Temporary Extension for Net Tax Moratorium Urged by States
The Internet tax moratorium set to expire in the fall should get a temporary extension so states can figure out the best way to tax access without hurting broadband penetration or needing to increase other taxes, state officials told the House Judiciary Commercial & Administrative Law Subcommittee on Tues. Industry witnesses challenged states’ contention that taxes indirectly affecting Internet access haven’t slowed broadband penetration or widened the digital divide. But when those tax rates vary nationwide, investment in buildout slows, they said.
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An extended moratorium would give states “time to review where this industry is going,” said David Quam, National Governors Assn. dir.-federal relations, referring specifically to VoIP. IP-based phone service was exempted from the last moratorium extension, but taxing VoIP didn’t slow its growth, he said. States worry most about the definition of “Internet access,” which under the Internet Tax Freedom Act could be read as including bundled services not central to providing Internet access, Quam said. A permanent moratorium would lead multiple industries to “come to Congress and ask for one-stop shopping.”
Congress should “use extreme caution whenever you take action to infringe on the rights of states,” said Okla. Tax Commission Vice Chmn. Jerry Johnson, speaking for the Federation of Tax Administrators. The tax base is eroding as activity moves online - and as states lock into long-term funding commitments for transportation and education, he said. Okla. has “constitutional restrictions” on how the state can boost revenue. The Federation supports a temporary extension, too, but the definition of access “definitely needs to be revisited and reworked,” Johnson said. He also asked Congress to retain the grandfather clause, which let states that taxed Internet access in 1998 keep their levies.
States simply will increase other taxes if they can’t tax Internet access, said Mark Murphy, AFSCME fiscal policy analyst. A 2006 GAO report found no significant evidence that a permanent moratorium would spur Internet growth, he said. The original moratorium was meant as a “temporary pause” during which to develop a “fair system” that hasn’t evolved, Murphy said. Societal progress “cannot all be made tax-exempt,” he said. Cars, gasoline and airlines weren’t exempt from taxation in their early days, Murphy said; that would have imposed a huge burden on agriculture.
Look at what Mo. is doing to wireless service providers to see what will happen without a moratorium, economist Scott Mackey said. Local govts. there are trying retroactively to collect taxes never meant to apply to wireless service, he said. States also have ignored congressional intent by applying taxes to “transport” facilities undergirding Internet access -- burdens typically 2-1/2 times higher than sales tax, and which “hit low-income people the hardest” through higher prices, Mackey said.
The communications network is the “central nervous system for all the other businesses in the economy” that will be dragged down unless states are stopped from enacting Internet taxes, said Heartland Institute consultant John Rutledge. Noting that a Chinese trade delegation was in Washington, he said import battles were “yesterday’s battle,” today’s battle is energy and tomorrow’s is technology. China knows it can’t sustain its 8-10% annual growth with manufacturing, so it’s switching investment to IT and communications technology, he said.
Chmn. Sanchez (D-Cal.) asked Rutledge why a temporary moratorium is so bad. It’s impossible to make investment plans with such uncertainty, he said: “You need to see 40 years into the future” to know whether a given investment will pay for itself. About 13.5% of the average communications subscription fee goes to taxes, Mackey said; for a broadband service, that would mean $5 on top of a typical $36.50 fee. He said the “expectation” that the moratorium would be reinstated explains the lack of broadband fallout during the moratorium’s lapse late 2003 and 2004. In response to Ranking Member Cannon’s (R-Utah) question, Quam and Murphy said a 2-4 year extension would be appropriate, in line with prior extensions.
Rep. Johnson (D-Ga.) compared access tax to a tax on entering a mall or library. It’s more like a tax on the mall when online stores pay no tax, Quam said. But that’s a goods tax, and this is “entry to premises, if you will,” Johnson said. Pushing the metaphor, Murphy said states can charge a tax on mall parking with no one complaining. Mackey said there were no “real world” examples of telecom and cable companies trying to “sneak things in and say they're Internet access as part of a package,” as states fear would happen under a permanent moratorium.