- The Washington Times - Tuesday, April 24, 2007

2007 will be a fateful year for Internet taxation and regulation, and not simply over “net neutrality.” On Nov. 21, the tax moratorium on Internet access enacted in 2004 will expire. Re-upping the moratorium back then was hard enough, and it will be all the harder in a Democratic Congress. There will also be a fight over the taxation of e-commerce, which is wider-reaching and probably more significant. These debates are well underway. It’s time for Republicans to recognize the golden opportunity all this presents. In the coming months, they can stand athwart a sizable piece of history yelling “Stop.” Or they can go along weakly with the encroachment.

As both a bulwark against heavy-handed government and an engine to advance economic growth, a broad moratorium on Internet taxation continues to make sense. In some distant future of heavy Internet commerce, the country may need to reassess. But for now, the Internet is still more a frontier province than a settled land and should be treated accordingly. We’re not intending to disparage the arguments of opponents who sometimes make a strong case that unfair competition results from disparities in taxation. But those circumstances are often more complicated than the aggrieved parties suggest. Sometimes, more Internet commerce by established players, not appeals for federal authorities to slog new competitors, would better serve markets and the broader public.

The political headwinds threatening to slow the Internet economy are clear enough, though. Last week, the Iowa state senate approved a 5 percent sales tax on digital downloads — an “iPod tax” — on the argument that the rules governing shoppers at the local mall should also apply online. The bill now moves to the lower chamber. Similar fights are taking place in other states. “There remain a lot of officials in local government who are licking their lips at the prospect of going after this cash cow,” said Sen. Ron Wyden, Oregon Democrat and a co-sponsor of the original 1998 moratorium.

The good news is that this issue cleaves the parties in unconventional ways. For instance, in Internet monitor CNET’s 2006 rankings of Washington lawmakers on friendliness to high technology, the average House Democrat scored slightly better than the average Republican. Senate Democrats, meanwhile, were measurably more hostile than Republicans. Among other things, geographic considerations make this a difficult issue for many coastal Democrats. There is hope that a solid coalition of Republican Internet defenders would be joined by a sizable minority of Democrats.

At issue is whether lawmakers are content to let a conventional taxation and regulation regime take hold on the Internet, which would usher in business as usual from Washington and especially from state and local authorities keen on collecting new revenues. For a freer and more vibrant economy, it’s quite clear that Internet taxation will be one of the key issues this year and in the future. And there’s no reason to throw up one’s hands just yet.

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