TCS Daily

The Five Great Lies About Internet Taxation

By Dave McClure - November 17, 2003 12:00 AM

Of all of the issues generating headlines in the Congress today -- judicial appointments, health care and appropriations bills included -- the one that will most affect consumers is the fight over taxing the Internet.


Specifically, it is the fight over Senate bill S.150, the Internet Tax Nondiscrimination Act, which would permanently ban new, multiple and discriminatory taxes on Internet access and services other than electronic commerce transactions.


The states, led by the National Governors Association, want the right to heap billions of dollars in taxes on consumers over the next year or two for their Internet use -- taxing Internet access, services, email, downloads, instant messaging, web hosting and video streaming. These taxes will double the cost of Internet service for most Americans, and will cripple the national goal of deploying broadband to every school, library, business and household in the nation.


Standing against them are the Bush Administration, the federal agencies, the House of Representatives (which voted unanimously last month to ban such taxes forever) and the majority of the US Senate. Also standing against them are virtually every business group, civic group and consumer advocacy group in the nation, as well as nearly all state and local legislators.


Supporting the governors are a handful of senators who are using filibusters, deceit and misdirection to mask their tax-and-spend agendas. This group of nine Senators uses many arguments to justify the imposition of new, multiple and discriminatory taxes on the Internet, but there are five that are used most often -- five that are outright lies.


#1. This is an issue of state's rights that the federal government should not trample. Internet services are global in nature, and clearly fall within the realm of interstate commerce. According to Article I, Section 8 of the US Constitution, the individual states have no right to regulate, tax or tamper with interstate commerce. Denying the states the right to tax the Internet is a cornerstone of what the Founding Fathers had in mind when they drafted the Constitution.


#2. The states need the money, or widows and orphans will starve and schools will have to close. The states are actually doing very well in terms of revenue generation. While a few states -- notably California and Michigan -- still face enormous deficits, these are to runaway spending. Federal aid to the states has increased by a whopping 220 percent since 1990, to nearly $357 billion. State and local revenues have increased for the past five quarters, and nearly all of the states expect to meet their revenue projections for this year. Revenues for state and local governments are up nearly 70 percent in the past decade and still growing. Sadly, spending since 1990 has more than doubled, and even during the recession of 2000-2003 grew by 16 percent.


#3. Banning Internet Taxes is an illegal "Unfunded Mandate." In the Republican "Contract with America," Congressmen and Senators pledged they would not pass laws that required the states to spend money unless they also provided for reimbursement of that money. Nowhere in that pledge did they give the states a right to plunder the pocketbooks of working Americans. Nor does the pledge promise that the federal government won't step in to keep the states from acting in a way that harms national interests, such as taxing Internet access.


#4. Without Internet taxes, the states will "lose" revenue. You can't lose what you do not have. The states -- with only a few exceptions -- have been barred from taxing Internet access since 1998. This extension of the moratorium on Internet taxes merely updates the law to include technologies that were not in common use then, such as broadband. The seven states that are currently taxing the Internet will have three years -- on top of the five years they have already had -- to replace the small amount of revenue they might lose.


#5. Internet taxes will be small and reasonable. If that were true, the moratorium would not have been necessary in the first place. The Internet Tax Freedom Act was passed in 1998 to curb the excesses and abuses that were putting Internet services out of business and crushing the growth of the Internet. Tennessee was the worst offender, but dozens of states were threatening to kill the Internet through taxation. Even this year, tax commissars in Boulder, Colorado attempted to put the Colorado Internet Cooperative -- servicing more than a hundred rural towns in that state -- out of business by illegally applying retroactive taxes. If the states are granted the right to apply multiple taxes to every Internet service and connection, the cost of Internet service will double or more for most Americans.


Within a matter of days, supporters of the tax moratorium hope to force the issue to the Senate floor, where the Internet Tax Nondiscrimination Act will pass easily into law. But the handful of senators opposing the bill -- mostly former governors or senators who are retiring -- are working furiously to stall it.


What happens will say much about how the United States -- already lagging most other industrial nations in broadband deployment -- will move into the future. We can only hope that the Senate will vote in favor of broadband deployment, in favor of the American people, and in favor of an Internet that is the cornerstone of the US economy.


The author is President, US Internet Industry Association.

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