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Let's Not Rush To Tax The Net



Everyone hates taxes--especially when they're imposed where they didn't exist before. That's why the debate over taxing the Internet is so heated. Governors want to extend state sales taxes to the burgeoning business taking place on the Net. Electronic-commerce merchants and some in Congress say "forget about it." A better response is "Cool it." It's time to shed some light, as opposed to heat, on the issue.

It's true that governors rely increasingly on sales taxes to fund schools, pay salaries, and repair roads. They don't want to lose revenues if business shifts to a tax-free Net. Fair enough. But states are running budget surpluses now, thanks to the strong economy. In fact, most governors are rushing to cut taxes. There's no immediate need to tax the Net.

The Net is not the first no-tax zone. Mail-order retailers have been thriving for decades. The Supreme Court's decree that only companies with a physical presence in a state are required to collect sales taxes there has helped catalog sales soar to $78 billion in 1997. Compare that with $4 billion in electronic commerce. If mail order isn't threatening state solvency today, the Net probably won't anytime soon (page 131).

Then there's the matter of tax policy. Government has tended in recent years to shift revenue sources from income, property, estate, and capital-gains taxes to sales and payroll taxes, which are regressive. Some three-quarters of all households now pay more in payroll taxes than in income taxes. Sales taxes have the virtue of being simple and transparent--everyone pays them equally. But they do fall more heavily on the poor than the rich, and they must be paid in good times as well as in bad. They are also a heavy burden--8 1/4% in New York, which helps explain why people like catalog shopping.

Extending a regressive tax to the Net is a bad idea. Any discussion of Net levies should be part of a larger debate over simplifying and broadening taxes, making them both fairer and lighter. The Net is too young an arena and too important to the nation's competitiveness to tax just because it's there.

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