No New Taxes … or Same Old Story?

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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 foremphasis--that there should be "no new taxes" on Internet sales. MikeLeavitt, the taxpayer's friend! But wait: in Leavitt-speak, no "new" taxesdoesn't mean the state won't take more of your money; it will just do thejob with additional "old" taxes. Follow?

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

It took several more minutes to pin him down, but as it turns out, GovernorLeavitt's notion of "no new taxes" leaves plenty of room for, well, newtaxes.

The key is a dubious distinction between "new" and "higher" taxes. Allstates with a sales tax also theoretically levy a "use tax." Whenever youbuy something from out of state over the Internet (or from a catalog) andthe seller doesn't collect sales taxes, you're supposed to report thepurchase and voluntarily pay the use tax. Of course, the use tax isvirtually unknown to ordinary taxpayers because no state has ever made aserious effort to collect it.

States hate collecting taxes directly, so they delegate the task tobusinesses. But under federal law and the Constitution, a state isprohibited from forcing wholly out of state sellers to collect the state'staxes. That's why Governor Leavitt, the unofficial leader of the AdvisoryCommission's pro-tax faction, wants Congress to change the rules. If he hashis way, an antique shop in Maine would have to collect and remit taxes toSalt 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 fortaxpayers.

Thus, Governor Leavitt can say he opposes "new" taxes while stillsupporting higher taxes. The difference is, of course, meaningless. Formerpresident George Bush lost an election because, among other things, hebroke his "no new taxes" pledge by signing a bill that raised the federalincome tax. Maybe Leavitt would argue that collecting more of thatpreexisting tax wasn't really a "new tax," but it was close enough forvoters.

The governor touts his plan as one that would level the playing fieldbetween local and out-of-state businesses. After all, if local businessesmust collect taxes, why shouldn't out-of-state businesses bear the sameburden?

But there's nothing fair about exporting taxes. When a local businesscollects sales taxes, there is a clear link among taxes paid, servicesprovided and legislative representation. Local firms benefit from policeand fire protection, roads, waste collection and other services, so it'sproper that they help cover those costs. Remote sellers don't enjoy any ofthose services, and shipping companies already pay taxes to cover their useof 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 currentsales tax rates were set with the knowledge that use taxes wouldn't becollected. If states want to expand their tax base, tax rates should belowered first. It's not as if states are strapped for cash: over the pastfour 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 thattakes place within its borders. But no state taxes sales that in-statebusinesses 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 inthe 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 arepushing--is for Washington to step in and solve the states' collectiveaction problem. If that happens, states could collect more tax moneywithout 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 muchmoney their states need. So when your governor cries, "No new taxes!" watchyour wallet: he may not mean what you think he means.