Tax Moratorium Is Greatly Needed

Posted October 21, 2007 at 11:00pm

It’s a logical question and the one I get asked repeatedly by both sides of the Internet tax debate. The answer is simple, telecommunications taxes in the United States have traditionally been levied at a rate far higher than other types of sales and business taxes; in fact, telecommunications are taxed at a rate that rivals, and in some places exceeds, the taxes on tobacco and alcohol.

We tax tobacco and alcohol at such high rates because we are trying to discourage their consumption and pay for their effects on society. Telecommunications services support jobs, education and economic growth — are these objectives we want to be discouraging? Federal, state and local tax policies have created this perverse situation, and that is the reason we need an Internet tax moratorium today more than ever.

Currently, the Internet Tax Freedom Act, which I first authored with then-Rep. Christopher Cox (R-Calif.) in 1998, prevents federal, state and local governments from levying multiple and discriminatory taxes on electronic commerce. Three types of taxes on Internet-related services are specifically prohibited: taxes on Internet access, multiple taxes on the same product or service (for example, by two or more states) and discriminatory taxes that treat Internet services differently from other types of commerce, or that are enacted with the specific purpose of taxing Internet products or services. This ban is scheduled to expire on Nov. 1.

If the expiration date passes without another extension, many consumers will soon be paying taxes of 30 percent or more on their Internet access, and millions of businesses will be hit with a barrage of discriminatory taxes. Montana, for instance, would begin taxing Internet access the day after the moratorium lapses. And states could begin to demand withholding of taxes and even retroactive tax on any number of Internet transactions made after Nov. 1.

Imagine suddenly being faced with the challenge of having to comply with thousands of tax jurisdictions on every sale that is made on your Web site. A small “mom and pop” Web site with customers scattered across the country would find this task impossible, and the burden of having to comply with each jurisdiction would effectively strangle Internet commerce for all but the biggest players. Do we really want to create another situation where you must be a large corporation in order to compete? And for those families who are struggling each month just to get by, a 30 percent tax on monthly access fees could very likely put the Internet out of reach.

Over the past 15 years our economy has become increasingly dependent on two things — worldwide trade and the Internet. The Internet has fundamentally changed the way we work, learn, communicate and do business, and the productivity growth it has fostered is essential to our ability to compete in the world economy. Thanks to the Internet, we can quite simply do more with less time.

The Internet has helped produce millions of news jobs over the past decade. According to a recent study conducted by the Brookings Institution, for every percentage increase in broadband penetration, nearly 300,000 new jobs are created. Economics, however, dictates that even a modest increase in prices will shrink the market. This certainly will hold true for broadband deployment if a 20 percent fee is charged on Internet access. A regressive tax will only expand the already growing gap between broadband access rates among lower- and high-income families.

The United States also is falling behind the rest of the world in terms of broadband access. In 2000, the United States ranked fourth in the world in broadband deployment per capita. By December 2005, its position had fallen to 12th, and a year later the U.S. was down to 15th on the list. Being at the forefront of the Internet’s creation meant Americans got to reap its early economic rewards, but American students and workers are increasingly being left in the dust as those economic benefits foster growth in Asia and Europe. We need to be taking steps in Congress to turn this trend around, not make it worse.

As they often do today, states and localities will tax different technologies at different rates. The incumbent technologies will have real political advantages over new innovations, pushing the taxes onto the very technologies we should be promoting. Large telecommunication companies and others with large lobbying operations would prefer this arrangement, but ultimately it would be bad for competition and bad for consumers.

Beyond our ability to compete with the rest of the world, higher taxes — and maybe more importantly the uncertainty of higher taxes — in an area where profits often are hard to foresee will cause a real and economically dangerous drop in the funding of new and innovative ideas related to the Internet. This is why we have pushed for a permanent extension of the Internet Tax Freedom Act.

Of course, a temporary extension of the Internet tax moratorium would work. I would support an extension that leaves the intent of our original legislation intact, and I am confident that the Senate will address this issue before the Nov. 1 deadline passes. There is strong bipartisan support for an extension, and Senate Majority Leader Harry Reid (D-Nev.) is committed to getting it done. However, simply extending the ban just puts us back in this same position in another couple of years. So, as long as we can agree that taxing the Internet is a bad idea, why not consider making the ban permanent? Congress can always make revisions to the moratorium should unforeseen issues arise down the road, but the current law has been working for nearly 10 years and a permanent ban would add some needed certainty to the system.

So why do we need a moratorium? We need it for every American who is working to enhance their skills to make a better life for their family; for entrepreneurs who are at the root of our economic prosperity; and for our economic competitiveness in an increasingly interconnected and technology dependent world. We need it for our future.

Sen. Ron Wyden (D-Ore.) is a member of the Finance and Energy and Natural Resources committees.