December 18, 2003 | Commentary on Taxes
The Taxman Clicketh
One of Feulner's Laws of Public Policy reads: "There are no
permanent victories in Washington." These days, we're seeing that
law borne out over Internet taxation.
This looked settled years ago. Congress has voted twice-in 1998 and
2001-to ban any taxes on Internet access. Those acts also prevented
states from slapping any additional sales taxes on Internet
Online commerce has skyrocketed during the last five years, and
it's been helped along by these tax bans. Shoppers enjoy the
convenience and comfort of shopping at home. Plus, they boosted the
economy with all the high-tech computer equipment they bought to
make online purchases.
But there's one piece of bad news. The moratoriums were only
temporary. The latest expired on Nov. 1. If Congress doesn't act
quickly, states will step in and start passing their own Internet
taxation laws, which could harm businesses and disrupt the entire
Sen. Lamar Alexander, R-Tenn., has proposed renewing the
moratorium, but with one key change. He wants to "level the playing
field" between Internet providers and telephone companies. "The
Internet is not a baby in a crib anymore, it's a grown-up
business," he announced recently. "It can at least afford to hire
some of the most expensive lobbyists."
In the interest of "fairness," he's introduced a measure that
would allow states to begin taxing Internet services just as they
already do phone services.
That's a big mistake, one that could cause long-term harm. After
all, the Internet drives the new economy and is also a big part of
the current economic recovery.
Virtually every day, new technologies come online.
One example is called "Voice Over Internet Protocol." VOIP enables
us to make telephone calls over the Internet. That's significant,
especially when you consider how many more people own computers
today than in 1998, and how many of us conduct more business via
e-mail than we do by phone. Five years from now, we could be
conducting all our business through the computer-if VOIP technology
is allowed to mature tax-free.
But states are eager to impose taxation-and lots of it-on this
emerging technology. They collect plenty of revenue from phone
taxes. In fact, about 25 percent of the average residential phone
bill is taxes. States want to slap the same taxes on VOIP.
But it makes no sense to simply apply yesterday's taxes to
tomorrow's technology. The government doesn't need to tax
everything, and it should attempt to avoid imposing new taxes that
will then be in place for years and decades to come. Plus, unless
people think they're going to get savings and convenience, they're
not going to bother investing in and learning to use VOIP. A
promising new technology could be strangled in the crib by high
If lawmakers really want to promote fairness, they should
permanently end all taxes on Internet services. Right now, 10
states have some form of Internet taxation. They've been allowed to
maintain those taxes because they had imposed them before Congress
passed its moratorium in 1998.
This makes no sense. In effect, federal lawmakers are rewarding 10
states for quickly imposing taxes on an emerging new technology.
That isn't something we ought to encourage. In fact, just the
opposite. If we want greater tax revenue, we shouldn't tax the
Internet, the unquestioned leading source of innovation in today's
economy. We should give the Internet time and space to grow. As it
does, it will generate higher tax revenues through greater profits
and higher wages.
It's time for federal lawmakers to settle this, before states jump
in and start imposing a variety of Internet commerce and access
taxes. Then maybe, on this issue at least, we can finally declare
Feulner is president of The Heritage Foundation
(heritage.org), a Washington-based public policy research