Copyright 2000 Federal News Service, Inc.
Federal News Service
February 2, 2000, Wednesday
SECTION: PREPARED TESTIMONY
LENGTH: 2237 words
HEADLINE:
PREPARED STATEMENT OF GOVERNOR JOHN ENGLER MICHIGAN ON BEHALF OF THE NATIONAL
GOVERNORS' ASSOCIATION
BEFORE THE SENATE BUDGET
COMMITTEE
SUBJECT - INTERNET TAXATION IN THE NEW MILLENNIUM
BODY:
Mr. Chairman and members of the
committee, on behalf of the National Governors' Association and the people of
Michigan, thank you very much for the courtesy that's been extended to me this
morning.
No other innovation -- no other way of doing business -- has
revolutionized our nation's economy faster than the Internet. It took
generations for the Industrial Revolution to play out around the world. The
Internet Revolution has unfolded before our eyes, in less than a decade. The
speed of this change has been astounding. In the Industrial Age, as change took
place, governments were able to react accordingly. In the Internet Age, today's
innovation is tomorrow's standard. Government simply cannot keep up.
Congress, as well as state and local governments, need to function in
this new economy without hindering its continued expansion. I welcome this
committee's thoughtful approach to an important issue, e- commerce, and how it
fits into government's traditional revenue- raising functions. Any thoughtful
discussion on e-commerce must include the following key issues: 1. The proper
relationship between the federal government and the states on issues of
taxation;
2. The necessity of keeping tax policy neutral so that neither
traditional retailers nor remote sellers (catalog, Internet, or similar
enterprises) are given an advantage based on tax policy;
3. The need to
stop erosion of essential revenue streams that support education and other key
public services at the local level.
Governors are vitally concerned
about any action that could negatively affect the vast majority of retailers --
most of them small businesses, by the way -- as well as their employees in our
states, and erode the revenue source most important to the provision of
education, public safety, and transportation services to the American people and
businesses.
So I am grateful you have invited the National Governors'
Association to be represented, and I am honored to be their witness, as well as
to be joined by Michigan's esteemed Senator Spencer Abraham, who so ably
represents our state in the Senate.
Collection of Existing Taxes
The central issue between the states and federal government as it
relates to e-commerce is not about new taxes on the Internet, but rather how the
states will collect taxes already on the books, and whether states will remain
sovereign in their right to collect those taxes.
As part of the Internet
Tax Freedom Act, Congress imposed a threeyear moratorium on new state and local
Internet access fees, and multiple and discriminatory taxes on
the Internet. The act is silent with regard to federal taxes on
the Internet, and it is silent with regard to federal, state,
and local sales and use taxes. Today, we will
discuss a moratorium that does not expire until October of 2001, more than 18
months from now.
In Michigan and many other states, we strongly oppose
any new taxes on the Internet. We should not impose new surcharges or access
fees to this emerging technology.
State governments should not seek to
enrich themselves with new taxes just because of new technology and new methods
of delivering goods.
In Michigan, we have spurred our economy, created
new jobs, and strengthened families by cutting taxes, not finding new ones.
The states must, however, act effectively to inform consumers of their
obligation under existing law and find ways to help efficiently collect it.
What is this tax obligation for which consumers need to be better
informed? It is called the "use tax." Every state with a sales tax has a
companion tax for purchases made outside the state. This remote sales tax -- or
use tax -- applies to any purchase on which the consumer did not pay a state
sales tax.
This remote sales tax has an obvious purpose. It would be
pointless to require a tax on purchases of furniture in Michigan, but then allow
Michigan residents to purchase furniture in Illinois, Indiana, Ohio, or
Wisconsin -- all bordering states -- tax-free. To have no tax on purchases made
elsewhere would put each state's retailers at an obvious disadvantage.
In Michigan, this legal obligation to pay tax on goods purchased outside
the state has been on the books since the 1930s. It is equally longstanding in
other states. This obligation is well understood by businesses. Unfortunately,
most ordinary shoppers do not understand it and it is this misunderstanding that
we are beginning to address -- from Michigan to Virginia and nationwide.
The New Economy
Electronic commerce is not new. It first began
with the invention of the telephone. It continued over the decades and expanded
with the invention of the fax machine. Nobody ever suggested that the federal
government should begin regulating this industry or that the states should be
prohibited from imposing taxes.
Today, however, e-commerce as it relates
to the Internet has prompted House Budget Committee Chairman John Kasich and
Senate Commerce Committee Chairman John McCain to propose legislation that would
have the federal government preempt existing state and local sales and use tax
systems. This legislation would be an unprecedented infringement upon the
states' ability to raise the revenues necessary to carry out state functions,
much less compel the federal government to provide state tax loopholes.
That could mean, Mr. Chairman, that if you happened to be in a store in
Albuquerque and saw a pair of Levis but, instead of pulling them off the rack
and paying for them at the counter, you used an Internet kiosk in front of the
rack and then went to the counter and picked up exactly the same pair of
trousers, there would be no state or local tax. Under such a system, one can
imagine just how long it would take for every vendor in America to migrate to a
kiosk or other system simply in order to maintain a level playing field.
If you think this sounds far fetched, just talk to the local furniture
or computer sales people in your state. They have already experienced this
problem.In the face of the impending transformation of retail shopping,
government tax policy must remain neutral. It is not the time to have government
tilt competitive forces in favor of either traditional retailers or emerging
electronic retailers. Unfortunately, without the states effective enforcement of
our current laws -- and with the passage of proposals like that proposed by
Chairmen Kasich and McCain -- such government-sponsored favoritism will result.
