Wednesday, October 10, 2007

Government Hungers for Internet Taxation

If you use the internet for any reason - from shopping to reading to connecting with friends and family - the current debate of internet access taxation is aimed at you. Unless Congress takes action, a ban on taxing your access to the internet will expire on Nov. 1.

With the tax ban in place, the economic growth and the spread of internet access has been phenomenal. Access has changed the way we communicate and do business, changed politics, changed education, and more changes will come as well. The technology too has been changing.

Some state government leaders are complaining that the boom of sales on the internet has meant a loss of tax dollars for such states. Yet, wherever Americans shop, the money they spend will still make its way into a tax revenue stream. Here's a reality check: A slower growth on spending and taxation by states places a bigger burden on state governments to spend more wisely and to prioritize spending. Residents, business and government will benefit from that.

Some in Congress are pushing for a permanent ban on internet access taxation. And some fear what effects that might have, since as yet unknown technologies may develop and avoid even more current tax structures. I keep sensing this philosophy that All Things Must Be Taxed is deeply ingrained in many government offices. A constant and effective oversight of government spending and the tracking and eliminating of wasteful spending is just one way to insure government has the funds it needs for vital services. Simply adding a new tax discourages such efforts.

Tennessee Senator Lamar Alexander has a bill now which would keep the ban in place for 4 years, but then open the way for every city, county and state to then begin taxing internet access, especially on bundled services. Sen. Alexander says that 4-year period will allow time for Congress to create legislation appropriate to the technology.

Some info from Sen. Alexander's website:

In short, Carper-Alexander legislation improves the existing moratorium by closing tax loopholes and clarifying the definition of “Internet access” to better protect essential goods and services provided by state and local governments.

The Carper-Alexander bill alters the definition of tax-free, “Internet access” to ensure that a consumer’s connection to the Internet, including email and instant messaging, remains tax-free. At the same time, the bill closes a loophole in the original 1998 moratorium that could allow an Internet Service Provider to bundle Internet access with other services and make them all tax-free.

This loophole is important because it could harm the traditional tax base of state and local governments. In 2004, the last time Congress extended the ban, Congress exempted voice-over-Internet-protocol services from the moratorium because of fears that states and localities could lose billions of dollars in revenue as telephone services migrated to the Internet.

As the Internet continues to grow and more services migrate to the Internet, Sens. Carper and Alexander said it makes sense to close that loophole and define “Internet access” exclusively as the connection between a consumer and the Internet Service provider. Such clarity will continue to ensure that Internet access is tax free, while also ensuring state and local governments do not have to come up with new – and potentially more burdensome – sources of revenue to pay for teachers, firefighters and health care services.

“Our bill would ensure that consumers continue to enjoy tax-free access to the Internet, including email and instant-messaging,” said Sen. Carper. “In the meantime, we fix many problems with the current law so that as future services, such as cable television, migrate to the Internet, we don’t completely erode the tax base of state and local governments.”

We should not undermine the ability of governors and mayors to pay for goods and services that everyone depends on. A temporary extension, as we have in our bill, will allow us to keep Internet access tax free, while giving Congress more time to understand the Internet’s evolution and what it means for state and local governments.”

“This is a common sense compromise that would extend the moratorium for another four years without blowing a hole in the budgets of state and local governments,” Sen. Alexander said. “A permanent moratorium would create a massive federal unfunded mandate, which members of Congress have repeatedly promised not to do. When the federal government starts restricting Tennessee’s ability to raise revenue that means increased tuition, higher sales tax on food and even a state income tax are just around the corner.”

I note again the concept here is on increasing tax revenues, not on keeping spending limited. Unknown costs are certainly troubling to states and cities - which again says to me that future leaders need to be even more informed and active in seeking ways to limit government growth and not just assume that government must continue to grow.

Another perspective from the National Review Online:

This new Internet-access tax could do real damage to the U.S. economy, which is finally starting to get its feet back under itself from the tech implosion of 2000-01. In this nascent recovery, growth is again being propelled by technology and knowledge-based industries. At the very heart of this critical debate is the question of whether the Internet should be treated as a tax- and regulation-free form of commerce, or should be converted into a new cash cow for government officials to fund favored programs.

Sen. John McCain and others have decided to stop Lamar and his small band of tax-the-Internet cronies, and have introduced a compromise to address all of the legitimate concerns outlined by the state and local groups regarding their existing tax base for telecommunication services. The McCain compromise will extend the expired moratorium on Internet-access taxes for four years, phase out taxes on Digital Subscriber Lines ("DSL") that states had illegally started to collect, and address concerns about the treatment of Voice Over Internet Protocol (VOIP). The compromise will bring the necessary votes to finally pass an Internet-tax moratorium out of the Senate.

In 1998, Congress wisely declared the Internet a tax-free zone by establishing a moratorium on Internet-access charges. An "access charge" is just the government's polite way of adopting a new tax. The idea was to prevent the government from causing infant-crib death of this new consumer technology. After all, as Justice John Marshall once observed, "the power to tax is the power to destroy." By all accounts, the Internet-tax moratorium has been a resounding success. In 1985, about one in six American families and businesses had access to the web, now three in four do.

Moreover, e-commerce is the new frontier of business enterprise. International Data Corporation recently estimated that the Internet economy in 2003 reached $2.8 trillion. In the U.S. alone, e-commerce accounted for $500 billion in business activity and employed 2.3 million Americans. The Internet sector of the economy is growing at 12 percent per year compounded. E-commerce, in short, is to the early 21st century what the steam engine was to early-20th-century economic development. Meanwhile, the telecommunications sector of the economy now stands ready to invest billions to upgrade the nation's communications networks and make high-speed (or broadband) Internet access available to all American homes and small businesses, as it is for large corporations today.

All of this is to say, if ever a public policy has worked precisely as hoped, it is the Internet-tax moratorium.

Opponents of the ban on Internet taxes believe that this policy deprives state and local governments who need the money to fund vital public services. Lamar Alexander has absurdly labeled the federal ban on the Internet-access taxes an "unfunded mandate on states." But an unfunded mandate is a requirement by the federal government for the states and localities to
spend money. This policy doesn't even deny states and cities a traditional revenue source. Most important, the growth of the Internet and the information economy has been an enormous net positive fiscal development for the states. In the 1990s, as the Internet economy soared, state and local revenues grew at a rate three times the pace of inflation. By the end of the 1990s states and local government coffers were overflowing; it wasn't until the tech bubble burst that government revenues sank.

The proposal by Senator Alexander, along with co-sponsors Kay Bailey Hutchinson and George Voinovich, to allow fees levied on Internet usage seems maddeningly misguided politically given that in just six months voters will decide on which party controls the U.S. House, the Senate, and of course the White House. It makes little sense for Republicans to run for re-election as the party that initiated the nation's first ever tax on the 74 percent of American households who use the Internet."

Another perspective from the Clarksville newspaper says taxation is the only sane response to the internet economy. In my mind, such opinion is reckless and hostile to those who make our economy work.

Your opinion may vary.

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