The politics of a tax-free cyberspace

Cut taxes to shrink government.

For some officials in President Reagan's administration, that was the strategy behind the massive 1982 tax cut.

The same idea is also part of the story behind the current political battle over the taxation of electronic commerce.

Republican presidential candidates and congressional leaders say the current three-year moratorium on states and other governments imposing sales or other taxes on Internet transactions should be made a permanent ban.

Democratic presidential candidates Al Gore and Bill Bradley have not taken a stand. Considering the financial support Democrats have been getting from executives in the New Economy, they may be wishing the issue would go away.

But Congress has made sure it won't.

Investigating online tax impact

Last year, US lawmakers created the Advisory Commission on Electronic Commerce to devise an Internet-tax policy. The commission has been running around the country hearing testimony on the pros and cons of taxing dot-com sales. Its report is due next April, in the heat of the political campaign.

When the 19-member commission held hearings in San Francisco last week, one antitax witness was Christopher Wysocki, president of the Small Business Survival Committee (SBSC). His 35,000-member group includes several thousand small firms dependent on the Internet.

In general, SBSC members want to restrain Washington. When Mr. Wysocki got his job five months ago, the SBSC board told him he could support practically any proposal that reduced taxes or shrunk government.

"Hundreds of thousands of men and women have been able to start a small business or home office as a result of technology and e-commerce," argues Wysocki. Don't damage that.

But many state and local government officials fear that a greater shift to online business will deprive them of needed tax revenues. They are joined by bricks-and-mortar merchants with stores on Main Street and in malls who see an unfair disadvantage if they must pay tax on their sales and their virtual competitors do not.

Economists at such think tanks as the Center on Budget and Policy Priorities and the Brookings Institution, both in Washington, back that view. They see government as useful. They talk of the revenues needed for smaller classes in schools and public health and safety services.

With today's prosperous economy, however, state and local governments are flush and lost revenues from Internet sales are minor and seemingly unimportant.

University of Chicago economist Austan Goolsbee points out that last year, Internet sales of $13 billion were 0.1 percent of total retail sales. This year they might be 0.2 percent.

Future revenue explosion

But those favoring Internet taxation expect explosive growth in Internet sales.

Conservative estimates put sales-tax losses in four years at $10 billion from the Internet and $5 billion from catalog sales, another area that escapes taxes to a large degree.

"Combined that's 2-1/2 times what state and local governments spend on libraries," says Michael Mazerov of the Center on Budget and Policy Priorities.

Republican Utah Gov. Michael Leavitt, chairman of the National Governors Association, has said: "It boils down to a question of whether sales taxes are viable in the 21st century."

State and local governments get about 25 percent of total revenues from sales taxes.

Professor Goolsbee favors a temporary continuation of the moratorium on sales tax on Internet deals until this "infant industry" is better established. Otherwise, a tax could shrink the number of online buyers by "up to 24 percent."

Congress is unlikely to get much help from its commission on this issue. It needs a two-thirds majority to make a recommendation and it is deeply split. So the experts see little chance of an Internet tax decision in 2000.

(c) Copyright 1999. The Christian Science Publishing Society