Final ‘Firing Line’ Illuminates Basic Internet Tax Issue

William F. Buckley, Jr., the conservative moderator of the long-running Firing Line television series, engaged his colleagues in a lively two-hour debate over the Internet taxation issue Friday night before turning his set dark for the last time.

The debate, titled “The Federal Government Should Not Impose a Tax on Electronic Commerce,” appeared on most Public Broadcasting System (PBS) stations, pitting a conservative team led by Buckley and former Republican Vice-Presidential nominee Jack Kemp against liberals Robert Kuttner, Dallas, Texas mayor Ronald Kirk, and others.

The question of whether to charge tax on online sales is arguably the biggest political issue facing the Internet community this year. In addition to a handful of bills awaiting action in Congress to clarify the situation, a Congressionally appointed Advisory Commission on Electronic Commerce (ACEC) will present an extensive report to Congress next summer.

Ultimately, the debate explored the basic question of who would be harmed by a national tax on e-commerce, who should be responsible for collecting such a tax, and where it should be collected.

Level Playing Field

The “level playing field” is the image that taxation advocates most often invoke when debating this issue, arguing that brick-and-mortar shops would be at a disadvantage if Internet sales were exempt from state taxes in jurisdictions that currently require such taxes.

Under the current scenario, Internet businesses selling goods out of state are not required to charge a sales tax unless the buyer resides in a state with a sales tax law. In that case, the online merchant is responsible for collecting the tax on behalf of the buyer’s state and forwarding those revenues to that state.

Under the conservative plan to eliminate all sales taxes on goods sold over the Internet, state and local government leaders worry that they would lose their slices of the rapidly growing Internet economy.

If the Internet continues to explode as predicted and purchases are increasingly shifted from Main Street to a tax-free Internet, Kirk predicted, “At a minimum, I think in five years you will see a 25 to 35 percent diminution in sales taxes at state and local levels.”

Kemp, however, suggested that the math is not that simple. “They take a zero sum approach to the economy; that a book sold over Amazon.com is a book that won’t be sold somewhere in Oxford, Mississippi,” he said. “I reject that totally. Book sales are up, and they will be even greater. The Internet today in America has boosted the economy, according to the Commerce Department, by more than one-third.”

As the Internet economy keeps growing, Kemp argued, states will continue to reap revenues from the various taxes — such as corporate, payroll and income – that the Internet companies must pay. “The implication is that Internet companies are not paying taxes. They are. Internet companies that have grown and exploded in growth in the last several years are paying taxes,” Kemp said.

Kemp also noted that in 1995, when e-commerce was just getting started, state revenues from sales taxes were $132 billion (US$). In 1998, with e-commerce in full swing, states took in $160 billion — more than 10 times that amount — from sales taxes.

Seeing and Touching

Electronic commerce does not hurt small businesses, added Ken Blackwell, the Ohio Secretary of State and a director of the National Taxpayers Union. “Mom and pop stores and home operations have set up their own Web sites, and they are selling everything from pies to wool sweaters. Retail stores are not hurting because many folks like to see and touch what they buy,” he said.

Despite the Clinton administration’s vocal celebration of the Internet’s contribution to the currently booming economy, the liberals rejected Kemp’s argument. “I don’t think you have anything or anyone can tell you that the increases in state and local revenues are solely related to the Internet,” Kirk claimed. “They are related to the overall health of the economy and the fact that people have more money to spend and they are spending more money everywhere.”

A Matter of Social Policy

As Internet sales continue to grow, Kirk argued, “There’s going to be a huge withdrawal from the infrastructure that we use to pay for” local government services such as health care, education and law enforcement. “The time to deal with it is now, when it’s big enough to see and small enough to solve.”

Liberal team captain Robert Kuttner agreed. “If we are to have public institutions at all, we have to find a means to pay for them,” he said, arguing that catalog sales have already cost states and localities about $5 billion a year in lost revenues. “With the growth of the Internet, that loss is going to increase by about $2 billion a year in the next few years.”

Kuttner also claimed the local governments, which are chiefly responsible for the education of future work forces, will have a direct bearing on the Internet’s long-term prosperity. “This wonderful high-tech sector depends on skilled employees, and higher education institutions produce skilled employees,” he said. “So let’s not cut off our seed corn. Let’s not ruin the promise of the Internet economy by denying the resources to states and localities whose number one business is education institutions and primary schools and secondary schools.”

Poor Americans will be the first to feel the loss, Kirk claimed, noting that a tax-free Internet would put more buying power into the hands of the rich. Citing the Clinton administration’s report on the so-called “digital divide” between wealthy, Internet-connected Americans and their poorer counterparts, Kirk noted that 80 percent of families with incomes of more than $50,000 have computers. Most of them are also connected to the Internet and shop online regularly.

“The poorest of Americans do not [have computers],” Kirk argued. “And if we create this artificial system that says you can basically shop sales tax-free because you can afford to have a computer, you’re going to shift a disproportionate burden for paying for local government services to the poorest of Americans.”

The burden for supporting local governments should be borne by the Internet companies reaping the benefits, not by the consumers who are spending their money to keep driving the online economy, Kemp countered.

“The wealth that’s been generated by technology and this Internet economy has, in my opinion, led to the ability of many companies from Microsoft to Oracle to Sun to Intel to be giving away computers free to schools,” he said. “It’s going to be wealth that helps the poor and creation of jobs that helps the poor, not just the redistribution of wealth through taxes.”