Speech to National League of Cities Annual Conference in Washington, DC

March 13, 2000

Internet Taxation  

I believe, as you do, that few issues are more important than protecting the local tax base.  I am especially sensitive to this concern because I come from Orange County, California.  And the community that I represent, which has 2.8 million people, is more populous than 17 states in the union.  We have an annual economic output of more than $100 billion.  That makes us bigger than the entire nation of Greece, for example. 

On most matters, Orange County’s interests are better served by our mayors, our city council people, and our county supervisors than they are by the Washington bureaucracy.  That’s because with all those people and with all of that economic output, we have no senators to call our own.  We have to share our two senators with more than 30 million other Californians.  And as a result, Washington, DC routinely shortchanges our local taxpayers. 

Let me just give you one example.  I mentioned gas prices.  Motorists in Orange County, as in each of your cities, pay the 18.4 cents per gallon federal gas tax--the same that people in Rhode Island pay, for example.  All of these taxes go into the Federal Highway Trust Fund.  By any objective measure, one would assume that people in Rhode Island, people in California, and people in Orange County (where I live) would get back about the same amount that they put in. 

But that isn’t even close to true in our case.  Orange County receives as much federal funding for highways from the federal gas tax as does the state of Rhode Island, even though we have three times as many people.  On a per capita basis, the same is true: For every federal highway dollar that is spent per capita in the other 49 states, Orange County gets 50 cents. 

Keeping more of our tax dollars and our tax base at home, where tax revenues can be spent locally, is even more important for Californians than for people in any other state because we lack representation here in Washington.  And I should add that there is only one part of the U.S. Constitution that cannot be amended and that is the part that guarantees every state equal suffrage in the Senate.  So even under Article Five of the Constitution, we can’t fix it.  We are stuck with this system and our only recourse is to make sure we don’t send the money to Washington in the first place, that we collect it locally.   

I bring this out because it’s one of the points of common interest that we’ve had working together as the National League of Cities, mayors, city council members, and Congress when we went through the exercise of enacting the Internet Tax Freedom Act.  Congress, states, counties, and cities all need to continue working together to protect the local tax base. 

The Internet Tax Freedom Act, which is currently law, aimed to do this in two ways.  First by ensuring that the Internet will continue to propel the new economy that is contributing to record tax receipts at every level of government.  And, second, by setting up a commission to study and recommend ways to simplify the collection of state and local sales taxes.  It’s essential that we work together on these issues because otherwise we will impair our state and local tax bases. 

I have another fear that’s even worse.  It’s that Congress and the White House—Washington—is going to step in and solve this problem for us, because it’s the only way to impose uniformity.  It’s the only way to simplify things.  And as you can tell from my preparatory remarks, I think that would be the worst way to simplify things, to fix the problem.   

        Our ultimate goal should be to provide simplicity and certainty in the imposition of local taxes and questions of interstate tax liability.  It’s in everybody’s best interest to do that.  It’s in the best interest of a Main Street business or a rural family that wants to set up operations on the Internet because it will give them access to a global marketplace.  It’s in the best interest of any Internet user because people who use the Internet want to know that their products and services are not subject to multiple, discriminatory, or special taxes. 

And it’s in the best interest of tax collectors because tax collectors need clear rules about what kinds of transactions are and are not subject to tax, and who is going to collect that tax.   

I want to devote the balance of my remarks to talking with you about the current Internet Tax Freedom Act.  There’s a real need to clarify, probably not in this room but throughout the country and with the media, what the Internet Tax Freedom Act does and does not do.   People in this room are probably uniquely aware of what the Act does and does not do, but as you know from reading the newspapers and listening to politicians discuss this, there’s a great deal of fog surrounding the issue. 

The current law is ideally suited to our common objectives.  But there are many other proposals that are not.  And these other proposals, such as banning sales taxes on the Internet, are often confused with the Internet Tax Freedom Act. 

Senator Ron Wyden, a Democrat from Oregon, and I, a Republican from California, began drafting the bill back in 1996.  Our concern was that the Internet's very design—-its global nature, and its decentralized architecture—would make it especially vulnerable to multiple and special types of taxation. 

        The goal of the Internet Tax Freedom Act was not to preclude the taxation of electronic commerce.  I agree that such a proposal would be unwise.  It would violate our most basic principles of tax fairness.  It would harm state and local budgets.  It would, furthermore, represent an unprecedented and unwarranted federal intrusion into state and local tax sovereignty. 

        So, we rejected that approach.  Instead, the express aim of the Internet Tax Freedom Act is the neutral tax treatment of all economic activity, whether it’s e-commerce or whether it’s commerce conducted by any other means.  The law is aimed only at ensuring that the Internet is not subject to discrimination, that it is not singled out for special taxes that don’t apply in the offline world. 

