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Roll
Call
March 27,
2000
A Commission
Divided
Advisory Panel Member Grover Norquist
Discusses
Controversy Over Web Taxation
After a couple of years of
bipartisan work on one of the hottest issues facing the nation, the
federal Advisory Commission on Electronic Commerce wound up
deadlocked in its final meeting last week.
The 19-member commission, which was
created to make recommendations to Congress about setting national
policy on collecting taxes on Internet-based sales, could only agree
to disagree.
"We do not believe that a consensus at
this time is forming,"said Virginia Gov. Jim Gilmore (R), the
commission's chairman.
Gilmore led a faction of anti-tax
members who banded together with the six business representatives on
the commission to push a proposal to have the moratorium on Internet
taxations extended at least until 2006. But those 11 votes were not
enough to reach the 13-vote majority needed to agree on a formal
recommendation.
One of the anti-tax members, Grover
Norquist, spoke to Roll Call Executive Editor Morton Kondracke on
March 17, on the eve of last week's commission meetings in Dallas.
Norquist, who runs Americans for Tax Reform and is a close ally of
ex-Speaker Newt Gingrich (R-Ga.), is well-known for being virulently
opposed to any kind of tax increase.
ROLL CALL: How was your
commission created?
GROVER NORQUIST: Congress was
concerned that a lot of states and local governments were starting
to throw taxes on Internet access and other pieces of the Internet.
There are some pretty wild ideas - that if electrons went through
North Dakota, then North Dakota could claim the right to tax your
server, your pieces of the Internet.
So Congress said, "OK, no new taxes on
the Internet for three years while we rethink this." It was supposed
to be a permanent ban, but [Vice President] Al Gore and the cities
lobbied it from permanent to six years, then from six years to three
years. The people who wished to tax distance sales - catalogs and
Internet sales like Amazon.com - said, "Let's have a commission to
think through what we're doing on this."
Their goal - and they structured the
commission to come up with this answer - was to have federal
legislation making it possible for a state to require L.L. Bean or
Amazon.com to collect its sales taxes when somebody who lives in the
state buys something by catalog or over the Internet. They are the
same, legally and institutionally. The Supreme Court, in the 1992
Quill [Corporation vs. North Dakota] decision, said it was too
onerous to collect taxes on distance purchases. This is a
long-running battle between certain cities and states and the
catalog people.
There's a hysteria out there that in
five years people will by buying everything including their lunch
over the Internet and there'll be no sales taxes collected by states
and cities and all the schools will shut down. We heard this 25
years ago with catalog sales. People said there weren't going to be
any shopping centers or Macy's because everybody would buy
everything from catalogs because it saved sales tax. Well, that
hasn't been true. Two percent of sales in this country is from
catalogs. There is some lost revenue but it's de minimis for states
and local governments.
ROLL CALL: When is the
commission supposed to report and what is likely?
NORQUIST: The final commission
meeting is March 21 to 22. Right now there is an 11-vote majority
[out of 19 commissioners] that has coalesced for a tax-skeptic
position. There are two pieces at issue: "Should we tax the
Internet?" is the way people generally talk about it. In point of
fact, the component parts of the Internet are heavily taxed now. So
one question is, "What do we do about the present level of taxation
of telecommunications?"
Second is, "How do you tax distance
sales?" The first question is being answered much to my
satisfaction. There is majority support for calling for the
abolition of the 3 percent federal excise tax on telecommunications.
This was the tax that was enacted in 1898 to pay for the
Spanish-American War and it's still there. It was put on as a luxury
tax when only very rich people had phones. Now, everybody pays
it.
ROLL CALL: That raises how much
a year?
NORQUIST: About five billion
[dollars] federal. But that's not the only tax. The average state
levies sales taxes or excise taxes of 14 percent on phone bills. So
telecommunications is more heavily taxed than any other industry
with the possible exceptions of liquor and tobacco. So we have
punitive taxes on telecommunications. Now, the historical reason for
this is that telecommunications were granted monopoly status, as
were power plants.
Local and state governments figured
you could easily tax the phone bill or the power bill because of two
things. The company didn't object because it was a pass-through to
consumers. And they had a monopoly. They weren't going to lose
market share because of it. Taxpayers got mad at the phone company
or the power company, not the mayor or the legislature.
