Heritage Foundation Leadership for America

The best solution would be to keep the Internet completely tax free, Thierer says. Short of that, policymakers should follow the precedent set by the taxation of catalog sales, which allows taxes to be levied only on businesses with a physical presence in a state or locality. But what won't work, Thierer says, is the proposal recently issued by the National Governors' Association (NGA), which urges Congress to allow states to levy taxes on all Internet sales, regardless of where the sellers are located. The NGA plan would effectively create a national sales tax that would eventually extend to other forms of commerce, Thierer says.

"The NGA plan is premised on two myths—that the Internet is a massive drain on state and local tax revenues, and that it's unfair to exempt interstate vendors from taxes that Main Street businesses must pay," says Thierer, Heritage's Walker fellow in economic policy. "In reality, state and local tax revenues and budget surpluses are at an all-time high, thanks to a high-tech Internet economy."

The NGA plan also ignores legal precedent and raises constitutional questions by allowing states to collect taxes beyond their geographic borders, says Thierer, who recently debated the NGA's Director of State-Federal Relations on e-taxes in State Tax Notes.

The congressionally appointed Advisory Commission on Electronic Commerce (ACEC), which must offer its recommendations on Internet taxation to Congress by April 21, is divided on whether to approve an e-tax or call for making the moratorium on Internet taxes permanent. The NGA plan currently enjoys the support of several commission members, but a two-thirds majority is needed to forward an official recommendation to Congress.

In a related paper, also released today, Thierer explains how competition and choice in the market are outpacing government "solutions" to the so-called "digital divide" that some say keeps lower-income Americans from enjoying the fruits of the high-tech economy. He notes that Internet access has surged from 6 percent of the U.S. population six years ago to 43 percent today. Recent news events confirm Thierer's point: Ford Motor Co. and Delta Airlines both announced they are giving free computers and low-priced Internet access to every one of their nearly 400,000 combined workers.

In a third paper, Thierer and Heritage researcher Gregg VanHelmond scour President Clinton's fiscal year 2001 budget proposal and find it crammed with $1.9 billion worth of "high-tech pork"—everything from $45 million for something called "tele-mentoring for at-risk youth" to $16 million for "ready to learn digital television."