November 3, 1999
By Adam D. Thierer
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
Adam D. Thierer is the Walker fellow in economic policy at
The Heritage Foundation (www.heritage.org), a
Washington-based public policy research institute.
Distributed nationally by Knight-Ridder Tribune News Service
Internet Taxes Could Crash the System
Adam D. Thierer
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