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Opinions/Editorial Internet Taxes Could Crash the System Released by Adam D. Thierer on 11/10/99 of
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If Supreme Court
Chief Justice John Marshall was right 180 years ago when he observed
that "the power to tax involves the power to destroy," then the 19
members of the federal Advisory Commission on Electronic Commerce
should ask themselves today: Will taxing the Internet kill this
revolutionary medium in the cradle?
Regrettably, some members of the commission, appointed by
Congress last year to study the feasibility of taxing electronic
commerce, appear unconcerned with such questions. Egged on by
governors and mayors, they are pushing proposals to start taxing the
Internet as soon as a congressionally imposed three-year moratorium
on "e-taxes" expires in October 2001. Indeed, they seem to be
working under the assumption that the need to tax the Internet is a
foregone conclusion.
Why would
any public official want to impose taxes on a largely unfettered
medium that has ignited a surge in entrepreneurial activity? The
answer, of course, is money. While most Americans view the Internet
as a technological passport offering countless ways to get
information and exchange products and services, state and local
officials (including some who sit on the commission) consider it a
threat to their traditional tax base, which they say will erode if
"e-commerce" isn't taxed.
This
is ironic, since the explosive growth of electronic commerce has
been accompanied by a dramatic increase in state and local tax
revenue. A recent analysis by budget experts Dean Stansel and
Stephen Moore of the Washington-based Cato Institute reveals that
state tax collections grew at almost twice the rate of inflation
between 1992 and 1998, forcing them to conclude that "today, almost
without exception, state governments are awash in tax revenues."
Investor's Business
Daily notes that state revenues
grew 227 percent and local revenues grew 193 percent between 1980
and 1995. And a report by Michael Flynn of the American Legislative
Exchange Council finds states "in their best financial health in
over a decade," with a $74 billion revenue windfall flowing into
their coffers over the past four years.
Pro-tax commission members are unmoved, even
though Congress appointed the commission to study "the effects of
taxation, including the absence of taxation," on the Internet. House
Majority Leader Richard Armey, R-Texas, and 35 other lawmakers
reminded them of this in a Sept. 14 letter, saying the commission
should bear in mind that "only Congress can authorize one state to
compel sellers in another state to collect Internet taxes. This idea
is not a popular one in Congress or among the American people. You
should know that there are many Members that will oppose any new
taxes on the Internet."
Commission members are so concerned with figuring out how to
tax the Internet, rather than whether it should be taxed, that they
are ignoring the wide gulf separating their views from those held by
the lawmakers who appointed them. Indeed, some members of Congress,
such as Sens. John McCain, R-Ariz., and Bob Smith, I-N.H., have
already introduced legislation that would make the Internet tax
moratorium permanent. Unless commission members adhere more closely
to their original mandate, they may find their work disregarded
entirely.
Which would be a
shame, because the commission could serve a useful purpose by
examining the larger questions the federal government must consider
if it wants to encourage the growth of the Internet economy. For
example, how can Internet taxes be reconciled with the ban on
interstate taxation established by the Constitution and past Supreme
Court decisions? And shouldn't the ability to tax a company be
reserved for that state and locality where the company resides? And
finally, if the proposed Internet tax threatens e-commerce,
shouldn't lawmakers consider the harm existing taxes inflict on the
broader telecommunications industry?
In avoiding such questions, the commission has maneuvered
itself to the left of even the unabashedly pro-tax Clinton
administration, which has proposed a global free-trade zone for
Internet commerce. The administration recently lent its support to a
congressional resolution introduced by Rep. Christopher Cox,
R-Calif., and Sen. Ron Wyden, D-Ore., that urges U.S. trade
officials to lobby for a permanent global ban on Internet taxes
during a World Trade Organization meeting in
November.
Sometime before its
report is due next April, the commission needs to recall one of the
central tenets of economics: The more you tax something, the less
you get of it. Unless their intention is to discourage on-line
commercial activity, commission members should hit the "delete" key
on any proposals to tax the Internet.
# # #
Adam D. Thierer
is the Walker fellow in economic policy at The Heritage Foundation
(www.heritage.org), a Washington-based public policy research
institute. |
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