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May 17, 2000, Wednesday

SECTION: PREPARED TESTIMONY

LENGTH: 1966 words

HEADLINE: PREPARED TESTIMONY OF GROVER G. NORQUIST

BEFORE THE HOUSE COMMITTEE ON THE JUDICIARY SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

SUBJECT - H.R. 4267: INTERNET TAX REFORM AND REDUCTION ACT OF 2000

BODY:
Thank you for the opportunity to testify today in support of H.R. 4267 the "Internet Tax Reform and Reduction Act."

In keeping with the Truth in Testimony legislation, let me assure you that neither I nor Americans for Tax Reform receives any taxpayer dollars from federal, state or local sources or contracts. As a matter of policy ATR does not accept taxpayer monies.

I was appointed to the Advisory Commission on Electronic Commerce as the representative of consumers. Other members of the 19-member commission were appointed to represent state, federal or local governments. A majority of the commission agreed on a set of proposals that were transmitted to Congress in April of this year.

Those recommendations included:

1. Extending the present three-year moratorium on discriminatory taxes on the Internet by another five years.

2. Endorsing federal legislation banning taxation of Internet access.

3. Abolishing the 3 percent federal excise tax enacted to pay for the Spanish-American war more than 100 years ago.

4. Reducing and simplifying the array of state and local taxes on telecommunications.

5. Codifying the Quill Supreme Court decision so that businesses and consumers would have a clear understanding of when Nexis does and does not exist. At present "gray" areas are being defined haphazardly by courts rather than Congress.

6. The commission repeatedly rejected the attempts by some lobbyists for state and local governments to call for undermining the commerce clause of the constitution and allowing taxing authorities in one state to force businesses in another state to collect that states sales taxes.

7. The commission also called for keeping the Internet tax-free at international borders-opposing new tariffs on electronic commerce between nations. The commission commended The Clinton Administration for its pro-taxpayer, pro-consumer position against tariffs on electronic commerce.

8. The commission called for the elimination of taxation on digitally transferred goods and services. Taxing the downloading of software or video or audio would require a massive invasion of the privacy of American cities and would damage the Internet as a means of commerce.The Commission heard from all parties, including a great deal from politicians who hoped to use the Internet as a new source of increasing taxes and spending at the state and local level.

Experts testifying before the commission helped to expose four myths that have clouded the discussion of taxation and the Internet.

First, The Internet is not taxed.

At present the building blocks of the Internet--telephone and cable services--are very heavily taxed. There is the 100 plus year old federal excise tax of 3%. There is the Gore tax--imposed by the FCC without Congressional approval. And without sunset. This tax will still be with us in 100 years. State and local governments impose an average excise tax of 14% on telecommunications. This makes telecommunications the most highly taxed good or service other than tobacco or liquor.

These heavy excise taxes were imposed when phone companies were local, regulated monopolies. Politicians found they would hide small taxes in the phone bills of their constituents. The phone companies didn't complain too loudly--they could pass on the tax as a cost of doing business and they wouldn't want to complain too much on behalf of their consumers as they were under the regulatory thumb of the local and state politicians.

Now, however, Congress has begun the process of moving telecommunications to a fully competitive market. These heavy taxes are no longer sustainable.

I would strongly recommend that Congress look to include telecommunications in the 4R law that prohibits state and local governments from levying discriminatory taxes on railroad property. This would allow a state with a five percent sales tax to have a five percent sales tax on phone bills--but not a ten percent tax. Similar protection must be afforded telecommunications in the property and income tax area. The other industry that mirrors telecommunications in having once been local monopolies now moving to national competition is the electric utility industry and it too should be protected by the 4R law.

I join the commission majority in strongly endorsing the abolition of the federal excise tax and I urge you to sunset the Gore tax before it also lives to tax your grandchildren.

The second myth is that states are broke and desperately need more money. In 1998, the 50 states ended the year with $11 billion in surpluses. The first Internet Christmas found sales tax revenue at an all time high. The untold story is that while Congress has found fiscal discipline in recent years--federal spending has fallen from 21.5% to 18.7% since 1994--state and local governments have not become more productive.

State and local governments have grown from 6.9 percent to 9 percent from 1968 to 1998. State and local politicians should focus on providing the best government at the lowest cost to taxpayers. State and local governments should be increasing productivity because of the technological progress of the past decade. Instead, some politicians not competent to improve their work have turned instead to calls to increase taxes on the very technologies that are making the rest of the country more efficient and productive. Any politician who sees the Internet as a source of even more taxes rather than a tool to save taxpayer monies should retire and let a more competent person take over.

The third myth is that the growth of the Internet is "costing" state and local governments lots of "lost" revenue.

