Testimony
Jack Kemp,
Co-director, Empower
On
H.R. 49
The Internet Tax
Nondiscrimination Act
before
the
Subcommittee on Commercial and Administrative Law
House Committee on
the Judiciary
Testimony on
H.R. 49
The Internet Tax
Nondiscrimination Act
before
the
Subcommittee on
Commercial and Administrative Law
House Committee on
the Judiciary
by
Jack Kemp
Co-director,
Empower
Mr. Chairman and Members of the Committee, thank you
for allowing me to express the views of Empower America on H.R. 49, the
Internet Tax Nondiscrimination Act, which would permanently extend the existing
moratorium on many forms of internet taxation (the Internet Tax Freedom Act of
1998—ITFA—as extended in November 2001 by the Internet Tax Nondiscrimination
Act of 2001 until the fall of this year).
We at Empower
First, I would like to note that Empower America has
actively participated in the Internet tax debate since it began with the
Advisory Commission on Electronic Commerce (ACEC), chaired by my good friend
Gov. James Gilmore who I am glad to see has been called upon to testify as
well. My views expressed today are based on the work Empower
Mr. Chairman, I believe a good starting point for
understanding the Internet tax debate is laid out in the conclusions of the
congressionally-mandated ACEC, which was conducted under the outstanding
leadership of Virginia Gov. James Gilmore. The Commission did an excellent job
of framing the issues involved with Internet taxation from the perspective of
protecting the taxpayer, advancing economic growth, and balancing the interests
of the states and the national government with due regard for our
constitutional structure and provides a blueprint for Congress to consider in
asserting its power to define the scope of states authority to tax cross-border
transactions. Another excellent source discussing the Constitutional
limitations on Internet taxation is a paper published by the Institute for
Policy Innovation (IPI) titled, “New Economy, Old Constitution,” by
However, the authority and foundation on which we rest our
case is not on the Commission’s recommendations or policy studies alone; we
rest our case on the firm authority and foundation of the Constitution, Supreme
Court precedent and sound economic policy. It is this authority that
should guide the members of this Committee and members of Congress as you seek
to reach a consensus to ultimately resolve this issue.
In the last six years the debate over Internet taxation has
changed with the economic climate. During the mid-to-late 1990s as
e-commerce, the economy and states tax revenues all took-off (no coincidence)
the focus of the debate by those whom were against the moratorium and in favor
of sales tax simplification was on the issue of “fairness.” Their case
rested on the simple proposition that it is simply wrong to give Internet-based
companies preferential tax treatment over brick-and-mortar industry. And,
I would agree if that were the case, but it is not.
The ITFA does not prevent states from taxing e-commerce if
there is a sufficient “nexus” or physical presence between the out-of-state-seller
and in-state purchaser in their jurisdiction.
The ITFA only bars access fees and multiple and discriminatory forms of
taxation on e-commerce. One example of a discriminatory tax
might be a surtax on products ordered through the Internet (for example, a
state assessing a 10% tax on books
ordered online when it only demands a 5% tax on books bought in a
bookstore). Another would be claims by multiple states to collect tax for
a single transaction with a buyer in one state and a seller in another, thus
doubly taxing. The possibilities for imposing multiple and discriminatory
taxes on e-commerce are limited only by the law and the imagination of the
taxing authorities.
Let me be clear, the Internet deserves neither special tax
burdens nor unique tax privileges. This is the central premise underlying
the ITFA and, in practice, it is serving that purpose. The supporters of
Internet taxation would like to point to the ITFA as the source of their
problems, and they insist the problem is merely a misguided act of Congress
that can be remedied with more legislation. But the origins of this
dispute are much older than the Internet and the source of their problem is
much more permanent than an act of Congress.
The central issue in the Internet tax debate is not “fairness”
as the NGA and some others would have us believe; it is taxation without
representation. States have been trying for more than three decades to
tax people and businesses that are located out-of-state because politicians are
acutely aware non-residents can’t vote them out of office.
This issue began long before the Internet or the new
economy, it began with catalogue sales. The Supreme Court finally settled
that dispute in 1992 in Quill Corp. v.
By 2001 the technology sector of the economy was devastated
by deflationary monetary policy and an ever increasing regulatory and tax
burden from which it has yet to recover. Concurrently, federal, state and
local tax revenues declined with the sagging economy. A key lesson to be
learned from the rise and fall of the technology sector during the late 1990s
through 2003 is that economic growth is the key to solving federal, state, and
local fiscal problems, not a systematic search for new and creative ways to
increase the tax burden on hardworking Americans.
