U.S. Governors: Reduce Telecom Taxes To Grow E-Commerce

The National Governors’ Association (NGA) has issued a stern call to action for U.S. states to help grow e-commerce by eliminating “the horse-and-buggy tax systems that are unsuited to the exploding telecommunications market.”

In a report issued Tuesday, the NGA — citing statistics from the U.S. Department of Commerce — said the Internet economy grew 68 percent from the first quarter of 1998 to the first quarter of 1999 and is projected to reach $507 billion (US$) this year.

Although growth was strong in all layers of the economy, the NGA pointed to e-commerce as its main focus, showing a 127 percent growth from 1998 to 1999. In the first quarter of 1998, the NGA reported that e-commerce accounted for 25.8 percent of Internet revenues, but that figure jumped to 34.8 percent just one year later as companies leveraged investment and infrastructure to expand e-commerce.

The NGA also indicated that Internet-related jobs increased from 1.6 million in the first quarter of 1998 to 2.3 million a year later, as new companies were created and others shifted employees to new assignments related to the Internet economy.

Armed with those figures, NGA Chairman and Utah Governor Michael O. Leavitt said, “Telecommunications is among the highest taxed industries in the nation. It simply doesn’t make sense to apply a 100 year-old, antiquated tax system on the most dynamic segment of our economy. Clearly our goal as leaders in the 21st century is to create governance models that help our businesses and industries flourish.”

A Call To Stimulate Competition

Leavitt said many states’ tax structures discourage progress in e-commerce. Not only are tax rates too high, he claimed, but they are “stacked” on top of each other — federal on top of state on top of local.

The 19-member panel of the NGA, which was appointed last year to study the future of e-taxes, could, among its recommendations, call for a repeal of the century-old three percent tax on telecommunications. Likewise, state and localities should follow suit, the panel urged, by cutting and paring back their own decades-old telecommunications taxes.

According to Leavitt, the whole process must be done carefully so as not to encourage e-commerce among upscale suburban areas at the expense of its development in rural areas. The NGA report argues that industry-specific taxes do not make sense in a competitive environment.

As currently structured, the report claims that state and local telecommunications taxes may impede investment in the telecommunications infrastructure in economically distressed areas.

The report also calls for neutrality among tax structures to address the “digital divide” issue. Although the Department of Commerce estimates that more than one quarter of all U.S. households had Internet access at the end of 1998, households with incomes of $75,000 or higher were 20 times more likely to have access to the Internet than those at the lowest income levels.

Pointing out that there is a growing conflict between state regulators and local governments to raise revenue through new taxes and franchises, Leavitt said states need to re-evaluate their systems. Referring to cable TV, telephone and Internet use, he said, “The question is what portion of that should be taxed, since telephone service would be taxed, cable might be handled a different way and Internet would not be taxed under current rules.”

A Permanently Tax-Free Internet?

Meanwhile, Senator Ron Wyden (D-Oregon) and Representative Christopher Cox (R-California) introduced a measure in the U.S. Congress last week to permanently ban Internet taxes. The measure builds on a moratorium that was imposed by Congress in October 1998 and is slated to expire in October of next year.