Consumers Face New ‘Net Taxes If Ban Expires

Published December 1, 2007

Beginning this fall U.S. consumers could face a slew of new Internet taxes unless Congress extends or makes permanent a federal ban that is set to expire November 1.

On October 16, the House of Representatives voted 405-2 to extend the ban for four years. At press time, the Senate had yet to vote.

Although there is strong bipartisan support for an Internet tax ban, the House and Senate have yet to vote on an extension or making it permanent.

The twice-extended 1998 Internet Tax Freedom Act prohibits taxes on Internet access and multiple or discriminatory taxes. The ban applies to taxes and fees levied by state and local governments, with just a handful of exceptions where taxes imposed before 1998 have been grandfathered in.

Permanent Ban Sought

Phil Kerpen, policy director for the free-market grassroots group Americans for Prosperity, says a tough, permanent ban on Internet taxes as embodied in H.R. 743 and S. 156 is needed to provide a stable tax environment for businesses and consumers and to prevent any future lapses of the moratorium.

“The Internet has provided countless economic opportunities and remains one of the few areas of commercial activity that has not been taxed into submission,” said Kerpen. “Allowing the moratorium on Internet taxes to expire, even temporarily, would be a gross public policy error.”

Rush to New Taxes Feared

A lapse in the moratorium might mean state and local governments would enact rushed Internet taxes in hopes of qualifying for grandfather clauses when Congress finally extends the moratorium or makes it permanent. Taxes could take the form of access fees, bit-taxes on downloads, discriminatory taxes on Internet sales, and possibly even e-mail taxes.

“There would be unlimited potential for taxation, which would only impede the flow of commerce and information on the Internet and slow a great engine of economic growth,” Kerpen said.

Disagreements over whether to extend or make permanent the Internet tax ban, as well as disputes over the definition of Internet access and when to eliminate grandfather clauses, have helped to create the hang-up in Congress.

On September 27, Senate Commerce Committee Chairman Daniel Inouye (D-HI) pulled a watered-down four-year extension of the tax ban (S. 1453, The Internet Tax Freedom Extension Act of 2007), off a list of legislation to be amended and approved.

Committee Favors Permanent Ban

Sen. John Sununu (R-NH), an outspoken supporter of making the Internet tax ban permanent, said the bill was pulled after it became obvious there were enough committee votes to replace it with a permanent ban that had teeth.

“The Democratic Leadership in the Senate appears uninterested in protecting Internet users from higher taxes,” Sununu said. “We introduced a bill to permanently ban Internet access taxes back in January. I just don’t understand the continued delay in action.”

States, Localities Want Tax

Since the federal Internet tax moratorium was first enacted nearly 10 years ago, local and state government officials have sought to retain the power and latitude to tax the Internet by opposing efforts to make the ban permanent.

The National Governors Association was among 10 organizations to sign a September 26 letter to the Senate Commerce Committee in support of the watered-down extension, S. 1453.

Gov’t Workers Back Tax Hikes

Taking a cue from state leaders, representatives of the American Federation of State, County, and Municipal Employees (AFSCME) have testified before Congress arguing a permanent ban on Internet access taxes would place an undue burden on state budgets.

“[T]he ban imposes revenue losses and a loss of revenue capacity on states and local governments, and is not paid for,” testified Mark Murphy, a fiscal policy analyst for AFSCME, last May. He added the ban is “costly to state and local governments and of questionable value to the greater public, it risks unintended consequences for a broad range of state and local revenue sources.”

Phil Kerpen, policy director for Americans for Prosperity, countered, “It is an egregious distortion of reality to imply that banning a tax that has not been and should not be levied is costing states money. This unquenchable thirst for tax dollars underscores the difference between government officials and the American public, a vast majority of whom favor unfettered, untaxed access to the Internet and the opportunities that it provides.”

Party Lines Blur

Lawmakers aren’t dividing on the issue along partisan lines. Rep. Anna Eshoo (D-CA) and Sen. Ron Wyden (D-OR) are both sponsors of legislation to permanently ban Internet taxes. Meanwhile, Sen. Lamar Alexander (R-TN) is sponsor of the watered-down Internet Tax Freedom Extension Act.

Under pressure from state and local governments hungrily eyeing Internet tax possibilities, some members of Congress appear to be more inclined toward a four- or six-year extension of the current moratorium.

Wyden may move the legislation he sponsors with Sununu through the Finance Committee. This might be the best hope for Senate efforts to pass a ban.

“Without this ban, consumers would face upwards of a 17 percent increase in their costs for access to the Internet and businesses would face a barrage of discriminatory taxes,” said Wyden.

Annie Patnaude ([email protected]) is media relations director at Americans for Prosperity.