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Ban Internet Taxes? The Taxman Clicketh

One of Feulner’s Laws of Public Policy reads: “There are no permanent victories in Washington.” These days, we’re seeing that law borne out over Internet taxation.

This looked settled years ago. Congress has voted twice–in 1998 and 2001–to ban any taxes on Internet access. Those acts also prevented states from slapping any additional sales taxes on Internet purchases.

Online commerce has skyrocketed during the last five years, and it’s been helped along by these tax bans. Shoppers enjoy the convenience and comfort of shopping at home. Plus, they boosted the economy with all the high-tech computer equipment they bought to make online purchases.

But there’s one piece of bad news. The moratoriums were only temporary. The latest expired on Nov. 1. If Congress doesn’t act quickly, states will step in and start passing their own Internet taxation laws, which could harm businesses and disrupt the entire high-tech industry.

Sen. Lamar Alexander, R-Tenn., has proposed renewing the moratorium, but with one key change. He wants to “level the playing field” between Internet providers and telephone companies. “The Internet is not a baby in a crib anymore, it’s a grown-up business,” he announced recently. “It can at least afford to hire some of the most expensive lobbyists.”

In the interest of “fairness,” he’s introduced a measure that would allow states to begin taxing Internet services just as they already do phone services.

That’s a big mistake, one that could cause long-term harm. After all, the Internet drives the new economy and is also a big part of the current economic recovery.

Virtually every day, new technologies come online.

One example is called “Voice Over Internet Protocol.” VOIP enables us to make telephone calls over the Internet. That’s significant, especially when you consider how many more people own computers today than in 1998, and how many of us conduct more business via e-mail than we do by phone. Five years from now, we could be conducting all our business through the computer–if VOIP technology is allowed to mature tax-free.

But states are eager to impose taxation–and lots of it–on this emerging technology. They collect plenty of revenue from phone taxes. In fact, about 25 percent of the average residential phone bill is taxes. States want to slap the same taxes on VOIP.

But it makes no sense to simply apply yesterday’s taxes to tomorrow’s technology. The government doesn’t need to tax everything, and it should attempt to avoid imposing new taxes that will then be in place for years and decades to come. Plus, unless people think they’re going to get savings and convenience, they’re not going to bother investing in and learning to use VOIP. A promising new technology could be strangled in the crib by high taxes.

If lawmakers really want to promote fairness, they should permanently end all taxes on Internet services. Right now, 10 states have some form of Internet taxation. They’ve been allowed to maintain those taxes because they had imposed them before Congress passed its moratorium in 1998.

This makes no sense. In effect, federal lawmakers are rewarding 10 states for quickly imposing taxes on an emerging new technology. That isn’t something we ought to encourage. In fact, just the opposite. If we want greater tax revenue, we shouldn’t tax the Internet, the unquestioned leading source of innovation in today’s economy. We should give the Internet time and space to grow. As it does, it will generate higher tax revenues through greater profits and higher wages.

It’s time for federal lawmakers to settle this, before states jump in and start imposing a variety of Internet commerce and access taxes. Then maybe, on this issue at least, we can finally declare victory.