Conservatives battle over online sales tax as bill hits House

The architect behind Reagan-era economic policies is getting behind a plan that would allow states to collect taxes on online shopping – fueling a battle in Congress that has pitted conservatives against conservatives.

Renowned economist Arthur Laffer argued in a study, to be released Thursday, that taxing online purchases would stimulate growth and create more than 1.5 million jobs over the next 10 years.

The problem, some say, is that the plan slices through decades of conservative Republican ideology – much of which he had a hand in crafting.

“This bill is a mad bill and unfortunately it passed the U.S. Senate,” Sen. Ted Cruz, R-Texas, said during a press conference this week.

Cruz, along with Tea Party favorite Sen. Rand Paul, R-Ky.; Americans for Tax Reform President Grover Norquist; and Heritage Action for America’s Michael Needham, vowed to fight the legislation which passed the Senate in May but will likely face greater opposition in the GOP-controlled House.

Critics, like Cruz, argue the policy is unfair to small businesses by burdening them with requirements to implement the new tax.

Laffer says the bill offers cash-strapped states a shot at beefing up their budgets and argues the plan doesn’t create a new tax but instead gives states the opportunity to go after taxes they were already owed.

“All taxes are bad, some are just worse than others,” Laffer told FoxNews.com during an interview on Wednesday. “When you look at this carefully, this is exactly what you want. The lowest tax rate on the broadest possible base.”

Laffer and Donna Arduin, president of Arduin, Laffer & Moore Econometrics, say closing the online sales tax "loophole" is key to building a more robust economy. They say the Marketplace Fairness Act would help states level the playing field for local retailers -- which are already subject to sales tax in most states -- and would create a more efficient system that would lead to a bump in the GDP by $563.2 billion and add more than 1.5 million jobs over the next 10 years.

“By broadening the tax base and using the increased revenues to lower marginal tax rates, we can reinvigorate the U.S. economy and increase overall national wealth,” he said.

In May, the Senate sided with financially strapped state and local governments when it passed the Marketplace Fairness Act 68-27. Among the Republicans to join Democrats in passing the bill were Sens. John McCain, R-Ariz., Lamar Alexander, R-Tenn., and Lindsey Graham, R-S.C.

The 11-page bill closes loopholes in the current law and streamlines the process that allows states to collect taxes on online shopping.

Currently, if an online retailer sells a product in a state where it does not have a physical presence, the company is not required to collect tax but the buyer is expected to claim the tax on their annual tax return. That almost never happens, Laffer says.

If the bill does pass it would apply to out-of-state sellers who make $1 million or more in annual online sales. Businesses would be required to buy software that keeps track of their sales and the amount of sales tax to add to the purchase.

But it would depend on the state. There are now five states -- Alaska, Delaware, Oregon, New Hampshire and Montana -- that currently have no statewide sales tax. Residents of those states won't be charged on goods they have shipped to their home state but businesses based in those five states would have to add sales tax for items shipped to other places where there is a sales tax -- as well as a tax on online purchases.

So Delaware residents, for instance, still won't have to pay for sales tax but businesses based in Delaware making more than $1 million will have to chart and track sales taxes collected in states that will implement the law.

Supporters of the plan also say the current tax system encourages shoppers to go into stores, pick out what they want and then go online to avoid sales taxes.

The issue has not only divided conservatives in Congress, it’s also causing a commotion among retailers. Amazon.com, Target and Wal-Mart, support the measure but other companies like eBay aren’t buying it. Part of eBay’s problem, the company says, is that the proposed policy change doesn’t do enough to protect smaller sellers. The company wants the current $1 million threshold exempting businesses from the law increased.

While conservatives in Congress try to come to a compromise, some states like Wisconsin and Ohio are taking a more proactive approach. The Republican governors there signed laws this year that would dedicate revenues from so-called e-fairness legislation, which includes the Marketplace Fairness Act, and invest them in income tax reductions.

For Laffer, the math is easy. He estimates Wisconsin’s gross state product will increase by 2.2 percent over the next decade and create 23,701 jobs. In Ohio, he estimates 46,660 jobs would be created over the next 10 years.