Written by David Corn on . Posted in Breaking News, Posts.

Sales taxes
account for about one-quarter of all tax revenues collected by states and localities
to pay for education, public safety, health programs and other services. They
may not be as fair
as a progressively indexed income tax–flat-tax fans would like that–but
in most states they are an essential component of the tax structure. Yet the
champions of tax-free cybercommerce insist that Internet businesses be given
a pass when it comes to funding necessary government functions.

The No-Net-Tax
crowd argues that Internet sales are more akin to out-of-state mail-order sales
than cash-register purchases; mail-order firms are not taxed, therefore… Case
closed. But this basic premise is wrong. Sales taxes are levied on the buyer,
yet they are collected by the seller, who then sends the money to the government.
If you buy by phone from a L.L. Bean catalog, you still are obligated to pay
sales tax–but not through the retailer. Instead, you’re supposed to
forward the tax payment to your state capital. Technically speaking, all you
good citizens who shop by catalog or online and don’t pay sales taxes are
tax cheats. Of course, no one pays these taxes, but that’s not because
there’s an established tax break for those who shop this way. It’s
because there is no collection mechanism. A 1967 Supreme Court ruling declared
that businesses could not be compelled to collect sales taxes from consumers
in states where they do not maintain a physical presence. The court reasoned
it would be too much of a pain-in-the-bookkeeper for businesses with mail-order
customers across the country to gather sales taxes that would have to be sent
to dozens of different state revenue offices. The law did not create a sales-tax
exemption for mail-order transactions.

In the computer
age, collecting and forwarding sales taxes on mail- or phone-order sales should
be no problem. Certainly Land’s End could find software that would calculate
how much tax to collect from these sales and determine where to send the money.
(And a 1992 Supreme Court decision noted that Congress had the power to force
such sellers to charge sales taxes.) Such software could easily be applied to
Internet sales.

In 1998,
President Clinton signed into law legislation that imposed a three-year moratorium
on Internet-related sales taxes and set up the Advisory Commission on Electronic
Commerce, which is supposed to study the “remote sales taxation issue.”
Its report to Congress is due this April. The National Governors Association,
under the guidance of Republican Utah Gov. Michael Leavitt, has proposed a system
in which a third party–such as a credit card company–would gather
the sales tax on Internet commerce and, using high-tech software, zap it to
the proper governmental recipient, for a slight fee.

A band of
conservatives and Republicans–including Virginia Gov. James Gilmore, Rep.
John Kasich, members of the National Taxpayers Union, Americans for Tax Reform,
the Heritage Foundation and the Cato Institute–have called for legislation
to prevent states and localities from collecting sales taxes on Internet purchases.
And conservative policy shops in Washington have been churning out a blizzard
of faxes and studies opposing an Internet sales tax. Lisa Dean, vice president
of the Free Congress Foundation, recently warned–with a touch of melodrama–that
the “greatest development of modern times, namely, the Internet” could
be “regulated out of usefulness,” if Internet sales are taxed. California
Gov. Gray Davis, a Democrat, has sided with the advocates of a tax-free Internet.
“This industry, which is powering the new economy, providing jobs and newfound
wealth for many Americans, is only eight years old, it’s an infant, it’s
too early to tax it, and we should extend the moratorium,” he says. No
surprise there: Davis has Silicon Valley to make happy.

But why
do Internet sales deserve any break? Maintain the tax moratorium, and Internet
businesses will have a powerful edge over Main Street businesses that must charge
the sales tax. This is cybersocialism, with the right-wingers seeking a government
preference for Web-based firms. “As an economist, I believe various forms
of enterprise should compete with one another,” says Henry Aaron, a senior
fellow at the Brookings Institution. “I don’t see any substance [to
the arguments for an Internet tax break]. All you hear is rhetoric extolling
the wonders of the Internet and heavy-breathing about its potential to change
society and that it would be a shame if government squelched new technology.
But here we have a technologically advanced enterprise with a real efficiency
advantage that allows it to present a wide range of choices to consumers and
maintain lower inventories [than street-front stores]. These are real strengths.
It doesn’t qualify for special treatment… Why should the government subsidize
Internet sellers in competition with retail shops? Why should either be favored?”

