Politicians are
famously adept at employing what one might term "creative" language.
President Clinton is the acknowledged master of this art, with his
infamous line, "It depends on what the meaning of 'is' is." But at a
recent meeting of the Advisory Commission on Electronic Commerce in
New York, Gov. Michael Leavitt of Utah proved that he's in the same
league.
While laying out a list of principles
that should guide Internet taxation, the governor proclaimed --
forcefully, with glasses in hand for emphasis -- that there should
be "no new taxes" on Internet sales. Mike Leavitt, the taxpayer's
friend! But wait: in Leavitt-speak, no "new" taxes doesn't mean the
state won't take more of your money; it will just do the job with
additional "old" taxes. Follow?
The governor explained:
"[We] don't want any more taxes being
raised by this . . . uh, by being imposed on the Internet itself,"
he said.
"Does that mean," another commissioner
asked, "no net tax increase on citizens?"
"No, what it means is no new taxes being
imposed on sales over the Internet."
It took several more minutes to pin him
down, but as it turns out, Governor Leavitt's notion of "no new
taxes" leaves plenty of room for, well, new taxes.
The key is a dubious distinction between
"new" and "higher" taxes. All states with a sales tax also
theoretically levy a "use tax." Whenever you buy something from out
of state over the Internet (or from a catalog) and the seller
doesn't collect sales taxes, you're supposed to report the purchase
and voluntarily pay the use tax. Of course, the use tax is virtually
unknown to ordinary taxpayers because no state has ever made a
serious effort to collect it.
States hate collecting taxes directly, so
they delegate the task to businesses. But under federal law and the
Constitution, a state is prohibited from forcing wholly out of state
sellers to collect the state's taxes. That's why Governor Leavitt,
the unofficial leader of the Advisory Commission's pro-tax faction,
wants Congress to change the rules. If he has his way, an antique
shop in Maine would have to collect and remit taxes to Salt Lake
City for all its sales in Utah. Technically, that might not be a
"new" tax, but the result is the same: more money for the state,
less for taxpayers.
Thus, Governor Leavitt can say he opposes
"new" taxes while still supporting higher taxes. The difference is,
of course, meaningless. Former president George Bush lost an
election because, among other things, he broke his "no new taxes"
pledge by signing a bill that raised the federal income tax. Maybe
Leavitt would argue that collecting more of that preexisting tax
wasn't really a "new tax," but it was close enough for
voters.
The governor touts his plan as one that
would level the playing field between local and out-of-state
businesses. After all, if local businesses must collect taxes, why
shouldn't out-of-state businesses bear the same burden?
But there's nothing fair about exporting
taxes. When a local business collects sales taxes, there is a clear
link among taxes paid, services provided and legislative
representation. Local firms benefit from police and fire protection,
roads, waste collection and other services, so it's proper that they
help cover those costs. Remote sellers don't enjoy any of those
services, and shipping companies already pay taxes to cover their
use of public goods. If current state tax systems disadvantage local
retailers, the best remedy is to cut taxes, not collect more.
Besides, states aren't "losing" money on
cross-border sales. The current sales tax rates were set with the
knowledge that use taxes wouldn't be collected. If states want to
expand their tax base, tax rates should be lowered first. It's not
as if states are strapped for cash: over the past four years, tax
collections have exceeded expectations by about $25 billion.
In truth, politicians don't really fear
the Internet; they fear each other. Every state has the legal
authority to tax (or not) each transaction that takes place within
its borders. But no state taxes sales that in-state businesses make
to out-of-state buyers. Any state could, but none do. Why? Because
unless all states follow suit, more businesses might set up shop in
the low- and no-tax states. Politicians call that a "race to the
bottom," but it's really just healthy tax competition.
The alternative -- one that Leavitt and
many of his fellow governors are pushing -- is for Washington to
step in and solve the states' collective action problem. If that
happens, states could collect more tax money without worrying about
competition from other states and, incidentally, without the
unpleasant task of facing voters back home.
Congress shouldn't listen. Only local
taxpayers should decide how much money their states need. So when
your governor cries, "No new taxes!" watch your wallet: he may not
mean what you think he means.
Aaron Lukas is an analyst at the Cato
Institute's Center for Trade Policy Studies. |