Archive for Monday, July 10, 2000

Tax-free Internet sales won’t last

July 10, 2000


It's the fashion in Washington to say that you love the Internet and hate taxes. And so the House bill to continue forbidding states to demand that online retailers collect the same sales taxes as the stores in town made a nice cocktail mix. Best of all for the reps, while they might jeopardize the revenues that states rely on, they did not touch the flow of federal tax dollars with which they must work.

That was really big of them. Under the Internet Tax Freedom Act, consumers are required to pay the sales tax on a CD they buy at a record store in the mall but not on the same CD purchased through an Internet site, such as

Lets propose a new resolution: Only those industries that arent doing very well should pay taxes.

Well, the heady buzz after last month's passage of a five-year moratorium on new Internet taxes has since faded into sober reflection. Sales taxes provide the states an average 40 percent of their revenues. It is estimated that states will be losing $11 billion a year to Internet sales by 2003. Huge and sudden changes in revenue flows do have consequences.

Since that vote, various people have been sitting down with the elected officials in Washington and explaining state government to them. It is surprising that such coaching would be needed. After all, these politicians are the same guys who have been busily transferring social programs health care, welfare reform to the state and local levels. States, counties and municipalities also provide fire and police protection, education, roads, a court system, and lot of other services that the public wants.

(Note that Congress also passed a bill on national airports that includes an increase in Internet taxation. Not one member raised a voice in protest. After all, the revenues were going to the federal government.)

Because they do not charge sales taxes, Internet retailers enjoy a competitive advantage over local store owners. Local merchants do not think this is fair, and the National Retail Federation has been all over Capitol Hill expressing its displeasure. Firefighters, teachers and other local government workers also question the wisdom of making cyberspace a tax-free zone.

And they are being joined by the sort of people who would reliably oppose most any kind of tax. After all, if state and local governments lose large swaths of revenue to a sales-tax-free Internet, what will fill the budget gaps? Higher income and property taxes. (The threat of hikes in property taxes has brought real estate agents into the fray.) And if e-commerce puts local stores out of business and their employees out of jobs, then there will be even more property and income tax revenues to replace.

Some normally anti-tax legislators have recognized the reality that tax freedom on the Internet does not reduce overall taxation. It just shifts the burden elsewhere. Texas, for example, does not have a state income tax and depends on sales taxes for 51 percent of its revenues. Republican Sen. Kay Bailey Hutchinson put two and two together. "If we allow this inequity to continue to occur," she said, "I can well see a drumbeat beginning for a state income tax, which I am going to fight to the death."

Politicians who worship at the cyberspace altar have argued that the Internet is a fabulous machine for growth. It is employing multitudes and pumping untold riches into our national economy. Charging sales taxes on e-commerce would "hamper the growth of this vital medium by imposing old ways of thinking that just do not apply." These are the words of Sen. John McCain. During the presidential campaign, the Arizona Republican called for a permanent ban on Internet sales taxes.

Let's propose a new resolution: Only those industries that aren't doing very well should pay taxes.

The senator from Arizona is reportedly experiencing a change of heart on this issue. Someone has apparently informed him that his state derives 44 percent of its revenues from sales taxes. Losing that source of income would punch a canyon-size hole in the state budget.

As the light bulbs go on all over Capitol Hill, the passion for a tax-free Internet is dimming. The Senate version of the House measure now bobs quietly in the horse latitudes of legislative inaction. As in the case of the horses thrown overboard from ships trapped on becalmed seas, the future for Internet tax freedom does not look very good.

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