that various states can't tax the same transaction as it bounces around the Internet.

Prohibiting "discriminatory" taxes means that if your state can't collect sales taxes when you call or mail across the country to place an order, then it can't collect taxes if you use the Internet to do the same thing. Some creative tax collectors have considered trying to slap new levies on e-commerce by claiming that the orders went through an in-state server.

To save the Internet from an avalanche of new taxes that would appall the framers of our Constitution, the Senate should immediately vote yes on HR 3709. State and local governments don't need more of our money, but the Internet economy does need freedom to grow.

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