First, when the government fails to take a dollar from a citizen that dollar is not lost. It is found in the pocket of the person who earned it. We learn a great deal about the thought processes of politicians who view every dollar they fail to take as "lost."

Second, a June 1999 study by Ernst and Young point out that because most ecommerce is business-to-business or the sale of intangible services or other products not subject to sales taxes the actual "loss" to state and local sales tax collection was $170 million in 1998 or one tenth of one percent of sales taxes collected.

The recent panic attacks by some politicians is the third in a series.

First, these politicians said that catalogue sales would eliminate sales tax revenues to states--everyone would buy everything from out of state catalogues and there would be no money for police or schools. This didn't happen. Catalogue sales are about 2% of the sales of goods.

Second, in the 1980s we were told, by these same forces that America was moving from a goods economy to a service economy and that unless we began taxing services there would be--yes, no schools, no police. (They never threaten stop building stadiums or hiring their brothers in law in response to less taxes.) Governor--Former-Governor Martinez of Florida tried this and was retired. Somehow sales taxes have increased each year anyway.

Now this third crisis is the Internet. It too will pass--unless Congress allows tax and spend politicians at the state and local level to undermine the commerce clause in search of more taxes.

The fourth myth is that the commerce clause is a loophole and that there is no good reason to forbid Utah from imposing its sales taxes on businesses in other states. The commerce clause was a good idea. It created a single American market and stopped states from attacking "foreign" (out-of-state) businesses. We do not want to create a situation where Alabama businesses can levy taxes on New York businesses. We have already seen the damage Alabama juries to do "foreign" auto companies in Detroit through the abuse of tort law.

Politicians love to hide taxes and love to tax those who cannot vote against them. Allowing Utah politicians to audit, harass, and tax L.L. Bean in Maine or Amazon.com in Washington state gives politicians power without responsibility. It is taxation without representation. We used to be against that.

Myth Five: Fairness.

Some politicians have enlisted the political support of some shopping mall owners and retailers by arguing that it is unfair that some consumers must pay a sales tax when buying in state and not have to pay the sales tax when buying over the Internet. Let's look at this. Buy one hundred dollars of books at your local bookstore in Utah and the state government will take six dollars from you--a six percent tax. Buy that $100 of books from Amazon.com and you will pay $12 in overnight shipping fees. If that $100 of books weighs more than one pound--as is likely--the shipping fees double.

For most sales the shipping fees are higher than the sales taxes avoided.

If the politicians who employ the "fairness" argument were seriously could end this problem by one, taxing all sales at the point of origin. Maine could tax all sales by L.L. Bean. Utah could tax all sales by Utah firms. The politicians refuse this simple solution because they don't want instead to levy taxes on out of state businesses. But this does expose the hypocrisy of the argument. Or politicians could cap the sales tax on large furniture purchases or computers so that the sales tax would always be lower than the shipping fees. This would reduce the sales tax revenue only a little and solve the problem of "fairness" for retailers. But again, the politician who use the "fairness" argument would accept this idea if they were the least bit interested in fairness-they are not, they want more tax dollars. A third solution would be to lower the sales tax burden governors and mayors impose on their own citizens and businesses.

A number of shopping mall and retail representatives have told me that they have been threatened by mayors and governors that if they do not help this drive to tax the Internet they will be the victims of property tax hikes. As they are not able to move easily, I appreciate the pressure they are under and look forward to working with them to oppose tax hikes on them and their consumers.

Myth Six: The Leavitt Constant.

Governor Mike Leavitt of Utah was a consistent advocate on the commission in support of higher taxes and in opposition to tax relief. He would ask witnesses to assume government spending was a fixed number, could not be reduced, and then ask them what taxes they thought would best raise the amount of money now spent by government.

The Leavitt constant, that government spending is fixed (and American families will have to adjust to the demands of government spending) is the Breshnev doctrine of big government. What the government owns today of your income is fixed. What you have kept to date is negotiable.

American taxpayers reject the Leavitt constant. Competent political leaders can reduce the cost of government by becoming more productive. Welfare reform, the Freedom to Farm Act and the reduction of the defense budget from 10% of GNP to 3% of GNP are examples. Privatization saves many states and municipalities billions. Avoiding white elephants such as stadiums and light rail subsidies reduce the cost of government.

Tax and Spend politicians look at tax cuts and ask "where are we going to get the money", they never look at their tax increases and ask what sacrifices citizens will be forced to make.

Government spending is not a fixed number. Not for competent political leaders.

The commission report is a good collection of policy ideas that will protect consumers and taxpayers from invasion of their privacy and will allow the Internet to develop free of the heavy hand of government.

I look forward to working with this committee and this Congress to make the Gilmore Commission Report a reality as soon as possible.

END

LOAD-DATE: May 18, 2000

Document 38 of 142.


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