Commentary

Ban Internet Taxes

The electronic superhighway is becoming an ever more important forum for commerce, and states want a piece of the action. But just as American colonists resisted British attempts to tax paper and tea, American citizens should bar states from taxing online transactions.

An important battle over Internet taxation has been fought within the Advisory Commission on Electronic Commerce, created by Congress to study the issue.

In attempting to write its report, due in April, the commission was riven with acrimonious debate. Storefront retailers were determined to see their online competitors suffer under the heavy hand of government.

A majority of ACEC members voted to support extension by five years of the existing moratorium on new state taxes on the Internet, and elimination of the 3 percent federal excise tax on telephone services.

But advocates failed to reach the necessary super majority of 13 (out of 19) members necessary to make the recommendation official. The biggest fight occurred over ”nexus” issues, that is, when online retailers had a large enough physical presence in a state to warrant collection of sales taxes.

Lisa Cowell, executive director of the retailers’ lobby, the e-Fairness Coalition, complained that business members of ACEC ”used their position on the ACEC to serve their corporate interests.”

ACEC member and Utah Gov. Mike Leavitt denounced the ”desire to create very special privileges for one type of retailing.”

Tax advocates like Cowell and Leavitt argue fairness, but the real issue is money.

Dallas Mayor Ron Kirk, another ACEC member, argued that online sales could cost states $20 billion a year and, that, of course, would mean a cut in important government services. He kept a fire truck on the commission table to symbolize that such services are real, not virtual.

But states have more than enough money to provide essential services: their revenues have been increasing more than 5 percent a year throughout the 1990s, and states ended 1998 with a collective $11 billion surplus.

Moreover, such services do not benefit e-retailers, in contrast to local sellers, who are also able to vote on Kirk and Leavitt, and their programs.

Anyway, frivolous government outlays abound, and economic good times have encouraged states and localities to spend even more on unnecessary projects. That projected $20 billion ”loss” belongs in the hands of taxpayers, who today face the highest peacetime tax burden ever.

The concern of storefront retailers for fairness is understandable, but it would make more sense to simplify and reduce the existing tax burden than to extend today’s regulations to online sellers.

After all, these fears are not new: catalog sales were once believed to threaten neighborhood department stores. But local businesses survived. They will survive Web retailers.

In 1998, Internet sales ran just $5.6 billion, one-thirtieth of the $185 billion total for mail-order sales. The latter might sound like a lot, except in comparison to the $2.7 trillion total in retail sales.

Delivery charges aside, most people like to look at, touch, read, try on and feel the items that they are considering purchasing. Moreover, many people want the shirt or record right away. Lots of people simply like to shop. Surfing the Web is no substitute.

Anyway, just as competition among businesses is good, so is competition among states. Limiting the reach of grabby and greedy public officials gives citizens more options where to live, work and shop. Constraining political avarice ensures that citizens retain an opportunity to flee areas with excessive taxes.

The critical tactic, understood by America’s rebellious colonists, is to refuse government new sources of revenue. Once granted, such taxes will never be voluntarily surrendered by public officials.

A century ago, Washington imposed an excise tax on the newfangled telephone to fund the Spanish-American War. That exaction, which now costs more than $5 billion annually, is still with us.

The only circumstance under which Internet taxation could be justified is if government dropped a corresponding levy. Replace the federal income tax with a national sales tax? Then let’s talk about taxing the Net.

Are states willing to eliminate some taxes entirely, cut tax rates or accept constitutional tax limitations? Then let’s talk about applying sales taxes to the Internet. Until then, don’t call us, we’ll call you.

Computers and their various progeny, particularly the Internet, are transforming the economy. Their impact has been so great in part because they have developed relatively free of the government regulations and taxes that routinely hobble other businesses.

To protect their economic future, Americans must keep the electronic superhighway free of government roadblocks. Especially state attempts to turn it, like all other commerce, into a cash cow.

Doug Bandow is a senior fellow at the Cato Institute.