Undaunted by the facts, supporters of the new and multiple
taxation on e-commerce have shifted gears; no longer is the issue one of
fairness alone, now they argue taxation of e-commerce is necessary to plug
state budget deficits. But, as we have seen, economic growth not new
forms of taxation is the key to solving budget shortfalls and we need to keep
in mind that no government neither here nor abroad has ever taxed its way to
prosperity.
Another issue first raised in the Quill case, which
was debated by the ACEC, and is being pushed aggressively by the National
Governors Association (NGA) is the agenda for 'harmonization' and
'simplification' of state sales tax laws which would create a de facto national
sales tax for which neither the federal government or the states would be
accountable to the taxpayer. Under the proposed plan, supporters of the
‘streamlined sales tax initiative’, probably more properly labeled the
‘national sales tax cartel initiative’, seek preauthorization from Congress
(required under the Compact Clause) for a national sales tax cartel if just 20
states agree to their streamlined sales tax initiative. This national sales
tax cartel would be levied collectively by all states and run by a non-elected
‘consensus board’; so much for representative democracy.
In 2001, when Congress debated permanently extending the
ITFA, the debate was bogged down between those who wanted to make the
moratorium permanent, on one hand, and those who wanted to tie any extension of
the ITFA to preauthorizing a national sales tax cartel, on the other.
Senator Byron Dorgan (D-ND) is already out-of-the box supporting the latter
approach. At the winter meeting of the National Governors Association he
urged Congress to pass a sales tax “streamlining” bill this year. We feel
that if that happened it would probably be the worse case scenario. Besides
pushing the Constitutional limits of the Compact Clause, probably overstepping
such limits, ‘streamlining’ or ‘harmonizing’ sales taxes does not make much
economic sense. Tax competition in our
federal system of government keeps governments honest. It allows
businesses and individuals to vote with their feet, therefore preventing
government overreaching. Tax competition, and competition in general, is
a cornerstone of our economic system and federal system of government; it is
not a problem that needs to be solved, but rather a solution that should be
embraced.
As a result of this political stalemate some are now
suggesting that the ITFA and the national tax cartel initiative should be
separated, we disagree. In our view the ITFA and the national sales tax
cartel initiative are inextricably linked. The purpose of the ITFA was to
give Congress time to study the issues so that Congress could pass policy that
would foster economic growth in an emerging industry and to give the nascent
e-commerce industry a chance to mature. In the interim, the NGA and
supporters of a national sales tax cartel have ramped up efforts at the state
level so as to give the national sales tax cartel initiative an aura of
inevitability. Do not be fooled,
Congress need not be a party to this policy boondoggle.
What we have learned from the last eight to ten years is
that e-commerce, just like every other sector of the economy, is susceptible to
onerous monetary, tax and regulatory policy. We have also re-learned that
as the economy goes, so too goes the fiscal picture of governments at all
levels. And, if you want an idea of the negative consequences of tax
harmonization schemes simply look across the ocean to our European
friends. Tax harmonization is nothing more than a euphemism for high
taxes and is a recipe for economic stagnation. These issues should be
dealt with head-on and resolved decisively in favor of what is Constitutional; while
focusing on economic growth and not increasing the tax burden; and safeguarding
the proper roles of government.
To this effect our recommendations are simple: we strongly
endorse H.R. 49 to permanently extend the ITFA moratorium. We also
encourage Congress to resoundingly quash any notion that Congress would even
contemplate authorizing a national sales tax cartel. If Congress passed
such an authorization it may portend the beginning of what might appropriately
be dubbed an Internet tax revolt. And,
if some members of Congress should try to hold hostage permanent extension of
the ITFA for some “compromise” authorizing a national sales tax cartel, then
Congress may be better off allowing the ITFA to expire. The negative impact of a national sales tax
cartel is even more daunting than the multiple and discriminatory taxes states
could dream up for taxing e-commerce.
States on their own may do as they please, but there is a
real danger that the desire for simplicity and uniformity on the part of the
business community, coupled with the state and local eagerness for enhanced
revenue authority, could create an anti-constitutional tax structure that is
neither federal nor state in nature, but a 'third layer' of government
unaccountable to the people. At the same time it is appropriate to warn against
federal overreaching in this area via excessively prescriptive rules on what
states can and cannot do within their sovereign boundaries.
These are matters most worthy of the Committee's
consideration in the field of Internet taxation. Again, we applaud the initiative you and your
Committee have taken, Mr. Chairman, in seeking to permanently extend the
moratorium on unwarranted taxation of the Internet, and we look forward to a
stimulating and productive debate over tax policy and fiscal federalism in the
months ahead.
Thank you.