Congress Mulls Permanent Ban on ‘Net Taxes

Published November 1, 2007

As the current moratorium on Internet access taxes in the 1998 Internet Tax Freedom Act (ITFA) expires November 1, Washington’s legislative and lobbying forces are debating whether the levies should be permanently eliminated.

In what is becoming a yearly ritual on Capitol Hill, bills are pending in the Senate and House of Representatives to wipe Internet access taxation off the books permanently.

If ITFA is not extended or made permanent, state and local governments will be free to impose taxes on Internet service. Congress has extended the moratorium provision twice since the bill was enacted–in 2001 and 2004.

Permanency Sought

Congress’s regular extension of temporary moratoria and its triennial tussle over permanency frustrate Internet-centric business interests seeking a lasting solution. The current focus is on S.156 and H.R. 743–both called the Permanent Internet Tax Freedom Act of 2007 and both designed to amend existing Internet-related tax codes that offered the annualized moratorium status subject to Congressional renewal.

The bills are on the table from Democrats and have Republican co-sponsors, yet passage is far from certain.

S.156, now with 19 co-sponsors, and H.R 743, with 152 co-sponsors, were introduced in January 2007 by Sen. Ron Wyden (D-OR) and Rep. Anna G. Eshoo (D-CA), respectively. As the calendar year and legislative sessions approach their final quarter, attention and pressure are expected to mount in the Senate and House committees where the bills now reside.

Also supportive of permanency is a similar House bill–H.R.1077–the Internet Consumer Protection Act of 2007, which dates back to mid-February. It was introduced by Rep. John Campbell (R-CA) and has about 30 co-sponsors.

States, Localities Opposed

The common intent of the three measures is to make permanent the ban on state taxation of Internet access and all “multiple or discriminatory” levies on electronic commerce.

The proposed bills are each merely a single page in length, and they strike out moratorium language in the current ITFA, effectively making the tax ban permanent.

Previous Internet tax moratorium measures have surfaced in both standalone forms and within larger tax or telecom reform proposals. Most notable was the Senate’s large, sweeping communications law revamp that failed late last year.

Groups representing city governments, mayors, counties, and governors have lobbied against U.S. lawmakers’ efforts to disallow new cellular telephone taxes and create a permanent moratorium on Internet access service taxes. This session’s flap over S.156 and H.R 743 so far resembles past tax clashes.

Possible Rush to Tax

“If the moratorium is allowed to expire, states will likely impose new taxes on Internet access fees, bit-taxes on downloads, and perhaps even e-mail taxes,” said Phil Kerpen of Americans for Prosperity.

“There would be unlimited potential for taxation,” Kerpen continued. “State and local governments may rush chaotically to enact Internet taxes if and when the ban expires, anticipating that it will eventually be re-imposed and hoping to qualify for grandfather treatment. That’s hardly an environment for rational policy development.”

Former Congressman Jack Kemp, founder and chairman of Kemp Partners, points out a recent poll–commissioned by and conducted by McLaughlin & Associates of New York–indicated 71 percent of consumers support continuing laws that prohibit federal, state, or local governments from taxing Internet access.

“Without permanence, state and local governments could soon view booming Internet access and commerce trends as an easy target for additional tax revenues to fund ever-expanding state and local spending,” said Kemp. “This potential is especially alarming given the high level of taxes already imposed upon other communications services across the board, particularly wireless service.”

Poor Families Will Struggle

“For about the price of an ordinary television set, even the poorest families and the smallest businesses can buy a computer and enjoy the same access to the Internet as the richest families and largest businesses,” said Steve Stanek, research fellow with The Heartland Institute. “However, if Congress allows the moratorium on Internet access taxes to expire in November, new taxes and the resulting higher costs will cause those who already are struggling to struggle harder or give up their Internet access entirely.

“Rather than let the Internet access tax moratorium expire, Congress should work to make it permanent,” Stanek continued.

Watchdog Steps In

A major advocate of permanency is the Don’t Tax Our Web coalition, consisting of two dozen or more activist groups, lobbying associations, and companies.

The organization says extending ITFA will spur the digital economy, promote entrepreneurship and small business growth, encourage high-speed Internet access investments, and eliminate the alleged “digital divide” in access affordability. It expresses concern that state and local governments “continue to look for creative ways” to tax Internet access with various sorts of “excessive” and “unfair” levies.

“Without this moratorium, some state and local governments could view Internet access as a target for additional tax revenues, as evidenced by the high level of taxes imposed on other communications services and the attempts by some states to circumvent existing law by taxing the communications backbone used to provide retail Internet access,” the organization maintains. “Preventing the taxation of Internet access is critical if Congress wishes to advance its bipartisan goal of ubiquitous broadband deployment and affordable Internet access for all Americans.”

Frank Barbetta ([email protected]) writes from Little Falls, New Jersey.