FROMA HARROP: Internet tax law hurts states

A rebounding economy will not be enough to pull state governments out of their fiscal mess, according to a new report from the State Budget Crisis Task Force. While healthcare and other costs continue to grow, important sources of revenues are shrinking, the group led by former Fed Chairman Paul Volcker and former New York Lt. Gov. Richard Ravitch noted. One of those sources is sales taxes. Some states rely on them heavily for revenue. (Only four don’t have sales taxes – Delaware, Montana, New Hampshire and Oregon.)

Sales tax revenues have been falling, thanks in part to a Congress that has meddled in states’ ability to collect them. With a few noble exceptions, “conservatives” in Washington have worked hard to ban states from requiring online merchants to fork over the sales taxes that brick-and-mortar stores must charge. Online commerce is the fastest-growing sector in retailing. I put “conservatives” in quotes because real conservatives believe that local government, being closer to the people, is the best government. Deny it money, and you deny it power.

So what business did Washington politicos have denying local governments the tools to properly fund themselves? None, outside of irresponsible politicking. Telling states they could not tax the sale of a printer or tomato cage if it was bought online lets the lawmakers boast of their tax-cutting prowess while dumping the consequences on state and local governments. The notion that anything sold on the Internet should be tax-free was engraved in Republican ideology, making it hard for GOP governors to object to it.

But with their states strapped for funds, Republican governors are finally joining their Democratic colleagues in demanding the right to collect the same taxes from online merchants that they do from stores on Main Street or in the mall. Sen. Lamar Alexander, the Tennessee Republican and former governor, is pushing forward a bill to give states that authority. The result could be $23 billion in new revenues for states, according to the National Conference of State Legislatures.

Leveling the playing field between online merchants and the traditional shops would help states and localities in more ways than simply increasing sales tax revenues. Earthbound retailers are essential players in the local economy and culture. They pay real estate taxes. They hire locals, who then pay taxes. Very often they sponsor youth sports teams and buy ads in the high school yearbook.

What’s happened is that many stores have turned into showrooms where consumers come to look, and when they find something they want to buy, go online to avoid the sales tax. The retailer Lowe’s told the Wall Street Journal that being subject to the sales tax put it at a 5 to 10 percent cost disadvantage with the online competition.

Striking how many politicians justified this crashing unfairness. Their excuse was a 1992 Supreme Court ruling that let states collect sales taxes on mail order purchases sent to their residents only if the merchant had a physical presence in the state. At issue were catalog sales – online commerce then being a thing of the future. But Congress made sure that the same deal was extended to Internet retailers. Most online companies oppose changing this state of affairs, though the giant Amazon, expanding its physical presence in several states with warehouses, now seems on board.

Alexander has updated the script for 2012. “Conservatives don’t want to pick winners and losers,” he said. “And our bill gives states the right to tax the online purchases. It’s states’ rights.” Indeed, it is, and it’s about time that Washington lawmakers stopped handing out tax breaks that come out of other governments’ hide.