April 28, 2004

Sen. Alexander Battles For Higher Taxes

Sen. Lamar Alexander is continuing his battle for higher taxes with his ongoing opposition to the Internet Tax Non-Discrimination Act. That legislation now pending in Congress would permanently ban states from taxing all forms of Internet access. Full disclosure: I voted for Sen. Alexander and he is a friend of my wife's parents. That said, he's just flat wrong on this issue - wrong on the policy, wrong on the politics.

Upon reading a poorly-written story in today's Tennessean (by Gannett News Service writer Larry Bivins) I wasn't sure if I should blog about the bad policy Alexander is pushing, or the bad journalism - so I've decided to do both.

The proposed legislation would make permanent a ban on Internet access taxes that Congress enacted several years ago, but which lapsed late last year. Tennessee and seven other states were allowed to keep their Internet access taxes, which were in place before the first ban. (Please note, this issue has nothing to do with the separate issue of applying sales taxes to online purchases.)

Alexander's opposition to the federal ban on states taxing Internet access boils down to a few points. 1. It will cost Tennessee $360 million a year in revenue. 2. It is a states' rights issue - Congress has no business interfering in Tennessee's tax policies.

But neither of those two points stands up to scrutiny.

The claim that the legislation will cause Tennessee to lose $360 million in revenue is false. As I wrote back on Oct. 29, 2003:

Oddly, The Tennessean portrays the bill as "charity to the telecommunications industry," even though it would cut taxes that consumers - not the telecommunications industry - currently pay. And, despite what The Tennessean editorial claims, the ban won't cost Tennessee $360 million, or even $36 million. It will reduce state revenues by a mere $18 million - a flea on the woolly mammoth that is the state's $22 billion budget. Fact is, Gov. Phil Bredesen has assured the state's congressional delegation that Tennessee state government can live without that $18 million a year the state collects in sales taxes on Internet access

The $360 million figure is simply a lie, a scare-tactic number cooked up by a coalition of state and local governments that want the right to tax Internet access and email. They cooked up the number based on the (false) claim that the Internet Tax Non-Discrimination Act will end taxes on all sorts of telecommunications services, not just on Internet access.

So the upshot is that the proposed permanent ban on Internet access taxes that Alexander opposes won't cost Tennessee $360 million - the tax it would have ended was only bringing in $18 million a year. In fact, the proposed ban won't cost Tennessee a dime because Tennessee's Supreme Court already ended the tax.

A little journalism criticism before I tackle the rest of Alexander's shoddy argument: The Gannett reporter who wrote the story did a lousy job. He provided no source for the $360 million figure, and no explanation of it. The fact is, the $360 million figure was cooked up by opponents of banning Internet access taxes by claiming - without factual basis - that the proposed ban would actually exempt all forms of telecommunications taxes, not just taxes on Internet access. The reporter's lousy job was compounded by The Tennessean, which chose to publish the story without asking for source and clarification of the $360 million figure, without explaining that the tax at issue only brought in $18 million a year to Tennessee, under a sub headline - $360 million would be kept from state under plan- that declares the dubious $360 million figure as fact.

The lead of Bivins' story goes on to say that the $360 million in lost revenue would come "at a time when the state is struggling to balance its budget." Apparently Bivins is unaware that Tennessee state government is currently amassing a large revenue surplus and is likely to end this fiscal year with more than $200 million in extra cash - even after rebating some illegally collected Internet access taxes, and losing the $18 million in revenue because of the state Supreme Court's ruling.

Tennessee is not struggling to balance its budget. In fact, the biggest fiscal problem facing the current governor is restraining lawmakers from spending too much money now that the state has a revenue surplus and a strong revenue-growth forecast for the coming fiscal year.

Bivins, based in Washington DC, might not know these facts. But certainly editors at The Tennessean should - and they should have edited Bivins' story to reflect the truth.

Now, back to Alexander's second reason to oppose the federal ban on Internet access taxes - the states' rights claim. Alexander says he's fighting the legislation because it amounts to an unfunded Congressional mandate, and by meddling in states' tax policies it violates states' rights.

Alexander is flat wrong. The Commerce Clause of the federal Constitution reserves to Congress the right to pass taxes and regulations affecting interstate and international commerce - and specifically forbids states from doing so.

There is perhaps nothing more "interstate" and "international" than the Internet, a global network that carries email, data and transactions across state and national borders in the blink of an eye. Congress not only has the right to ban states from applying taxes to this global network - I believe it has a duty to do so under the Commerce Clause.

I addressed this issue more fully here and here.

If you wish to contact Sen. Alexander and urge him to drop his opposition to the Internet Tax Non-Discrimination Act, you can start here.

Here's a good Forbes story on the issue from a national perspective.

And here's a study that shows that taxing Internet access would harm the economy, harm the telecommunications industry, slow the spread of broadband Internet access and reduce job growth.

President Bush has affirmed his opposition to taxes on Internet access, noting it could slow the economically-important spread of broadband (high-speed) Internet access and the next-generation services it will enable.