October 29, 2003

Sabotaging the Internet Tax Non-Discrimination Act

An editorial in today's Tennessean praises Sen. Lamar Alexander for trying to block passage of the Internet Tax Non-Discrimination Act, which would make permanent a five-year-old moratorium on states taxing Internet access - and extend the ban to eight states that had such taxes in place before the ban was first enacted.

Alexander portrays the issue as one of states rights versus federal mandates, but that's a red herring. There's no federal mandate involved, simply a federal ban on a certain kind of taxes. The Commerce Clause of the U.S. Constitution clearly gives Congress the right to make laws governing interstate commerce, and the Internet clearly involves interstate commerce.

The real issue - the issue that The Tennessean editorial writers and Sen. Alexander don't address - is one of basic fairness. The issue is this: should a federal law that bans a certain kind of tax apply to all U.S. residents, or just some of them? Right now, it applies only to some of them. Meanwhile, people in Tennessee and seven other states are forced to pay taxes that Congress five years ago decided should be illegal.

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 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.

In the end, then, The Tennessean is editorializing against basic fairness and in favor of you and every other Internet user across Tennessee being denied the same protections that federal law gives taxpayers in most every other state. And the paper is opposing you getting to share in a tax cut worth $18 million a year. Why? Simple. They want state government - not you - to have the money to spend.

I have more on the issue - and how to contact Alexander and tell him to drop efforts to block the Internet Tax Non-Discrimination Act - here.

UPDATE: A reader pointed out today's Wall Street Journal editorial on the issue. In case you don't have a subscription to WSJ.com, here's an excerpt:

The current moratorium, known as the Internet Tax Freedom Act, prevents taxes on Internet access; double taxation of Web purchases; and discriminatory taxes that treat online sales differently from offline sales.

In effect since 1998, these bans are working just as the bill's original authors, GOP Congressman Chris Cox of California and Democrat Senator Ron Wyden of Oregon, intended: Internet use and electronic commerce are growing rapidly, while the digital divide continues to close. Families making less than $25,000 a year now comprise the fastest-growing segment of the Internet population, according to the Commerce Department.

But all of that will be jeopardized if the tax prohibitions are allowed to expire on Friday. A bill to make the provisions permanent passed the House in September but has stalled in the Senate, where GOP sponsor George Allen of Virginia is being thwarted by a few Republicans who have decided to dress up as tax-and-spend Democrats for Halloween.

Under pressure from the National Governors Association and others who see a digital cash cow in cyberspace, George Voinovich of Ohio and Lamar Alexander of Tennessee have bucked their President and party leaders by joining Democrats Maria Cantwell of Washington and Kent Conrad of North Dakota in holding up the bill. If these renegades are successful and the ban lapses, watch for the tax man to pounce.

"You will double-up the price of plain old Internet access faster than a dog can jump on a meat wagon," predicted Senator Wyden last week. But that's just the beginning. With no law to stop them, state and local officials can start taxing everything from spam filters to instant messages to Google searches. E-mail taxes alone would be a gold mine for free-spending politicians across the country. At a Senate hearing on spam in May, Minnesota Democrat Mark Dayton suggested "looking at some very, very small charge for every e-mail sent."

He's not alone. States and cities love the idea, and not just because of the potential for taxing, say, cross-country e-mails. Governors, mayors and county officials are thinking locally, too. A message sent by you to your neighbor per next Saturday's barbecue might easily pass through computer servers located in several of the nation's 7,600 different taxing jurisdictions.

"We have heard testimony repeatedly in Congress by representatives of states who wish to use that as a basis for taxation," says Congressman Cox. "The Internet by its architecture is innately susceptible to this type of multiple taxation. And it's because of the tyranny of multiple taxation that we enacted this ban in the first place."

Many states still in denial about their spending problems have continued to claim that they are revenue starved. Senator Voinovich, a former Ohio Governor, is being urged by his successor, Bob Taft, to oppose the moratorium on these grounds. This is the same Governor Taft who just raised the sales tax by 20% in Ohio, a state that has seen spending rise 70% over the past 10 years.

Mr. Alexander, another former Governor and one of the strongest proponents of Web levies, has been showing up at negotiations accompanied by lobbyists for state and local tax collectors. Their claim is that Internet taxation is a state issue. We're all for federalism, but if an e-mail transaction sent from Nashville to Phoenix via servers in Dallas and St. Louis isn't interstate commerce, then what is?