 National Association of Counties * Washington, D.C. Vol. 33, No. 11 * June 4, 2001 Previous story | Table of Contents | Next story In my Opinion... Exempting Internet Access from Taxes is Silly By Tom Bonnett
Last month, two Republican senators introduced S.777, a bill to make the current moratorium on the state and local taxation of Internet access permanent. One of the sponsors, Conrad Burns, represents Montana — one of five states that does not have a state sales tax. The other sponsor, George Allen, represents Virginia, which does have a sales tax but is home to the once obscure Internet access provider that last year merged with Time Warner to become a global media powerhouse. The irony is too rich to escape notice. When America Online was aggressively lobbying Congress for this moratorium some years back, it claimed this infant industry needed the protection of tax-free status. Ha! Some infant industry! The sales tax has been a mainstay of the state-local revenue structure for 65 years. In 1998, sales taxes generated one-third of state tax revenue and 16 percent of local government revenue, or roughly one-fourth of all state-local revenue. For most of its history, Congress had the good sense not to mess with this important revenue source. But following a spirited lobbying campaign, Congress enacted the Internet Tax Freedom Act in the fall of 1998. Whether one defines Internet access as a service or a commodity, it has much in common with electricity and telephone service. Thanks to our populist Congress, Internet access is not taxed, while electricity and telephone services are both heavily taxed by state and local governments. Why are they taxed differently? Timing, as crucial to tax policy as it is to comedy, explains this anomaly. Electricity and phone service both required a physical infrastructure to be built throughout the nation. The diffusion of these technologies was slow. Although begun in the late 19th century, many decades were required before the majority of households had access to what we now regard as essential services. Half of America’s households had electricity by the 1920s, but half did not have access to telephone service until 1950. And, for most of the 20th century, states granted exclusive franchises to these providers. As regulated monopolies, they were able to pass along a heavy burden of state and local taxes through the rate base to consumers. State and local governments could not resist temptation and placed discriminatory taxes on both. Contrast that ancient history with the explosive growth of the Internet. When Bill Clinton became president in 1993 there were a trivial number of Web pages. Most Internet users were on college campuses. Today, online users can access more than a billion Web sites, with another 3 million added daily. Last year, a federal government survey found 51 percent of households had a computer and 41.5 percent had Internet access. The rapid diffusion of these new technologies during the past decade rivals the formative development of radio and television in the last century. In 1925, just 10 percent of American households had a radio; eight years later, in 1933, 63 percent had one. Similarly, the television zoomed from 9 percent of households in 1950 to 87 percent in 1960. The rapid adoption of these communications technologies occurred without any sales tax exemption superimposed by Congress. Granting preferential tax treatment to Internet access was almost a reflex action when the rhetoric about social transformation was scorching. Remember when information technologies were golden? Before, like Icarus, they flew too close to the sun and their waxed wings melted? It was, venture capitalist John Doerr immodestly noted, amidst the Internet stock bubble following the Netscape IPO, “the greatest legal creation of wealth in the history of the planet.” National politicians were not unmoved by the high-octane media shower bestowed on Silicon Valley and its new wealth. Soon, both parties, many members of Congress, and even governors were flocking to curry favor with the industry titans of this information age. Campaign funds were sought and given. And public policy has surely followed. The jump in annual H1-B visas to 195,000, from 60,000 in 1996, is another blatant example of the power cord connecting Silicon Valley and the national capital. Although the digital divide is diminishing as the cost of computers declines, most of the current online users at home reside in middle and upper-income households. Could they afford to pay a sales tax on Internet access? In New York, paying 8.25 percent on my $21.95 monthly charge is … well … trivial. Do the math. Higher prices for just about everything will, at the margin, discourage consumption. That is why lobbyists for these industries still argue, with a straight face, that applying the sales tax to Internet access would deter others from getting online. Notice how these corporate advocates have asserted their self-interested objective as a national goal — Internet access has become the Holy Grail. Perhaps I was born in the wrong century, but shouldn’t achieving adult literacy be a higher domestic priority? Tax reform advocates want general taxes with broad coverage and low rates. Eliminate special treatment and narrowly defined nuisance taxes. Strive for simplicity and equity across industries. According to those principles, sales taxes should be applied to all services and not restricted to the consumption of hard goods. Include Internet access and lower telecommunications taxes. But this reform path would require that Congress stop encroaching on the state-local tax structure. No chance of that, unfortunately. It would be impossible to find a functioning brain in Washington that believes Congress will fail to extend this moratorium before it is due to expire on Oct. 21. Contemporary politics demand this. Online users have enjoyed this tax holiday on Internet access. Their numbers grow daily, and will soon constitute a majority of adults. They are voters. Three years ago Congress yielded to hyperbole about the digital revolution, the aggressive lobbying of the hot new industries, and the cyber-libertarians who regarded the tax-free Internet as an inalienable right. The euphoria toward NASDAQ was evident in the halls of Congress. The public policy campaign finance nexus cemented the congressional encroachment on the state-local tax structure. It need not have happened this way, and it need not continue. But it will. Postscript: On May 8, President Bush declared his support for a permanent ban on state and local taxes on Internet access in a speech to the Electronic Industries Alliance. (Tom Bonnett is a public policy consultant who has advised NACo in the past and has addressed NACo conference delegates. He is based in Brooklyn, N.Y. and can be reached via e-mail at TWBPARKSLO@aol.com.) |