With the move towards competition in
telecommunications, these discriminatory taxes will not be able to
continue as they have been. I think our commission is helping to
highlight that. Another factor on telecommunications: We will call
for a permanent ban on taxes on access to the Internet ...your
[America Online] account and those sorts of things.
ROLL CALL: There are no taxes
now? Because of the moratorium?
NORQUIST: Actually, Texas and
North Dakota stuck some on before the moratorium. We'll call for
going back and undoing them. I think it's just those two states.
There might be a town here and there. They were starting to do it
and the moratorium stopped it from becoming this incredible
patchwork. I think we can get a permanent moratorium.
Even the three Clinton people on the
commission are with us on that. I've got 18 votes for my resolution
to make a permanent ban on access taxes. On abolishing the 3
percent, I got all but four votes on that, including the Clinton
appointees. Everybody else was for it, including Ron Kirk, the mayor
of Dallas, and [Gov. Mike] Leavitt [R-Utah], the pro-tax governors
and mayors, 'cause that's federal money and what do they
care.
ROLL CALL: The Clinton
appointees are ...
NORQUIST: Secretaries of
Treasury and Commerce, plus the U.S. Trade Representative. They send
deputies. They are active supporters of the pro-tax coalition but
they try to stay not-high-profile. My job will be to yell, "Al
Gore's representatives here, did you notice, are voting pro-tax?
Everybody watching on C-SPAN, notice that!"
ROLL CALL: Is the pro-tax
position to extend the moratorium for awhile or to lift the
moratorium?
NORQUIST: Let me just add one
thing to that. There is a move that even people like Governor
Leavitt are not hostile to. That is to permanently ban federal taxes
on digitally transferred goods. We are still in the first category
of issues. Digitally transferred goods is when I go on my PC, I
download software, a CD or a video. There's no way you are going to
be able to police and tax it without massively violating people's
privacy. So, the other team is willing to say, "We're never going to
be able to tax that so why don't we explicitly NOT tax
it?"
ROLL CALL: Just to be very
clear on this, do the Democrats want to extend taxation of
telecommunication, that is to say the phone tax?
NORQUIST: The Clinton
administration favors continuing the 3 percent tax. They also tend
to oppose efforts to require a reduction in state and local taxes
because their constituencies see themselves as funded by
that.
ROLL CALL: Let's move to a
second category then: distance taxes. What is the breakdown
there?
NORQUIST: There are five guys
on the commission who are the pro-taxpayer guys. Myself; Gilmore;
Paul Harris of the Virginia legislature, who represents Thomas
Jefferson's old district; Stan Sokul, who is the representative of
the direct marketing industry, the Association for Interactive
Media; and Dean Andal, who is commissioner of taxes in California.
Those are the hard five pro-taxpayers. Six corporate guys from
AT&T [Chairman Michael Armstrong], MCI WorldCom [Chief Operating
Officer John Sidgmore], AOL [President Robert Pittman], Time Warner
[President Richard Parsons], Gateway [Chairman Theodore Wiatt], and
Charles Schwab [President David Pottruck].
We 11 got together and said, "We want
to extend the present moratorium. We want to fix these present
problems on telecommunications and taxes. We want to defer any
decision about overturning Quill or allowing states to tax
distances. So five years from now Congress should revisit it. What
do I really want? And what do, on the left, Leavitt, Kirk,
[Washington Gov. Gary] Locke [D], and the Clinton people want? They
say, "Let's wait a few years, get the state and local governments to
simplify their taxes, then states can tax." Automatically. Were you
to do that, the "if" part would be dropped quickly. They've been
promising to simplify for 60 years.
ROLL CALL: So, they want an
automatic click off and you want a hard moratorium?
NORQUIST: I want a hard,
permanent ban on states ever taxing people outside their borders.
That's what Gilmore wants too. The other side wants the right to tax
automatically after three or five years. In the middle, we said,
"Clean up the tax code now, simplify it, reduce the discriminatory
taxes and in five years we'll revisit the Quill
decision."
ROLL CALL: So that's likely to
be the final position?
NORQUIST: Correct. Now, that is
not acceptable to these guys because they're not stupid. Two things
happen over the next five years. One, the sense of hysteria and
panic ends. We have been through this before. The left said the same
thing about catalogs 25 years ago. It didn't happen. We live very
comfortably with catalog sales not being taxed.
