Research and Commentary: Laffer and the Marketplace Fairness Act

Published August 1, 2013

On July 18, economist Arthur Laffer released a study titled “Pro-Growth and E-Fairness,” in which he supports the Marketplace Fairness Act. Commonly known as the Internet sales tax, MFA has passed in the U.S. Senate and awaits action in the House of Representatives.

Currently, under a longstanding “physical presence standard,” states can force to collect sales tax only those businesses that have a physical presence such as a store, factory, or warehouse within their borders. MFA would overturn the physical presence standard and allow states to force out-of-state businesses to collect and remit sales tax to the state in which the customer resides.

Laffer and other proponents of Internet sales taxes say MFA would close a loophole and “jumpstart economic growth across the country” by allowing states to lower income taxes and other levies.

Opponents point out it is unlikely states would lower other taxes. Revenue-neutrality is not states’ goal, they note, but rather revenue increases. To date only three governors have pledged to cut other taxes if their states are allowed to collect sales taxes from out-of-state retailers, and nothing in MFA requires tax cuts to offset additional sales tax revenue from Internet shoppers. U.S. Rep. Jim Bridenstine (R-OK) responded to Laffer’s study by saying, “other states certainly wouldn’t do anything to keep tax revenue neutral, and local governments would be even less likely to do so.”

Katie McAuliffe, federal affairs manager at Americans for Tax Reform and executive director of Digital Liberty, says there is no online sales tax loophole: “All businesses collect and remit sales tax for sales made within the states where they are physically present. States have a use tax which they have not adequately tried to collect.” She adds, “The major issue is the precedent this legislation sets for states to tax beyond their physical borders.” McAuliffe says this precedent could be used to justify business activity taxes or business income taxes on out-of-state firms.

Eliminating the physical presence standard would be a dangerous extension of state power into other states. It also would subject retailers to taxation without representation by forcing them to comply with sales tax rules of states in which they have no vote. John Nothdurft, director of government relations at The Heartland Institute, says MFA would be a “massive expansion of taxing authority that could open the door to a Pandora’s Box of other new taxes.” 

The following documents provide further information about Laffer’s “Pro-Growth and E-Fairness” study and the Marketplace Fairness Act.

Research & Commentary: Marketplace Fairness Act
Heartland Institute Senior Policy Analyst Matthew Glans encourages Congress and state legislators to “implement a sales tax system based on where the product was sold, known as an origin-based tax system,” in order to level the playing field.

Conservatives Should Run, Not Walk, Away from So-Called ‘Marketplace Fairness Act’
Andrew Moylan of the R Street Institute argues the Marketplace Fairness Act “ends up giving a federal blessing to a massive expansion in state tax collection authority, the dismantling of a vital taxpayer protection upon which virtually all tax systems are based (the notion that physical presence is the appropriate limit for state tax authority), all while harming a sector (online sales) that still only accounts for roughly $0.07 of every $1 in retail spending.”

Policy Tip Sheet: Myth vs. Fact—Internet Taxes
In this Policy Tip Sheet, The Heartland Institute’s government relations director, John Nothdurft, examines several myths and facts about Internet taxes. 

States Already Can Tax Out-of-State Purchases, but Rarely Enforce those Laws
Michael S. Greve of the American Enterprise Institute reviews an overlooked element of the Internet sales tax debate, the use tax.

Why Art Laffer’s Unfortunate Endorsement of a State Sales Tax Cartel Is Misguided
Writing for Cato at Liberty, Daniel J. Mitchell analyzes Art Laffer’s Wall Street Journal column arguing for Internet sales taxes. Mitchell writes, “maximizing revenue should not be the goal of fiscal policy.”

Internet Sales Tax: Wishful Thinking Can’t Make it Pro-Growth
Chris Dubay of The Heritage Foundation argues against economist Art Laffer’s idea that the Internet sales tax would be good for economic growth. “The argument is premised on something that isn’t in the bill,” he writes, referring to the notion that states would lower their income taxes under the Marketplace Fairness Act.


Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit The Heartland Institute’s Web site at, and Heartland’s free online research database at

If you have any questions about this issue or the Heartland website, contact John Nothdurft Heartland Institute’s director of government relations at [email protected] or 312/377-4000.