| E-Myths by Sonia Arrison on 11/19/99 of Pacific Research Institute Topic: Taxation | |
| I The Advisory Commission on Electronic Commerce, the group considering whether or not to tax the Internet, has split into opposing camps. Predictably, the debate has fallen prey to myths, such as the notion that a tax-free Internet will cause state and local governments to "lose" tax dollars. That is the position of the pro-tax camp, mostly state and local government officials who are terrified the boom in electronic commerce will leave them in the dust, without the ability to provide community services such as schools and police. But electronic commerce will not mean the end of local services or communities. If allowed to flourish, as the pro-opportunity camp of the Advisory Commission desires, electronic commerce will bring with it the beginning of a prosperous new era. The problem with the argument put forth by local government lobbyists is that it relies on the myth of the zero-sum game – the idea that growth in one sector is fueled by a loss of growth in another. The growth of a tax-free Internet does not translate into less revenue for local governments. Instead, the opposite is true. Over the last five years, as tax-free Internet shopping has grown, so have traditional retail sales taxes collected by local governments. In California, where the zest for on-line buying is astounding, traditional sales tax revenues have ballooned. According to Dean Andal, vice chairman of California's Board of Equalization and member of the Advisory Commission, "between 1994 and 1998, California's sales tax revenues have grown at an annualized rate of 5.7% for an impressive total of 28.6%." That's a lot of growth – it beat the state's inflation and population growth combined. And it happened in tandem with rising e-commerce sales which have doubled every year since 1995. The reason for this impressive performance is clear. The economy is expanding and the economic pie is growing. It is not a zero-sum game. Internet retailers are reaching out to markets well beyond their local communities, sometimes even beyond the United States. This success leads to a more robust economy and higher incomes. People with higher incomes have more cash to spend, and many of them will spend it on local retail or property – both of which lead to increased taxes for local government. But pro-tax lobbyists don't seem to understand this concept of economic expansion. Instead, they argue that the pie will remain the same size, thereby predicting that e-commerce will cause them to lose their juicy slice. Of course, it is possible that the pro-tax proponents of state greed do understand that e-commerce will expand the economy, and they are simply attempting to ensure that their piece of the pie grows along with it. But that too would be a myth. While there is no evidence that on-line purchases have harmed local government coffers, there is ample evidence that taxes are economically destructive. And what happens to government revenues when the economy hits a downturn? They shrink. A study by Dean Stansel and Stephen Moore at the Cato Institute demonstrates how taxation affects the economy. They found that following California's $7 billion tax hike in 1991, "actual revenue growth came in below projections in each of the next three years." Alternatively, when California cut taxes between 1995 and 1998, income tax revenues rose 48 percent. Given the evidence, it is clear that the best outcome for consumers, and their governments, is to leave electronic commerce tax-free. Otherwise, both the Internet and the prosperity of the nation will suffer. * Sonia Arrison is director of the Center for Freedom and Technology at the California-based Pacific Research Institute |
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