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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. |