December 2000 Fraser Forum:
US Stalked by the Sales Tax Cartel
Using phoney arguments about internet taxation, state and local politicians in the US are quietly pushing a radical plan to create a nationwide sales tax cartel. If successful, this effort not only will mean higher taxes and more wasteful spending, but also will make a mockery of the Constitution’s Interstate Commerce clause.
In effect, state and local officials are using the old bait-and-switch routine. They are loudly complaining that many interstate sales—including those over the internet—escape taxation, and that they need the authority to tax out-of-state businesses in order to "level the playing field."
Yet what they don’t bother explaining is that most interstate sales currently are tax-free because these very same politicians have decided to give these products a special exemption. The state of Maine, for instance, can tax L.L. Bean catalogue sales that are shipped out-of-state, but the politicians in that state, as is the case across the nation, have decided exports are special and should not be taxed.
Indeed, the special preference for goods shipped out-of-state is nothing unusual. In the same way that lawmakers in Washington create special loopholes in the income tax system, state and local politicians do the same thing with the sales tax. Depending on the jurisdiction, food, health care, housing, and services may get preferential treatment.
State lawmakers should have the right, incidentally, to create loophole-filled sales tax regimes. What they should not be allowed to get away with, however, is then whining to Washington they are not collecting enough money. Even more importantly, they should not use this alleged problem as an excuse for pushing a system that will enable them to create a de facto national sales tax that will undermine the beneficial practice of tax competition between states.
The plan being pushed by the left-leaning staffs of the National Governors’ Association (NGA) and the National Conference of State Legislators (NCSL) would be a disaster for taxpayers. States would be given explicit authority to collude in the creation of a new national regime for state sales taxes.
Under the new system, every business with a mail-order or internet division would be forced to become a tax collector for every state and local government in the nation. For example, if a resident of New York City buys a product from Virginia, the business in Virginia would be required to collect and remit sales taxes for both the state and city of New York.
The logical question, of course, is why states would want to create such a complicated and bureaucratic system. If they truly are concerned that these types of cross-border sales are tax-free and that this creates an unfair advantage over traditional "bricks-and-mortar" companies, why not simply have Virginia impose its sales tax on the transaction. This would be perfectly consistent with the way other products are sold. After all, if a New Yorker visits a store in Ricmond and makes a purchase, he will pay the Virginia sales tax.
The answer, unfortunately, is that the politicians do not want taxpayers to have the freedom to buy products where taxes are lower. This is the real driving force behind the NGA/NCSL plan. State and local lawmakers fear the internet will make it increasingly easy for taxpayers to purchase products from businesses in states that have lower sales taxes.
This is what is known as tax competition, and politicians hate it. Vermont politicians grimace every time a citizen flees across the border to tax-free New Hampshire. California liberals complain when businesses flee to Texas, Nevada, Washington, and other states without an income tax. Similarly, Maryland politicians are unhappy because citizens can lower their taxes by purchasing liquor in DC and cigarettes in Virginia.
This freedom to live, work, and buy where taxes are lower protects us from excessive government and forces politicians to be more frugal with our money.
This is why the NGA/NCSL plan is so pernicious. If state politicians are allowed to tax their residents’ out-of-state purchases, consumers no longer will be able to escape bad tax policy and lawmakers will have much less incentive to behave responsibly.
Not only is this bad fiscal policy, it is bad law. The Constitution was designed in part to prevent states from imposing taxes on interstate commerce.
The NGA/NCSL plan turns this principle upside down and makes it an integral feature of the sales tax. Another concern is privacy. The new system allows the government to know every out-of-state purchase you make. By contrast, there is no need to divulge information about individual buyers if the business making the sale is taxed in its home state.
The internet tax debate is not about creating a level playing field between main street merchants and dot.com sellers. States already can tax—if they so choose— all catalogue sales and internet transactions. Instead, this debate is about whether politicians will use the internet as a Trojan Horse for their true agenda: Creating a nationwide sales tax cartel to prevent taxpayers from being able to buy products where taxes are lower.
Daniel J. Mitchell, Ph.D., is the McKenna Senior Fellow in Political Economy at the Heritage Foundation. This article first appeared in The Washington Times on July 24, 2000.
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