ROLL CALL: So basically, the
commission is coming out with a Texas Gov. George W. Bush (R)
position on this - which is, extend the moratorium - as opposed to
the Sen. John McCain (R-Ariz.) position, which was permanent - which
you personally favor?
NORQUIST: Correct. But I can't
get the votes for that.
ROLL CALL: If Internet sales
are going to be like catalog sales, a minority part of total
consumer sales, does that suggest that the future of the Internet is
not as glorious as some people expect?
NORQUIST: No. There's going to
be a vast expansion of Internet commerce. Eighty percent of it is
business-to-business and that will be more and more true. People
think of buying stuff from Amazon.com, but that is a fraction of
what goes on. Companies buy stuff between each other and most of
that isn't subject to sales tax.
ROLL CALL: So what percentage
of ordinary citizen taxable sales would you expect the Internet to
account for in 10 years?
NORQUIST: Today, .003 of 1
percent is the lost revenue. They lost $180 million due to this.
Now, for catalog sales it's about $4 billion in lost revenue out of
more than 100 billion in total sales taxes.
What you are seeing now is, people buy
over the Internet things they used to buy from catalogs. So you can
increase from .003 of a percent up to 2 percent - a huge jump - and
just be displacing catalog sales. So that has zero impact on revenue
to mayors and governors. The other factor is, when a factor of
production becomes more mobile, tax rates on it fall. You saw this
with people and income taxes. From the 1970s till now, the top rate
went from about 90 percent around the world to about 40
percent.
That's in the U.S., Britain, France,
Sweden. The top marginal tax rates are 30 to 50 percent everywhere.
Because people are more mobile, sales are now more mobile. We can't
have - we will not have - 9 percent sales taxes in this country. We
will have 3 to 5 percent sales taxes. Will the government run out of
money? No, the government didn't run out of money when the top
income tax rate went from 70 to 40 percent. We got more money
because at some point, the supply-siders are right but also because
the economy grows.
ROLL CALL: So you don't regard
this decision to exempt Internet sales from taxes, for however long
that happens, as "industrial policy" that favors the Internet as
opposed to street-corner commerce.
NORQUIST: No, and here's why:
The pro-tax mayors and governors have created a false alliance with
the shopping center guys, who are just panicked at the idea that
everybody is going to go online. But they also panic every time
another shopping mall, or a Wal-Mart, starts up. So they panic all
the time. If I buy $100 worth of books from a local bookstore in
Utah, I pay 6 percent sales tax, a $6 sales tax. If I buy $100 worth
of books from Amazon.com, I pay a $12 shipping fee. That's assuming
$100 worth of books only weighs a pound. If it weighs five pounds, I
pay $24 worth of shipping fees.
You have to buy a very high-ticket
item that doesn't weigh a lot before the sales tax savings is larger
than the shipping fees. So there isn't this disparity. Now I
understand why the governor says, "Yeah, it's the same to the
customer, not to me, cause UPS is getting that money, not me."
That's fine. But don't tell me that the customer is driven by the
cost disadvantage. It's not a cost disadvantage. Shipping fees are
bigger than sales tax fees. Exceptions are very expensive computers
and very expensive furniture.
ROLL CALL: What do you think
that the position of Congress is likely to be on this? And is it
going to be an election issue?
NORQUIST: It is going to be an
election-year issue if I can make a high-profile issue of Gore's
pushing for taxing the Internet. Gore's people have their fingers
all over this. Gore's people are lobbying to tax the Internet.
Gore's people have been fighting against getting rid of 3 three
percent tax. You've got to take it in two parts. We're going to push
legislation to get rid of the 3 percent telephone tax. Let's put
state and local taxes under "the Four-R law." The Four-R law
protects railroads from being raped by local government. You run a
railroad from Chicago to Los Angeles. Utah cannot have a 10 percent
tax on railroad property and a 1 percent tax on everything
else.
This is what keeps railroads from
being eaten by local governments and state governments because we
have, under the Commerce Clause of the Constitution, a national rail
network. Same thing with pipelines. I want to pass a federal law
which puts telecommunications and electric power generation under
the Four-R law because they used to be monopolies, but now they're
competitive. They used to be just local concerns. What did I care if
New York added taxes to New York's power plant or phone company? But
now they are part of national grid and I live in Florida. It matters
to me how Wisconsin taxes power and phone companies.
