- The Washington Times - Saturday, November 8, 2003

The contrast between two of Virginia’s leading 2006 Senate candidates could hardly be more stark. While Republican George Allen is leading the fight in the Senate to ensure that the Internet remains tax-free, a potential challenger, Gov. Mark Warner, thinks new Internet taxes are a good idea. Since early this year, Mr. Warner has been saying that state tax revenues must increase to pay for services like public education, and he has raised the possibility of taxes on Internet retail sales. By contrast, Mr. Allen has been leading the fight for legislation to resume the five-year moratorium on taxing Internet sales, which expired Nov. 1.

The major arguments made by Mr. Warner and other supporters of Internet taxes are as follows: 1) The taxes are necessary to enable state and local governments to balance their budgets; and 2) Internet retailers will have an unfair competitive advantage if they can avoid these taxes.

The problem with the first argument is that, according to statistics compiled by the Commerce Department, state and local governments collected more than $870 billion in revenue in 2002 — an increase of more than one-fourth in state and local revenue over the past 10 years. In other words, if politicians like Mr. Warner want to balance their books, they’d be well advised to concentrate on spending restraint instead of constantly demanding higher taxes. Major flaws in the second argument include the fact that shipping and handling costs often cancel out any price advantage enjoyed by Internet retailers who are exempt from sales taxes. Also, Internet firms often pay millions of dollars worth of telecommunications taxes that local brick-front stores do not. Moreover, it hardly enhances tax fairness to force companies that sell things over the Internet to be hit with state and local taxes, which go to pay for local services like fire and police protection, which they don’t use.

Taxing Internet sales would also place a heavy burden on Internet firms. “Why should a company be forced by the government to become a tax collector for more than 30,000 tax jurisdictions around the country? How many ‘Mom and Pop’ Internet sites will go out of business if that extraordinary business cost is forced upon them?” asks the National Taxpayers Union. “If that expense doesn’t put them out of business, then the cost of defending themselves against countless lawsuits from state governments claiming they didn’t collect a sufficient amount in taxes surely will.”

By allowing state and local politicians like Mr. Warner to collect these new taxes to get their governments out of debt, we will be hampering the growth of the Internet. That’s bad public policy. The good news is that, if Mr. Warner continues to advocate such policies, any 2006 Senate campaign will almost certainly turn out like his failed 1996 Senate bid, where he lost to Sen. John Warner.

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