Without compliance to both sales and use tax requirements, our
traditional main-street retailers will face a significant pricing gap with their
remote competitors. In Michigan, this gap would be 6 percent; it is even greater
in some other states. In effect, the federal government will be providing this
significant price differential to those who don't support communities, create
jobs, pay property taxes, and keep our cities and towns livable. It is both
unfair and counterproductive public policy. It is, in essence, a two- tiered
system: good for clicks, bad for bricks.
In order to keep the playing
field level and to increase compliance, Michigan and other states are stepping
up their consumer education and enforcement efforts. In recent years, we
included clear directions on how to comply with the use tax obligation in our
income tax booklet. This has not been as effective as we had hoped.
This
year, modeling the work of other states such as Virginia, Michigan has much more
prominently featured information on the use tax and its requirements in the
state's income tax booklet, including a worksheet for taxpayers to figure out
use tax owed and a Use Tax Table, for people who owe use tax but did not save
their receipts.
Most significantly, the Michigan income tax form now has
a new line for residents to pay any use tax obligation. Finally, the state is
working closely with the state retailer and education organizations -- even tax
preparers -- in raising public awareness of this very important issue.
Federalism
The federal government has a constitutional role to
prevent interference with interstate commerce. At the same time, the states
retain basic sovereignty under the 10th amendment to the constitution. For
decades the states have had the authority to enact and modify sales tax laws and
their complement use tax laws. Use tax laws have been effectively enforced for
decades as it relates to business purchases. For example, when K-Mart Corp.,
headquartered in Troy, Michigan, purchases furniture for their corporate offices
outside of the state, they automatically pay Michigan's 6 percent use
tax on that purchase.
While the rapid growth of
Internet sales has heightened interest in this important issue,
it is by no means limited to Internet sales. In fact, to the degree that such an
artificial boundary is maintained, the absurdity of the policy grows.
Is
it possible that the federal government will override long-standing state policy
and prevent states from collecting use tax on an Internet purchase from an Eddie
Bauer web-site, but continue to allow the collection of tax from catalog sales?
Will the federal government tell the states that have been enforcing use tax on
furniture shipments into their states that they may no longer do so? Once
successful in this regard, will we see additional actions of the federal
government? Will the federal government declare that income taxes can no longer
be applied to the software engineers who build the websites involved? Will
dot.com firms' warehouses be exempted from property taxes by action of the
federal government?
Such an action would clearly violate the sovereignty
of the states to enact and enforce sales and use taxes.
Imagine where
that slippery slope leads in the years ahead - congressional tax cuts imposed by
eliminating state taxes! The taste of enacting tax cuts that don't reduce
federal revenue could, of course, easily prove to be addictive. What about the
elimination of state use tax on equipment necessary to reduce environmental
emissions? Why not override states authority to tax diesel fuel that is used to
transport goods across state lines? How about an end to income taxes for
teachers? Or firemen? The opportunity for mischief is unlimited.
Only
with state action to efficiently collect existing taxes will our traditional
main-street retailers compete with the new world of ecommerce on a level playing
field, and will our funding base for critical services be preserved for the
years to come.
There is no question that the federal government has the
right to regulate interstate commerce. But it would be virtually unprecedented
for the federal government to stomp on the most basic rights of the citizens and
taxpayers of each and every state by determining how they may or may not raise
revenues.To reiterate, the states do not seek new taxes. We have been very
careful to craft our proposal for a zero- burden collection system to ensure
effective enforcement of current tax laws.
The point is this: the
federal government has absolutely no authority to override the states sovereign
right to administer existing state tax laws.
Closing
Let us be
clear. No Governor is looking to tax the Internet, any more than any Senator is
trying to impose a special, discriminatory tax on the
Internet.
The states' sales and use
taxes are existing taxes, not new
taxes.
All we are asking is to keep the right we now
have as a state to determine our own revenue policies under the laws the people
of our state have adopted and we are elected to implement. Most of these sales
and use taxes have been in place for at least 50 years.
The largest
revenue collections in the nation, even in the income tax states, are through
state sales taxes. If Congress overrides states' tax policies by cutting our tax
base, it will fundamentally upset both the states' and the nation's capacity to
provide critical services to the people. The sales and use tax revenues belong
to people and taxpayers of the states, not the federal government.
In
Michigan, education is the primary beneficiary of these revenues. We have a long
history of support for K-12 education at the state and local levels. Total state
and local funding for schools is estimated to exceed $12.5
billion in this coming fiscal year and grow to $14.3 billion by
fiscal year 2003.In fact, since fiscal year 1998, the state has consistently
spent more state dollars on K-12 education than is spent in our entire general
fund budget.
Nearly 75 percent of Michigan's sales tax revenue and
one-third of our use tax revenue goes to fund K-12 public education alone. The
second biggest beneficiary is local units of government, providing fire and
police protection, road improvements, and library services.
Other states
rely on sales and use taxes to fund other critical priorities, such as health
care services for vulnerable citizens, Medicaid, mental health services, public
health services, veteran's homes, and services to seniors.
Finally, if
we gravitate towards a tax system that creates a specific loophole for retailers
that use the Internet, we risk creation of a federal policy that favors Internet
vendors at the expense of Main Street stores and home-town merchants. We cannot
adopt a tax policy in America that assists in harming traditional Main Street
retailers.
Thank you for the opportunity you've given me to testify, Mr.
Chairman.
END
LOAD-DATE: February 3, 2000