Commentary

A Poor Excuse for Internet Taxes

By Aaron Lukas
January 4, 2000
Many Americans took advantage of tax-free Internet shopping for the first time this past holiday season. Did they unwittingly hurt the poor? That’s the bizarre claim being made by proponents of expanded online taxation. It was an oft-repeated refrain at the recent meeting of the federal Advisory Commission on Electronic Commerce in San Francisco.

No one on the Commission invoked the poor more often than Ron Kirk, the mayor of Dallas. Kirk says that since low-income individuals are the least likely to have Internet access, they are the least able to shop online. Soon, he warns, low-income Americans will be paying an unfairly large chunk of all sales taxes.

But would Kirk’s proposed alternative — applying new taxes to electronic commerce — actually help the poor?

Not likely. For starters, it’s high sales taxes — not the possibility that some people may be escaping them — that really burden low-income families. Poor households spend a large portion of their earnings on consumption and thus are more sensitive to sales tax rates than are other income groups. That’s why most states exempt purchases of essential items from sales taxes: to cushion the negative impact on the poor.

If such exemptions work, then low-income households won’t be affected by the growth of online shopping since most of their purchases are already tax free. If the exemptions are ineffective, then the Internet at least offers a chance for the poor to escape punishingly high sales tax rates.

The Internet is especially valuable to inner-city residents. Lower-income urban shoppers can go online to find goods and services not available in their own neighborhoods, which often aren’t served by traditional stores. A recent study conducted by PricewaterhouseCoopers and the Initiative for a Competitive Inner City (ICIC) concludes that inner-city residents with access to computers and the Internet use the Web as often as, and sometimes more frequently than, does the general U.S. population. Catalog shopping has long been popular among inner-city residents; the Internet merely expands the mail-order option.

As Carl Steidtmann, chief retail economist at PricewaterhouseCoopers, notes, “Bricks-and-mortar retailers have virtually ignored the inner cities, so it is natural that consumers there would look for other places to shop. The Internet opens doors for these people that they never saw before.”

Affluent households shop more online only because they are more likely to have access to a computer. The ICIC study found that 30 percent of inner-city shoppers have computers at home compared to 50 percent of the general population.

But that too is changing. As far back as 1996, a survey by Wirthlin Worldwide found that Internet use by people earning less than $15,000 per year had increased by as much as 160 percent. And this year the Commerce Department reported that from 1994 to 1998, computer ownership by whites increased 72 percent, while ownership by blacks increased 125 percent. Such trends have led Novell’s Eric Schmidt to predict, “At the current rate of growth every man, woman, and child on the earth will be connected to the Internet by 2007.”

Given that 98 percent of Americans have color televisions, and 88 percent have VCRs — technologies that once were prevalent only in upper-income households — Schmidt’s prediction is almost certain to come true. Families that don’t have computers now are going to have them soon, and they’re going to use them for shopping.

Even if low-income households decide not to embrace the Internet, the existence of untaxed e-commerce wouldn’t necessarily injure them.

For that to happen, states would have to experience significant revenue losses due to untaxed online shopping. With most states now running large budget surpluses, that fear is at most premature. And if revenues do fall, states would not be forced to respond by increasing sales tax rates. Instead, states could cut back on nonessential spending (of which there is plenty) or switch to an origin-based system that would tax all sales equally where businesses, not consumers, are located.

Politicians like Mayor Kirk forever claim that the best way to help the poor is by giving more money to — surprise! — politicians. But what low-income Americans really need is the opportunity to earn and keep more of their own money. At least for now, the Internet is making that possible.