Today's Internet tug-of-war has states screaming over lost revenues. They're whining that lost retail sales will have a detrimental affect on state budgets if they can't tax the Internet—and now. But state revenues are increasing, not decreasing, according to a new study "Should We Tax the Internet?" by the Institute for Policy Innovation (IPI).
"The assumption behind the states' argument is that if online sales increase, state revenues will decrease," says author Dr. Merrill Matthews, Visiting Scholar at IPI. "That is not necessarily true. Both retail sales and state sales tax receipts have continued to grow during the decade of the 1990s, even with the growth of Internet sales."
The states' aggressive attempt to prescribe sales, access, use, or other tax concoctions for non-existent budget problems could kill current economic growth, presently spurred by competitive prices between retail and online sales. Without such competition, prices would be higher and sales would be lower—which would actually cost the states money.
How can sales tax revenues continue to grow while more people buy online?
1. Many purchases made online would not be taxed even if purchased at the corner brick and mortar store. For example, pharmaceuticals and airfare, two rapidly growing areas of online purchases, are not typically subject to the state sales tax.
2. Retail outlets don't lose sales just because potential customers purchase via Internet. First, the product might never have been bought if the purchaser had to get in a car and go to the store. And second, online consumers are just as subject to impulse buying as those shopping retail—perhaps more so in areas such as technology products.
3. Online sales have a "multiplier effect" that spurs sales both online and in retail stores. For example, online sales are currently helping to keep inflation down, and this generates more economic activity.
While a consistent view of federalism and state sovereignty would acknowledge that states have the right—albeit limited by the Constitution and the courts—to tax the Internet, that doesn't mean they should. Taxing the Internet now, when economic symptoms reveal booming revenues, would be a cold move.
This information is from a new IPI Policy Report, "Should We Tax the Internet?" by Dr. Merrill Matthews.
Synopsis:
The Internet has quickly become the defining element of the last
decade of the 20th Century. Whether the Internet continues to
be the driving force behind the economy, education and even culture
in the next century depends to a large extent on what policies,
regulations and taxes - if any - Congress and the states impose
on the new medium.
While deciding not
to tax the Internet raises several problems, so does imposing
a tax. How will businesses ensure the privacy of purchasers? Would
government keep a record of those purchases? Would an Internet
sales tax slow the growth in e-commerce, and would e-tailers flee
U.S. shores in order to avoid the tax?
RELATED REPORT
IPI Policy Report
- # 153
New.Economy@Old.Constitution
by Lawrence A. Hunter, George Pieler on 03/20/2000
Synopsis
As the 21st Century dawns, few people doubt that something fundamental has changed in the American economy. The new economy is being fueled by a revolution in information technology and networking—the Internet. Today, more than 100 million American adults are using the Internet, and email already outnumbers regular mail by a ratio of 10 to 1.
Ronald Reagan characterized politicians' natural predisposition as, "if it moves, tax it; if it keeps moving, regulate it; and if it stops moving, subsidize it." The Reagan dictum still holds, it seems, even if "it" moves in data packets at the speed of light. Today politicians at virtually every level of government are looking for ways to tax the Internet.
Clearly, the reality is much more complex than a choice between making the Internet a "level playing field" and making it a "tax-free zone." For one thing, we must draw a distinction between constitutional and unconstitutional methods of taxing the Internet. Of course, everyone assents to the proposition that there should be no unconstitutional taxes on the Internet. But there is considerable disagreement about what is or is not constitutional.
The Madisonian model of government, as laid out in The Federalist Papers, is a model of competition, not collusion; friction, not harmony; a calculated division of power, not unification across all levels of government. The Internet is the most dramatic example yet of the power of markets, unencumbered by heavy-handed government intervention, to make the world a better place. How policy makers respond to the challenge of electronic commerce will help determine not only the future of the Internet, but also the continued relevance of constitutional governance.
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