States Should Be Allowed to Tax Internet Sales

By Mark Weisbrot

This article was published in the following news outlets:

Knight-Ridder/Tribune Information Services - June 5, 2003
Free Lance Star (Fredericksburg, VA) - June 7, 2003
Milwaukee Journal-Sentinel - June 8, 2003
Charleston Gazette (West Virginia) - June 8, 2003
Free Lance-Star (Fredericksburg, VA) - June 7, 2003
North County Times (Escondido, CA) - June 8, 2003
South Bend Tribune - June 8, 2003
Sunday Gazette-Mail - June 8, 2003
Duluth News-Tribune - June 9, 2003
Vindicator - June 9, 2003
Idaho Statesman - June 10, 2003
Florida Times-Union - June 11, 2003
Daily Press (Newport News, VA)- June 12, 2003
Pharos-Tribune (Logansport, IN) - June 15, 2003
Lexington Herald-Leader - June 15, 2003
Northwest Arkansas Times - June 16, 2003
Columbian (Vancouver, WA) - June 17, 2003
Hanover Evening Sun - (Pennsylvania) - June 17, 2003
Reno Gazette-Journal - June, 2003
Middletown Press (Middletown, CT) - July 1, 2003

"Only the little people pay taxes," said Leona Helmsley, the self-described queen of a luxury hotel empire in the 1980s. She turned out to be somewhat wrong, and went to jail for tax evasion. But the Helmsley principle has been the dream of "tax reform" advocates for decades, and over the last quarter-century they have made considerable progress toward their goal.

There is now a move underway to permanently prohibit states from collecting sales taxes on products purchased over the internet. This would be one more step in shifting our nation's collective tax burden toward those who can least afford to pay. 

Although internet use is growing every year, there is no doubt that people who buy things over the internet have a higher income on average than those who do not. So this would be yet another tax exemption aimed at upper-income groups.

It is important to emphasize this, because the Bush Administration's latest tax cut was even more targeted at the richest Americans. This fact has been obscured by deceptive arguments from those defending the latest rewriting of our tax code. They claim that the rich will receive a disproportionate share of the tax cut because they pay a disproportionate share of the income tax.            

This is a weak argument in any case, since a tax cut could be given to the working poor and middle classes regardless of the current distribution of the national tax bill. But it is especially deceptive when we are talking about cutting stock dividend and capital gains taxes. Since the dividend tax cut will not apply to Americans who hold stock in retirement accounts, both of these tax cuts go overwhelmingly to rich people. That is the main reason why, for example, the four-tenths of one percent of taxpayers who make more than $500,000 a year will get 19-23 percent of the tax cut.

Making internet purchases exempt from sales taxes is also wrong for reasons other than fairness. As any economist can testify, it is generally inefficient for the tax code to favor one type of business over another, unless there is a justifiable policy reason for doing so. Why should internet businesses be exempt from taxes that brick-and-mortar stores have to pay on their sales?

Some people even prefer to have stores in the neighborhood that sell books and CD's and other products, and may contribute to the community in other ways. If these businesses cannot compete with the internet, so be it -- buy why should government deliberately tilt the tax code against them? And why should government subsidize internet commerce that carries a higher environmental cost due to vastly increased packaging and shipping?

During the nineties boom, many highly-paid experts let their imaginations take flight along with soaring stock prices, which were led by dot-com ventures. They dreamed that America had arrived at a "new economy," characterized by a substantial and permanent increase in productivity. Since the internet was believed to be at the forefront of this transformation, they argued for -- and won -- a moratorium on states' taxation of internet businesses.

These illusions about the new economy have burst with the stock market bubble, and so, too, should the moratorium on internet sales taxes.

Our state governments are currently facing their worst fiscal crisis since the Great Depression, trying to close a gap of $100 billion dollars over the next year. There are teachers who have gone without pay, and in Oregon, parents have been selling their blood to raise money for public education. To deprive these governments of needed revenue, just to make further progress toward achieving the "Helmsley principle," would be inexcusable.