Beware Unintended Consequences of Ban

Posted October 21, 2007 at 11:00pm

On Oct. 16, the House voted 405-2 to extend the current Internet tax moratorium — which expires on Nov. 1 — for another four years. The Senate should do the same, rather than enact a permanent moratorium, because permanent action is likely to invoke a far higher law: the law of unintended consequences.

Because we can’t imagine the future impact of the World Wide Web, a permanent moratorium could produce at least two unintended consequences: a big, unintended tax increase or a big, unintended, unfunded federal mandate.

Here is an example of how a permanent moratorium could produce an unintended new tax. At the time the original moratorium was enacted in 1998, “Internet access” meant dial-up. Today, Internet access also includes broadband. Fortunately, Congress updated the moratorium definition in 2001 and 2004 so that access to broadband is exempt from taxation.

Or, here is an example of how an outdated moratorium can produce an unintended, unfunded federal mandate on states, cities and counties. States and local governments collect billions of dollars in sales tax on telephone services to pay for schools, roads, police and hospital workers. Under the old definition of Internet access, telephone calls made over the Internet might have escaped such taxation. That might sound good to conservatives like me who favor lower taxes. But most members of my Republican Party were elected promising to end the practice of unfunded federal mandates, that is, those of us in Washington, D.C., telling governors, mayors and county commissions what services to provide and how to pay for them. In fact, Republican candidates for Congress stood with then-Rep. Newt Gingrich (Ga.) on the Capitol steps in 1994 and said as part of a “Contract with America,” “No more unfunded federal mandates. If we break our promise, throw us out.” In 1995, the new Republican Congress enacted a new federal Unfunded Mandates Reform Act banning unfunded mandates. That is why in 2004, the new definition of Internet access allowed state and local governments, if they so chose, to continue to include telephone services within their tax bases, whether calls were made over the Internet or in the traditional way.

I’ve introduced with Sen. Tom Carper (D-Del.) a four-year extension of the Internet tax moratorium that would reinforce the original Congressional intent to leave basic Internet access alone to facilitate technological advancement and expansion of the network. Our four-year extension provides stability for continued development and investment but builds in a timeline for revisiting the issue to correct any unintended consequences down the road — not just for state and local governments, but (as we’ve seen with the advent of broadband) for consumers, industry or anyone else.

Our four-year moratorium has the support of the National Governors Association, the National Association of Counties, the U.S. Conference of Mayors, the National League of Cities, the Multistate Tax Commission and the AFL-CIO.

Almost all of us in Congress agree today that we don’t want to tax Internet access as we know it today. But we have no idea what the definition of Internet access will be tomorrow. That is why we should not write Internet tax policy into stone. In the 1990s, most of us discovered the Internet as a way to send notes to one another over e-mail. Now we use it to share pictures, videos and even talk on the phone. In the future, our televisions or even our home appliances may rely on the Internet to function. This is such an adaptable technology that continues to grow in size and complexity, affecting more and more aspects of our economy and our daily lives. As that happens, it makes no sense to adopt a permanent tax policy that would almost certainly have unintended consequences, such as a new tax or new unfunded federal mandates on states, cities and counties. By enacting a four-year moratorium, Congress will have to revisit this matter regularly to update the law to suit this ever-changing technology.

Sen. Lamar Alexander (R-Tenn.) is a co-sponsor of the ITFA Extension Act, which would bar Internet taxation for four years.