Commentary

No New Taxes … or Same Old Story?

By Aaron Lukas
October 7, 1999
Politicians are famously adept at employing what one might term “creative” language. President Clinton is the acknowledged master of this art, with his infamous line, “It depends on what the meaning of ‘is’ is.” But at a recent meeting of the Advisory Commission on Electronic Commerce in New York, Gov. Michael Leavitt of Utah proved that he’s in the same league.

While laying out a list of principles that should guide Internet taxation, the governor proclaimed—forcefully, with glasses in hand for emphasis—that there should be “no new taxes” on Internet sales. Mike Leavitt, the taxpayer’s friend! But wait: in Leavitt-speak, no “new” taxes doesn’t mean the state won’t take more of your money; it will just do the job with additional “old” taxes. Follow?

The governor explained: “[We] don’t want any more taxes being raised by this … uh, by being imposed on the Internet itself,” he said. “Does that mean,” another commissioner asked, “no net tax increase on citizens?” “No, what it means is no new taxes being imposed on sales over the Internet.”

It took several more minutes to pin him down, but as it turns out, Governor Leavitt’s notion of “no new taxes” leaves plenty of room for, well, new taxes.

The key is a dubious distinction between “new” and “higher” taxes. All states with a sales tax also theoretically levy a “use tax.” Whenever you buy something from out of state over the Internet (or from a catalog) and the seller doesn’t collect sales taxes, you’re supposed to report the purchase and voluntarily pay the use tax. Of course, the use tax is virtually unknown to ordinary taxpayers because no state has ever made a serious effort to collect it.

States hate collecting taxes directly, so they delegate the task to businesses. But under federal law and the Constitution, a state is prohibited from forcing wholly out of state sellers to collect the state’s taxes. That’s why Governor Leavitt, the unofficial leader of the Advisory Commission’s pro-tax faction, wants Congress to change the rules. If he has his way, an antique shop in Maine would have to collect and remit taxes to Salt Lake City for all its sales in Utah. Technically, that might not be a “new” tax, but the result is the same: more money for the state, less for taxpayers.

Thus, Governor Leavitt can say he opposes “new” taxes while still supporting higher taxes. The difference is, of course, meaningless. Former president George Bush lost an election because, among other things, he broke his “no new taxes” pledge by signing a bill that raised the federal income tax. Maybe Leavitt would argue that collecting more of that preexisting tax wasn’t really a “new tax,” but it was close enough for voters.

The governor touts his plan as one that would level the playing field between local and out-of-state businesses. After all, if local businesses must collect taxes, why shouldn’t out-of-state businesses bear the same burden?

But there’s nothing fair about exporting taxes. When a local business collects sales taxes, there is a clear link among taxes paid, services provided and legislative representation. Local firms benefit from police and fire protection, roads, waste collection and other services, so it’s proper that they help cover those costs. Remote sellers don’t enjoy any of those services, and shipping companies already pay taxes to cover their use of public goods. If current state tax systems disadvantage local retailers, the best remedy is to cut taxes, not collect more.

Besides, states aren’t “losing” money on cross-border sales. The current sales tax rates were set with the knowledge that use taxes wouldn’t be collected. If states want to expand their tax base, tax rates should be lowered first. It’s not as if states are strapped for cash: over the past four years, tax collections have exceeded expectations by about $25 billion.

In truth, politicians don’t really fear the Internet; they fear each other. Every state has the legal authority to tax (or not) each transaction that takes place within its borders. But no state taxes sales that in-state businesses make to out-of-state buyers. Any state could, but none do. Why? Because unless all states follow suit, more businesses might set up shop in the low- and no-tax states. Politicians call that a “race to the bottom,” but it’s really just healthy tax competition.

The alternative—one that Leavitt and many of his fellow governors are pushing—is for Washington to step in and solve the states’ collective action problem. If that happens, states could collect more tax money without worrying about competition from other states and, incidentally, without the unpleasant task of facing voters back home.

Congress shouldn’t listen. Only local taxpayers should decide how much money their states need. So when your governor cries, “No new taxes!” watch your wallet: he may not mean what you think he means.

Aaron Lukas is an analyst at the Cato Institute’s Center for Trade Policy Studies and member of the Advisory Commission on Electronic Commerce panel of experts