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Opinions/Editorial Should Internet Sales Be Taxed? Released by Aaron Lukas on 11/19/99 of
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As hardworking
Americans fatten already overflowing state government coffers this
tax season, they should be aware that many state and local officials
would like to squeeze them harder. But few taxpayers are aware of it
because the latest skirmish in the battle to tax electronic commerce
is being fought, not in public, but in federal
court.
Last October the
Internet Tax Freedom Act established an Advisory Commission on
Electronic Commerce to study Internet tax issues and make
recommendations to Congress. The members of that commission were
appointed last fall, but the National Association of Counties and
the U.S. Conference of Mayors filed suit this month in federal court
to block them from meeting. The plaintiffs claim that the panel is
unfairly biased in favor of business and against state and local
government. It's not right, local politicians say, that the
commission might be sympathetic to consumers and taxpayers.
At the heart of the
controversy are sales taxes. Currently, states can't force an
out-of-state business to collect them unless that business has a
physical presence in state. The result is that when a purchase is
made across state lines, sales taxes often aren't paid. Few states
have made any real effort to collect those "lost" taxes directly.
Instead, state and local officials want Congress to let them draft
out-of-state firms as tax collectors.
Why do states -- which are enjoying record budget
surpluses -- want to tax remote commerce? "We figure we're losing
over $200 million annually from direct marketing, catalog and
Internet sales," explains Clare Long, Ohio's deputy tax
commissioner. She'll have to excuse taxpayers if they fail to shed a
tear of commiseration.
Proponents of expanded state taxing authority usually offer
three arguments in support of their position.
The first is neutrality -- the notion that
products should be taxed the same regardless of how they're
purchased. The current system, they contend, distorts economic
activity because consumers might buy a product online on the basis
of tax considerations rather than "real" economic criteria.
Well, tax neutrality is
certainly an important component of economic efficiency, but so are
low rates. E-commerce serves to inhibit excessive taxation: when tax
rates get too high, it provides consumers with a shopping
alternative. That alternative induces state and local governments to
keep tax rates down.
Moreover, allowing states to tax out-of-state e-commerce
would effectively be a tax increase imposed without ever having to
bring the issue to a vote. That's a dream scenario for politicians
but a nightmare for taxpayers.
Second, state and local officials also argue that it's only
fair to let them tax e-commerce. Since local retailers have to
collect sales taxes, the argument goes, they're at a disadvantage
when competing with remote sellers. Thus, allowing states to tax
remote commerce would "level the playing field" between electronic
and traditional retailers.
That reasoning turns the concept of fairness on its head. If
states are concerned about local retailers, they should address the
issue by reducing tax rates. Minnesota policymakers, for example,
are considering eliminating the sales tax on certain products that
are easily acquired online.
And is it really fair to force out-of-state firms to act as
tax collectors when they don't benefit from state services? When a
local business collects sales taxes, there is a clear linkage
between taxes paid, services provided, and legislative
representation. Local firms benefit from police and fire protection,
roads and waste collection and other state services, so it's proper
that they help cover those costs. Remote sellers don't enjoy any of
those services.
Third, some
analysts warn of a dire future when states will be unable to raise
enough money to provide essential services. "State and local
governments face an ever-dwindling source of revenue, one that will
directly affect its ability to provide infrastructure and other
fundamental services," writes John Minan of the University of San
Diego.
Dwindling? In 1998
many governors submitted budget proposals that increased spending by
more than 7 percent, roughly three times the rate of inflation. On
average, states estimate an increase in general fund spending of 5.7
percent for fiscal 1998 and 6.3 percent for fiscal 1999, only two
states reduced their fiscal 1998 budgets. Those percentages are
almost twice the rate of inflation plus population
growth.
The truth is that the
battle over taxation of e-commerce has little to do with economic
efficiency, equity or the provision of essential services. The
reality is much simpler: state and local officials want to control
an ever-expanding portion of our incomes. E-commerce -- by providing
a means to avoid punishingly high sales tax rates -- threatens to
check that impulse. No wonder the politicians are
worried.
Aaron Lukas is an
analyst at the Cato Institute's Center for Trade Policy
Studies.
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