The US should have tax code that looks like it was designed on purpose. Even better, it should look like it was efficiently designed according to pro-growth, pro-market principles. And that’s why states should be permitted to require large Internet retailers like Amazon to collect sales taxes on all purchases and send the revenue back to state and local governments.
Two big benefits here, as I see it, to the Marketplace Equity Act currently under consideration by Congress:
1) It would end the special tax advantage given to online merchants at the expense of brick-and-mortar stores. The bill might not end the retailing phenomenon where consumers use big-box retailers as mere showrooms before an online purchase, but it would help. We don’t want the tax code picking winners and losers unless it is to compensate for some unwanted externality like air pollution. What we do want is neutrality. (It can reasonably be argued, however, that the $1 million sales threshold is too low.)
2) Broadening the state sales tax base — the exemption of Internet and out-of-state retailers from collecting state sales taxes reduces state tax revenues by $11 billion to $23 billion a year — would make it easier for smart governors to focus on raising revenue through broad-based consumption taxes and lower marginal income tax rates.
Indeed, one interesting policy option, recommended by my colleague Alex Brill, is to use the added revenue to nudge along repeal of the federal tax subsidy for state income taxes. That’s a terrible subsidy which encourages more state government spending finances by higher marginal income tax rates. Combining the two would be a big step forward for reforming the code. How you tax is every bit as important as how much you tax.
It’s not much of a counter, really, that state governments might merely spend the new revenue. (Money grab!) That’s assuming the pro-growth argument can’t win and thus we should never do tax reform. It’s arguing unnecessarily from weakness.