Opinion Editorial | |
| Monday, November 22, 1999 | |
To Tax Net Or Not To Tax.... |
The battle over Internet taxation is shaping up as the key tax battleground of the coming year. It is a classic "wedge" issue pitting supporters of big government on one side and those favoring smaller government on the other. Thus it would seem to be an issue ideal for Republicans to attack Democrats. But that is not the case, because Republicans control so many of the nation's governorships. For parochial reasons, many have sided with the big government forces, making it more difficult for the party to stake out a clear anti-tax position.
Internet commerce is exploding. According to the latest Internet Economy Indicators, the Internet Economy is expected to reach $507 billion this year. E-commerce grew 127 percent just between the first quarter of 1998 and the first quarter of 1999 to $37.5 billion and now employs 901 thousand Americans.
The problem is that states, which depend heavily on sales tax revenue, fear that continued growth of e-commerce will erode their tax base. On November 10, Congressmen John Kasich and John Boehner, both Republicans from Ohio, introduced legislation to permanently bar states from taxing Internet sales. A similar bill has been introduced in the Senate by John McCain, Republican of Arizona. Perhaps more importantly, McCain is also chairman of the Senate Committee on Commerce, Science, and Transportation, and a candidate for the Republican presidential nomination.
Gov. Mike Leavitt, Utah Republican, and the National Governors Association denounced the sales tax prohibition bills, repeating many of the cliches appearing on the web sites of liberal organizations such as the Center for Budget and Policy Priorities. For example, the NGA charges that failure to tax Internet sales will hurt the poor and lead to spending cuts that will slash education, police and firefighting budgets. The same charges were made in a May 1998 report from the CBPP.
In truth, there is no evidence that the states' inability to tax internet commerce is having more than a trivial effect on their revenues (see figure). First, the Internet is powering growth in the overall economy, which enriches the states through corporate, income and other taxes. Second, the vast bulk of Internet sales would be tax free in any case, because they involve business-to-business sales or purchases of things like airline tickets that are already free of state sales taxes.
Republican governors should put aside their parochial concerns and abandon efforts to tax the Internet. They should join Virginia Gov. Jim Gilmore in championing a tax-free Internet. In the long run, the economic and political benefits will far outweigh the loss of revenue.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, November 22, 1999.
For CBPP report
http://www.cbpp.org/512webtax.htm
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