We spent two years working on the bill to make sure that it achieved that result.  And we responded directly to concerns expressed by your leadership and staff in Washington and by each of you, or many of you, from throughout the country.  When I was working on this legislation, I kept trying to bring us back to the point of preventing discrimination.  

We hope that double standards will never be applied to e-commerce.  Through four committee hearings, six subcommittee and full committee markups of the legislation, and extensive debate on the floor of the House and the Senate, together we produced a law that protects our local tax base and the growing Internet economy. 

The final law benefited from your input in several ways. 

·         We changed the bill as originally it was written from a blanket ban on discriminatory taxes, which would have placed the burden of proof on state and local governments to establish that a tax was fair, to one that precisely enumerated only those types of special and multiple taxes that we were particularly concerned about.  

·         We included a provision in the bill entitled “Preservation of State and Local Taxing Authority.”  It expressly preserves city and state authority to gain revenue from the growth of the Internet economy through the application of normal business taxes to the Internet. 

·         We included language to ensure that the bill would not affect current revenue streams, and would not affect any outstanding tax liability. 

The final law keeps intact the right of cities and states to impose regular sales and use taxes on electronic commerce.  It doesn’t affect property taxes, it doesn’t affect business license taxes, it doesn’t affect franchise taxes, or any other taxes that are applied to the Internet in the same manner that they applied in the offline world. 

The final law, as is presently in place, only bars three types of taxes: 

·         The first is new taxes on the fees that consumers pay to connect to the Internet.

·         The second is multiple taxes on goods and services ordered over the Internet.  Now keep in mind that the use tax is not a multiple tax because as use taxes are defined, they are applied only where sales tax on the same transaction is not collected. 

·         Third, it bars discriminatory taxes on products and services bought over the Internet.  “Discriminatory” in this sense means taxing things on the Internet differently than they are taxed offline. 

Some news reports have erroneously blamed the Internet Tax Freedom Act for the inability of cities and states to collect sales or use taxes from remote sellers.  As you know, those restrictions on collecting taxes from remote sellers were imposed in two Supreme Court decisions, not by the Internet Tax Freedom Act.  And these court decisions were the law of the land well before the Internet was even invented by Al Gore.   

As you know, the Supreme Court ruled in its 1967 Bellas Hess decision and its 1992 Quill decision that no city or state can constitutionally compel an out-of-state seller to collect the use tax, unless that out-of-state seller has a substantial physical presence in the jurisdiction.  With or without the Internet Tax Freedom Act, those Supreme Court cases would be today the law of the land.  That’s why cities and states are still facing these challenges of attempting to collect sales and use taxes from remote sellers.  And that’s true whether things are ordered over the Internet, or through catalog, or over the telephone, or via the Postal Service.  If we didn’t have the Internet Tax Freedom Act, then we wouldn’t have a congressionally-chartered commission studying how to address these challenges. 

Now, as the Commission finishes its work, while there remain disagreements on many aspects of Internet taxation, there is one area of emerging national consensus.  And that is all of us agree that the Internet should never be subject to multiple taxes or discriminatory taxes. 

And that’s why Senator Ron Wyden and I recently introduced our one paragraph bill.  Our new bill is called the Internet Non-Discrimination Act.  We chose that title because we want to make it clear, as I hope I have illustrated today, that our intent is not to expand the moratorium.  The Internet Non-Discrimination Act simply makes the existing three-year ban on discriminatory taxes permanent. 

Putting these basic principles in law makes sense independent of whatever rules Congress or the Supreme Court may adopt on “nexus”—whether we have the existing physical-presence rule, as outlined in those two Supreme Court decisions I mentioned, or some new rule.  In any case, surely there is agreement that all sellers should be subject to the same standard.  None of us wants a regime that subjects the same seller differently if he sells by catalog or over the Internet. 

There’s another area of consensus that seems to be emerging and that is the need for increased simplicity in the collection of state and local use taxes.  The Supreme Court in fact ruled the way it did in its Quill decision precisely because of the complexity and burden of collecting interstate taxes.

 In illustration of the hassles and costs involved in collecting these kinds of taxes is the National League of Cities’ own policy when it comes to selling its publications online or over the telephone.  The National League of Cities doesn’t collect taxes on those publications if they are sold over the telephone or through its web page. 

A streamlined tax collection system is necessary as a pre-condition under the terms of the Supreme Court’s language if the Court is ever going to change its decision in the Quill case.  It’s also made an express pre-condition in the National League of Cities’ proposal for congressional action.  I want to commend the work that the League is doing, and that each of you as mayors and city council members is doing, because you have helped identify areas for simplification.  In my congressional district, for example, the city of Anaheim has set up a commission that has been studying this and my staff have been able to participate ever since we passed this new law and that input is being provided to Congress, as well as to state legislatures and to all of you to help contribute to our growing body of knowledge and recommendations for action to meet these challenges.   