I think this is doable. But that is a
several- year project. This year, we're going to fight on the 3
percent tax. This year, we're going to fight on the permanent ban on
access taxes. Two groups are vying to be this year's soccer moms,
swing voters in the election. The first one is the investor class,
the 48 percent of Americans who own shares of stock. And the
Republicans are doing everything right to expand IRAs and 401(k)s.
The other possible group to be the soccer moms are Internet users. I
include guys who buy and sell on the Internet. If they hear on Rush
Limbaugh and Matt Drudge all the time, "Al Gore wants to tax you,"
that will be a big issue. Will it be on CBS? Probably not. Will it
be on the Drudge Report? Absolutely. Drudge considers this a key
issue.
ROLL CALL: Now, isn't there
also an alleged "Gore tax" to close the digital divide, and is that
an issue?
NORQUIST: The Gore tax, also
known as the e-rate, was established by the [Federal Communications
Commission] ... which is a tax, like the 3 percent tax - I think it
is 1 or 2 percent - on your phone bill. It is supposed to be used
for wiring schools. The Baby Bells offered to wire schools for free.
The FCC said, "No, no, no, you don't get it. We want to collect the
tax and we want to spend it." The money is going out in grants to
schools, but 70 percent of schools are already wired. It's being
used as a political slush fund.
ROLL CALL: Is your commission
calling for a repeal of that?
NORQUIST: I have a resolution
which calls for sun-setting it. There's a piece of legislation I was
working with [Rep.] Billy Tauzin [R-La.] on, which he's introduced,
to also sunset it. Here's the challenge. The Gore tax is supposed to
be raising over two billion a year and over ten billion it's
supposed to wire all the schools. And does it end? It could be there
for your grandchildren, just like the 100-year-long Spanish-American
War tax.
Nobody wants to stand up and say,
"Don't wire the schools." So, we'll say, "You want $10 billion to
wire all the schools? Fine. But at the end of $10 billion, this tax
disappears." By the way, there's a law that says the FCC is never
again allowed to put a fee in. And by the way, we are then going to
audit the money. And we are going to put in prison anybody who spent
money on something other than wiring schools.
ROLL CALL: Why shouldn't the
government be doing something to make sure that poor kids have all
the advantages of computers that rich kids do?
NORQUIST: Taxpayers are
spending a lot of money on computers. And, there's been some very
good research recently that the digital divide - black people
supposedly not being allowed to use the Internet or something. It
was true 10 years ago, but not findable in the statistics anymore.
The difference between white and black participation on the Internet
is within a couple of points. Hispanics, same thing.
Ten years ago, five years ago, people
who used the Internet were explicitly libertarian, younger, white.
But those are the kind of guys who jump on any fad first. Now the
age disparity and the gender disparity is almost gone. It took four
years for television to get to 30 percent of U.S. households and
many decades for radios.
But the amount of time it takes for
each new product is shrinking. We're now in about half of all
households in the country with personal computers and Internet
access. There were only 90,000 guys on the Internet 10 years
ago.
ROLL CALL: You may have data
that in your average poor household there is a television. That's
entertainment. But surely there's not a computer there. Or when the
kid in that house goes to school, their teacher surely won't be as
swift in computer use as they would be in the finest high schools in
America.
NORQUIST: I assume that there
are differences there. The government is spending a lot of money to
fix that problem. Do I believe that means the problem is fixed?
Probably not. It's the idiot government that's in charge of fixing
it. Would you then assign the government a second task to do more of
whatever it was they were doing that isn't working? If the public
schools aren't teaching kids to read, are they ever going to be able
to teach them to use computers? This is the argument liberals always
use about trying to do organ transplants with a baseball bat. It's
not a question of how much good intentions you have.
It just doesn't work. So, is there a
digital divide? If you are talking about race, there isn't. I'm
assuming that in broken families where nobody works and they leave
guns under the pillows and stuff like that, that family probably
doesn't have Internet access.
You know what? I don't think the
problem is Internet access. Some people have argued that there's not
a digital divide, there's an alphabet divide. People who don't read
and can't type can't use a computer can't use the Internet. To argue
that the problem is lack of a computer is like arguing that when
drunks and drug addicts are homeless, the problem is that they don't
have a house.
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