A Tale Of Two Taxes

As the internet leaves its adolescence and becomes more integrated with all aspects of our economy, one of the issues it faces is its relationship to the tax system.

This issue will be moved to center stage by the Congress’ consideration of making the Internet Tax Freedom Act, which prohibits state and local government taxation of internet access, and access only, permanently.

The Internet Tax Freedom Act (ITFA) is a good thing, because it stops us from taxing a good thing – internet access.  Our tax system – and in particular, the quilt of sales taxes imposed across the fifty states and their localities – already recognizes that some goods and services shouldn’t be taxed.  You don’t see a “sales tax” line, for example, on your hospital bill, or on consumer staples you purchase at a grocery store.  These exemptions reflect our view that some products are so important to consumer welfare that they shouldn’t be in the tax base.

Internet access should be considered one of them.  It is rapidly becoming a prerequisite to full economic and social citizenship, and we have explicit national goals regarding bringing all Americans on line for precisely that reason.  The ITFA – which has been in place since 1998 – says that we will not tax your job search, your applications for a driver’s license, your child doing his homework or submitting her college application, your retrieval of medical records and search for health care advice – the list is endless because the importance of internet access to all facets of life is endless.

Moreover, failing to pass the ITFA risks having 10,000 different taxing jurisdictions across the nation’s tax communications services at disparate (and often confiscator) rates because of that very importance.  The average tax rates imposed on voice telephone services is now about 17 percent, and on cable and video services, 12 percent.  Why this high?  Because these services are in such demand that consumers obligingly tolerate them.  The risk is that they would do the same for taxes on internet access, despite the social harm they’d cause.

And bear in mind that communications taxes are generally regressive, and would slow consumer internet adoption.  A PEW Research Study reported nearly 20 percent of non-internet users cited “expensive of owning a computer or paying for an Internet connection” as their primary reason for not going online.  Similarly, a recent Phoenix Center study estimated that “a 5 percent effective tax rate…would undo the last four years’ adoption gains” in broadband usage. At a 10 percent effective tax rate, “six years of fixed-line growth would be reversed, returning the adoption rate to the level observed in 2008.”  Even if these estimates are only remotely true, they’re frightening.

There’s overwhelming bipartisan consensus around ITFA.  But, recall, this is a tale of two taxes.  The ITFA is one, but the other tax is the target of a group called The Alliance for Main Street Fairness and its proposed Remote Transaction Parity Act.

The Alliance, which represents brick and mortar businesses, wants legislation to assure that any jurisdiction’s sales tax treats online and brick-and-mortar business equally.

What’s wrong with that?  Certainly not the idea itself.  The issue of whether buying something from Amazon versus from a retailer in your community shouldn’t be influenced by sales tax differentials.  But the problem is that the Main Street Alliance opposes the ITFA and its ban on taxing internet access until their own legislative agenda is met.

Lawmaking is usually the process of resolving these kinds of stalemates.  But good public policy provides a compass to navigate the cross-currents.  With so much at stake regarding our national goal of universal high-speed internet access, we cannot delay the ITFA and its permanent ban on taxing internet access.

It should be passed, and passed now.

Yet, at the same time, we should be addressing the issues raised by the Main Street Alliance, and in particular, challenging the sophistry that creating a level playing field between on-line and brick-and-mortar sales amounts to “imposing new taxes.”  But it’s not a reason to handicap consumers’ access to the Internet.

Both of these tax proposals ought to be enacted.  But to play off working families who can barely afford broadband access as it is against small businesses up against the power of the “Big Websites” risks leaving us with neither, and the worst of all worlds.