Pethokoukis, Economics, Taxes and Spending

Internet sales taxes can be pro-economic growth, not just a state money grab

Image Credit: Shutterstock

Image Credit: Shutterstock

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.

11 thoughts on “Internet sales taxes can be pro-economic growth, not just a state money grab

  1. I’m just curios are you a fan of Marginal Well Tax Credit for oil companies? This is a special tax credit as well. It is silly. I can say if we want to level the playing field shouldn’t we try to bring down total revenue. Hopefully smart govenors will.

  2. This isn’t tax reform. This is only additional taxation. Tax reform would be lowering rates and closing loopholes together. The only thing pro-growth about this is that people’s frustration is going to grow as they start sitting in traffic as they drive (like 20th century savages) to the store to buy toilet paper rather than by ordering it with two clicks.

    • I totally agree with your sentiments…

      There are a lot of mom & pop shops that work the mail order circuit via outfits like eBay…

      This tax will put some or maybe many of these marginal businesses out of business…

  3. Your talking of forcing us to pay the tax. There’s a line on my Michigan tax forms that asks us to enter the costs of goods purchased online so that they can tax it. I’m assuming this is working out about as good as a governor not using a forced sales tax collection as a “money grab”.

    We finally have a way of rebutting the ridiculous amount of taxes and will just throw that away? Real cool. We cant die without being taxed.

  4. Why is it that maximizing state revenues is even a goal? I’d be in favor of the tax if it mandated that states must reduce other taxes by offsetting amounts, but to simply funnel more money into state coffers for politicians to use buying their re-elections isn’t a worthy goal.

  5. Come now Jimmy. The more comments like this the less you will be able to pretend that you are different than the Democrats. I am sad to say that wherever we look we find statists pretending to support free markets.

  6. I guess AEI’s idea of tax reform is to come up with new taxes to implement and layer on top of the existing tax system. Because past implementations of consumption taxes in the US and the world have done a bang up job of pushing tax reform. Why, just look at how low those European income tax rates are because of their VAT system …

  7. One problem is the internet sales website would need to know the taxes for each state and locations; which makes it almost impossible for small startups of maybe one programmer to launch an internet business.

    One solution, probably very unpopular, would be to make the postal system the tax gatherer. That way appropriate taxes would be gathered locally and poor people / poor companies trying to start websites would be able to compete with the rich / large ones.

    Taxes should not be used to influence business success or failure because religious people (Atheists, Socialists, Christians) try to use tax policy to impose their religion/beliefs on companies like “air polluters”. I’m a Christian.

  8. Eliminate the income tax code and bureaucracy in its entirety and then we can discuss a nationwide sales tax.

    Productive citizens and businesses are being relentlessly attacked by layers and layers of taxes, fees, surcharges, assessments, regulation, etc. This latest scheme will set the foundation for a national consumption tax – on top of the existing income tax code – and provides yet another massive invasion of privacy.

    How many state audits will online businesses be bombarded with?

    What massive database and audit scheme will result from this latest expansion of government reach?

    What is the long term impact of federal legislation enabling certain states to “project” their regulatory and taxing authority into other states, and forcibly enrolling online businesses to serve as tax collection agents (even when those businesses have no nexus in the taxing states?

    Americans better think long hard about this latest intrusion and what it really represents.

    Stop layering and loading taxation and regulatory burdens. And stop blindly “accepting” that government can put it eyes, ears and hands in every nook and cranny of our person, property and lives.

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