NCPA - National Center for Policy Analysis

To Tax Net Or Not To Tax....

November 22, 1999

Internet taxation is shaping up as the key tax battleground of the coming year. But because Republicans control so many of the nation's governorships, many have sided with 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 901,000 Americans.

States depend heavily on sales tax revenue, and fear continued growth of e-commerce will erode their tax base. But bills have been introduced in both the House and Senate to permanently bar states from taxing Internet sales.

Gov. Mike Leavitt, Utah Republican, and the National Governors Association denounced the sales tax prohibition bills, repeating many of the clichés 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 cuts in basic services. The same charges were made in a May 1998 CBPP report.

In truth, there is no evidence that states' inability to tax internet commerce is having more than a trivial effect on their revenues. 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, as business-to-business sales or purchases of sales-tax exempt items.

Republican governors 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 revenue loss.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, November 22, 1999.


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