As more
commerce shifts from real stores to virtual shops, the revenue consequences
for states and localities could become severe. The Center on Budget and Policy
Priorities estimates that, four years from now, local governments could lose
$15 billion in taxes due to catalog and cyber sales. And if Internet sales are
exempted from taxes, low-income consumers who cannot afford computer equipment
will end up paying a disproportionate share of state and local sales taxes.
An erosion in the tax base could prompt states and localities to raise sales
tax rates, which would further whack low-income people.

One needs
little imagination to picture the schemes that would be cooked up to exploit
a permanent Internet tax break. Circuit City could place computer terminals
in its stores and direct customers, once they’ve inspected the goods, to
make their purchases through the company’s website, rather than at the
sales counter. Sign on, provide your credit card number and then immediately
walk over to a sales clerk and pick up your merchandise–tax-free. Say goodbye
to the sales tax–and much of what it funds. And that’s the point:
Keep the Internet tax-free and there will be pressure on states to find other
revenue sources or to slash programs. The cons leading the charge on this battle
would not be sorry to see local governments end up in such a bind.

This fight–in
substance, not rhetoric–is not as much about the Internet as about taxation
itself. Sure, it’s fun to shop online and avoid paying an extra eight percent.
But it would also be a kick to get a paycheck without having to hand any of
it to the IRS. The bottom line is that Internet commerce is not something special
that warrants preferential treatment. But for antitax cons, this issue provides
them an opportunity to strike against their favorite target–taxes–while
portraying themselves as allies of the hip, gee-whiz technology of the future.
Surely, cyberexecs who benefit will be grateful and perhaps generous in campaign
contributions and foundation donations. Here’s a way for the right to prevent
money from flowing into government coffers and to lay a claim to Silicon
Valley bucks. What a twofer.

History Lesson
libertarian conservatives of the Cato Institute have one of the busiest fax-blasters
in Washington. Several times a day, I receive press releases from this outfit,
each one referring to yet another initiative to discredit government. To capitalize
on the faux end-of-the-century silliness, Cato recently faxed news of its study,
“The Greatest Century That Ever Was: 25 Miraculous Trends of the Past 100
Years.” The report notes that “almost every indicator of health, wealth,
safety, nutrition, affordability and availability of consumer goods and services,
environmental quality, and social conditions indicates rapid improvement over
the past century.” That’s a news flash? Couldn’t the same have
been said in 1899?

Cato credits
free enterprise for our 20th-century success, and cites an increase in the size
of government as one of the few negative trends of the past 10 decades. But
if one thinks about their list of positive trends for a moment, Cato’s
view–government bad/commerce good–is undermined. The air, Cato says,
is 97 percent cleaner. But it was government agencies, such as the Environmental
Protection Agency, that forced polluting corporations to clean up. (As far as
I can tell, Cato analysts have never met an environmental regulation they like.)
Wages are up since 1900. No thanks come from Cato for the minimum wage laws
that helped fuel wage growth. Electricity is widespread, indeed, partly due
to government rural electrification programs. Deaths caused by infectious diseases
are down. Let’s give credit to public health agencies. Home ownership is
up. Hail the income tax deduction for mortgage interest–a government subsidy–and
federal and state programs that encourage home-buying. The work week, Cato claims,
is 30 percent shorter. It may not feel that way to most of us, but that stat
should cause us to appreciate unions and workplace legislation. Accidental deaths
are down, yet Cato has never cheered the Occupational Safety and Health Administration
and workplace safety standards. The income of African-Americans has increased
tenfold. But would it be that high had there been no affirmative action, no
passage of civil rights laws and no enforcement of these laws? Remember, such
laws were opposed by segregationists as illegitimate governmental interference
in free commerce.

Yes, there’s
been progress these past hundred years. But not because corporations were permitted
a free hand to do whatever they wished. This is a good point to keep in mind
as we enter a new millennium. Cato and other laissez-faire cowboys will be arguing
for fewer rules for the international corporatists of the go-go global economy,
promising that no restraints will bring riches for all. Those truly familiar
with the history of this century know better.