Should there be a sales tax on Internet access?
Since 1998, the Internet Tax Freedom Act (ITFA) has prohibited state and local government taxation of Internet access. And in an effort to protect consumers and business owners alike, Congress is considering making ITFA permanent. But, as usual, there are problems.
Access to the Internet is an American necessity. Without it, children can’t keep up with schoolwork, families can’t keep in touch with loved ones, and businesses both large and small can’t compete. And that’s just the beginning.
Our tax system — and in particular the quilt of sales taxes imposed across the 50 states and their localities — already recognizes that some goods and services shouldn’t be taxed. You don’t see a sales-tax line on your hospital bill, for example, or (in most states) on food 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 one of them. It is rapidly becoming a prerequisite for full economic and social citizenship, and we have explicit national goals to bring all Americans online for precisely that reason.
The ITFA ensures that we will not tax your job search, your application for a driver’s license, your child’s ability to do his homework or submit her college application, your retrieval of medical records or search for health-care advice — the list is endless because the importance of Internet access to all facets of life is endless.
And in Philadelphia, only 47 percent of low-income households — those with incomes under $35,000 — have broadband Internet service at home, according to the U.S. census’ American Community Survey, putting those families at a greater economic disadvantage. Taxing the Internet would put an unreasonable and counterproductive burden on them, much as taxes at a grocery store or a hospital would.
Moreover, failing to pass the ITFA risks having 10,000 different state and local taxing jurisdictions across the nation tax communications services at disparate and often confiscatory rates because of that very importance. The average tax rate imposed on voice telephone service is now about 17 percent; on cable and video services, 12 percent. Why this high? Because these services are in such demand that consumers obligingly tolerate the taxes. The risk is that similar taxes would be imposed on Internet access despite the social harm they would cause.
And bear in mind that communications taxes are generally regressive and would slow consumer Internet adoption. A Pew Research study reported that nearly 20 percent of those not online cited the “expense of owning a computer or paying for an Internet connection” as the primary obstacle.
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.
But recall that this is a tale of two taxes. While the ITFA forbids access taxes, a group called the Alliance for Main Street Fairness has proposed another kind of online tax. The alliance, which represents brick-and-mortar businesses, wants legislation to assure that every jurisdiction’s sales tax treats online and brick-and-mortar business equally.
What’s wrong with that? Certainly not the idea itself. The decision to buy something from Amazon vs. a retailer in your community shouldn’t be influenced by sales tax differentials. The problem is that the alliance opposes the ITFA and its ban on taxing Internet access until its 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 crosscurrents.
With so much at stake for our national goal of universal high-speed Internet access, we cannot delay making the ban on taxing Internet access permanent. The legislation should be passed now.
At the same time, we should be addressing the issues raised by the Main Street Alliance and, in particular, challenging the sophistry that characterizes creating a level playing field for online and brick-and-mortar sales as “imposing new taxes.” But that is not a reason to handicap consumers’ Internet access.
Taxing Internet access would mean taking advantage of low-income families, schoolchildren, small businesses, and, fundamentally, all of us. There is overwhelming bipartisan consensus on ITFA and on ending taxes on Internet access. Sen. Bob Casey (D., Pa.) and Pat Toomey (R., Pa.) can seize this opportunity to reach across the aisle and demonstrate bipartisan support for this commonsense legislation.
Ev Ehrlich, who is president of the Washington-based consulting firm ESC Co., served as undersecretary of commerce for President Bill Clinton.