Research & Commentary: Internet Access Taxes and the ITFA Moratorium

Published November 3, 2015

Since 1998, the Internet Tax Freedom Act (ITFA) has helped promote the growth of the Internet by prohibiting state and local taxation of Internet access and discriminatory taxes on emails and other electronic data. The act has been extended five times, in 2001, 2004, 2007, 2014, and most recently in October 2015. The current extension, which was included in 2015 budget legislation, extends ITFA only through December 11, 2015.

The recent extension of ITFA gives Congress another chance to make the moratorium permanent. Under the moratorium, the digital economy for apps and music has boomed; according to the American Consumer Institute Center for Citizen Research, freedom from Internet access taxes has “enabled the app economy to create nearly 500,000 jobs, and digital music downloads from the iTunes store alone accounted for over 25 billion songs at this point.”

Allowing taxation of Internet access could quickly make Internet bills resemble cell phone bills. Cell phones are taxed higher than almost all other goods and services. Wireless tax rates have reached all-time highs, with almost half the states now imposing a wireless tax above 10 percent, according to the Tax Foundation; the national average is more than 16.3 percent. State and local taxes on Internet access would make it less affordable for consumers and impede capital investments in broadband deployment.

The Internet has become one of the driving forces behind economic growth, and ensuring affordable access for businesses and consumers is crucial. Temporarily extending the IFTA moratorium is only a patch job. Making the Internet access tax moratorium permanent is a necessary step in promoting wider access to the Internet while keeping the cost down and eliminating discriminatory taxes.

Recent attempts to pass legislation making IFTA permanent have been hindered by efforts to tie the popular moratorium to the controversial Marketplace Fairness Act, which would give states vast new power over retailers outside their borders, including the imposition of auditing requirements on out-of-state online sellers. States would be allowed to create their own unique definitions of how and when items are taxed, increasing confusion for out-of-state sellers.

One of the main reasons given for taxing Internet access is to help encourage the expansion of broadband through programs such as the Connect America Fund. Such programs are unnecessary. Broadband deployment has already spread across most of the country through the power of the free market, and broadband is inexpensive and available to nearly everyone in some form. Internet access taxes place an unnecessary burden on consumers in order to do something the market is already handling quite effectively. A permanent Internet access tax moratorium would help improve access to broadband, encourage development, and reduce the need for government broadband spending.

The following documents provide additional information about Internet access taxes.
 

The Internet Tax Freedom Act and the Internet Economy
http://taxfoundation.org/blog/internet-tax-freedom-act-and-internet-economy
Erik Cederwall of the Tax Foundation notes Internet access and the Internet economy are key drivers of productivity, equality, and economic growth. He discusses new taxes on access being proposed at the state and local level if Congress decides against extending the moratorium. 

Ten Principles of Telecom Policy
http://heartland.org/policy-documents/ten-principles-telecom-policy
In this Heartland Institute Legislative Principles booklet, Hance Haney and George Gilder examine the results of telecom reforms in Indiana, document the advances made by other innovation leaders in the telecom market, and explain how other states can follow their lead to reap the rewards of new investment in telecommunications services. 

Taxes and Fees on Communication Services
http://heartland.org/policy-documents/no-113-taxes-and-fees-communication-services
In this Policy Study from The Heartland Institute, David Tuerck, Paul Bachman, Steven Titch, and John Rutledge document taxes and fees on communication services, describe their destructive consequences, and call for tax and regulatory reform. 

Taxing the Internet Is a Bad Idea
http://www.theamericanconsumer.org/2014/04/taxing-the-internet-is-a-bad-idea/ 
The American Consumer Institute Center for Citizen Research finds innovation in the Internet sector of the economy would be encouraged if Congress were to permanently extend the tax moratorium to prevent governments from taxing digital goods and services and access to the Internet. 

A Policymaker’s Guide to Internet Tax
http://heartland.org/policy-documents/policymakers-guide-internet-tax 
The Information Technology and Innovation Foundation explains the state of current law and suggests how policymakers should approach taxing online activity. The paper focuses on four areas: the Internet tax moratorium, multiple and discriminatory taxes of digital goods, discriminatory taxes on wireless services, and the collection of sales taxes on online purchases of products. 

The Case for Tax-Free Internet Access
http://heartland.org/policy-documents/case-tax-free-internet-access
Daniel Castro of the Information Technology and Innovation Foundation discusses the advantages of tax-free Internet access and argues for keeping the moratorium on Internet access taxes. “State tax policy should reflect the fact that Internet access is not merely a consumer good, but rather a tool used by producers to increase economic efficiency and lower the cost of production,” he writes. 

The Economic Impact of Taxing Internet Access
http://www.heritage.org/research/reports/2004/02/the-economic-impact-of-taxing-internet-access
Heritage Foundation researchers Norbert J. Michel and William W. Beach present an economic analysis predicting that taxing Internet access would reduce GDP, disposable income, and employment. 

Internet Tax Debate: Freedom vs. Taxation
http://www.atr.org/internet-tax-debate-freedom-vs-taxation-a1933
Americans for Tax Reform contends keeping the Internet tax-free represents freedom and that taxes on Internet access would become onerous if allowed. 

A Scare for the Web: Will Congress Let the Internet Tax Ban Expire?
http://heartland.org/policy-documents/scare-web-will-congress-let-internet-tax-ban-expire
James L. Gattuso of The Heritage Foundation argues the national ban on Internet access taxes should be made permanent. 

Internet Access Tax Moratorium: Revenue Impacts Will Vary by State
http://heartland.org/policy-documents/internet-access-tax-moratorium-revenue-impacts-will-vary-state
The Government Accountability Office examines the Internet access tax moratorium, reviewing its language, legislative history, and associated legal issues; examines studies of revenue impact; interviews experts in access services; and presents information about eight case-study states. 

Bandwidth for the People
http://heartland.org/policy-documents/bandwidth-people
Robert Crandall, Robert Hahn, Robert Litan, and Scott Wallsten discuss broadband policies and their possible effects. The authors argue Internet access taxes are likely to be inefficient and costly to the economy relative to other taxes and would impede broadband rollout. Given the positive effects of competition, the authors highlight the importance of removing obstacles to investment and competition. 

Never a Right Time to Tax Internet
http://www.cato.org/publications/commentary/never-right-time-tax-internet
Stephen Moore of the Cato Institute argues against Internet access taxes and in favor of the moratorium. Implementation of an Internet access fee would do real damage to the tech sector, he writes.

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 and other topics, visit The Heartlander’s Tech News Web site at http://news.heartland.org/tech, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org. 

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