A streamlined system, which many of these recommendations are directed toward, is vitally important because it’s in the best interests of taxpayers, businesses, and cities and states.  But there is yet another reason it’s very important to simplify.  And that is that if we don’t, as I said, Congress is going to come up with ill-advised proposals for a federal Internet sales tax. 

In fact, we don’t have to wait any longer.  It’s already happened.  Democrat Senator Fritz Hollings, who is the senior Democrat on the Senate Commerce Committee, is using the complexity of the current system as a rationale for imposing a federal retail excise tax of five percent.  He’s concluded that Internet sales are simply too difficult to tax at the state or local level, and the federal government has to help. 

Of course, once a tax like this is put on the books, it’s going to be very, very hard to get rid of it.  Earlier, I was talking with some of our representatives about the telecommunications taxes that Congress imposes.  There is a three percent telephone excise tax that I am working to repeal.  It was put into place to finance the Spanish American War in 1898.  It collects about $6 billion a year now, making the Spanish-American War the most expensive war in American history. 

If Congress were to add new federal Internet tax, such as Senator Hollings has proposed, we might never get rid of it either for another century.  Even worse, it might be expanded in future years and that would still further erode the state and local tax base, sending more and more money to Washington, and less and less to our local communities. 

More complicated state and local taxes would come if we were to go that way, but more likely it would be that Congress will come in and impose its own solution.  That will be far worse than what we can achieve if we can keep our common goals in sight. 

I’d like to close by talking about the Internet economy and what benefits it is bringing to our local communities.  I offer these thoughts as a reminder of why we all have the same thing at stake in protecting the growth of the new economy and ensuring that the Internet can grow without special, multiple or discriminatory taxes. 

The Internet is opening up vast new markets, and making them accessible to each of our constituents at home.  In fact the brightest area for future growth of the Internet is foreign markets.  Reaching overseas markets in no way is going to displace businesses on Main Street.  It will at the same time add new revenue for our cities.  In Europe alone, an estimated 100 million people will be shopping online in 2004--just four years from now.   

Think about how much economic growth this is going to deliver to the United States, and just how much in taxable wages, earnings, and sales it’s going to mean for governments in the United States: 

·         U.S. firms are going to get the lion’s share, and already get the lion’s share, of the computer hardware and telecommunications services that are needed to connect people to the Internet.  In 1999 alone, U.S. firms sold almost $100 billion worth of computers and networking equipment, double the amount sold just five years ago. 

·         American firms excel in the information and media services that are flourishing on the Internet.  That also is our big advantage.  Last year, U.S. exports associated with software, with other digital products, and with other intellectual property exceeded $37 billion, versus imports of only $11 billion.  This represented the United States’ largest net surplus among all categories of goods and services offered.   

·         Finally, U.S. firms dominate e-commerce, which is the “stuff” of the Internet.  Over 90 percent of all worldwide e-commerce originates from U.S.-based web sites.  When someone in India, Egypt, or Taiwan buys a product or acquires a service over the Internet, the odds are that 9 times out of 10 they are buying from somebody here in the good old US of A. 

As more and more U.S. goods and services are sent overseas, and more and more jobs created here at home, this will mean billions of dollars more in taxable salaries and profits.  It’s especially true since the average high-tech worker earns $60,000 annually.  Job creation in Internet-related industries is leading and will continue to lead to an influx of new tax revenues, and a lot more disposable income to spend at the local shopping mall or Main Street business. 

In the one and a half years since the Internet Tax Freedom Act has been on the books, the Internet economy--the “new economy”—has generated tremendous new tax revenue, including record high levels of sales taxes for our state and local governments.  It’s done that by opening up new markets, by contributing new jobs, and by making a stronger and better economy with better wages. 

These are signs that our current tax policy is working.  It’s working for consumers and businesses.  It’s working for states and cities.  And it’s working even for the federal government, which has no direct taxes but benefits from all of the income taxes that are generated and sent here to Washington. 

It has been noted that the art of successful taxation is like plucking a goose: the object is to get the greatest amount of feathers with the least amount of squawking.  Recognizing that, policymakers in Washington would be wise to tread lightly and steer clear of special Internet taxes, if the object is to expand our tax base. 

I hope I can continue to work with you to ensure that result, and to protect the interest that we all have in protecting that local tax base.  It’s been a joy and a real education for me to work with you over these last several years, and I very much look forward to continuing that this year and in the years ahead.