Is Congress Helping Build a Toll Booth for the Internet?

On Oct. 31, 2003, the future of the Internet as a driving economic force in America became suddenly uncertain. That date marked the expiration of the temporary ban on Internet-specific taxes first enacted by Congress in 1998.

The failure of the House and Senate to extend the moratorium means that state and local governments are now free to impose discriminatory taxes on the information superhighway.  Taxing internet access would do very little to solve the budgetary problems many states now face and will further prevent those who still don’t have internet access from getting online.

The opportunity to extend -- or preferably make permanent -- the Internet tax moratorium (search) remains. Currently, a handful of senators have chosen to block passage of such a measure in order to give the states the ability to hike taxes on their citizenry. Advocates for blocking the tax ban moan about dire budget problems for state governments, but they fail to note that state revenues are growing at a record pace -- from $872 billion in 2002 to an anticipated $1.4 trillion in 2003. Clearly, low taxes are not the problem.

These advocates have placed themselves in a position to derail the renewed health of the high-tech sector that powered the dramatic economic growth of the 1990’s. By choosing tax revenues for government bureaucrats over economic growth and job creation, these senators fail to recognize the harm of allowing punitive Internet taxes. For the past five years, electronic commerce has grown -- yet it still represents barely more than one percent of total sales in the United States last year. That makes a lie of the argument that the Internet is now a mature technology and the industry could withstand high taxes.

Many of the opponents of extending the Internet tax ban would prefer to see broadband and other online access services subjected to typical telecommunications taxes (search). The levies placed on your local and long distance service and your cable TV plan could then be neatly applied to the Internet without so much as a vote of the state legislature or the local city council. In many cases, these telecommunications taxes approach the 20 percent rate on your bill when all local, state and federal charges are added together.

Saddling an emerging growth market like the Internet with surcharges of that magnitude would clearly place the progress of the past five years at risk. And those who would be hardest hit would be those who could least afford it. Real progress has been made in recent years to close the so-called “digital divide.” (search) The imposition of dramatic new taxes -- by sheltered government bureaucrats acting unilaterally -- could undo such progress overnight.

Tax creep (search) would make companies less likely to expand broadband services into typically underserved areas -- including rural and low-income areas. Discriminatory taxes (search) would make it less cost-effective to continue such expansion and would threaten the ability of consumers to afford the latest advances.

While the Internet continues to hold much promise for the future economic vitality of America, it very much remains in the incubator stage. Until high-speed online access achieves the same market penetration as television and radio, the information superhighway will not have reached the age of maturity.

The fact of the matter is that innovation abhors bureaucracy and undue burden. To prosper fully, the Internet must be free from multiple or discriminatory taxes. The taxman ought not to be allowed to tax your AOL account, put a surcharge on your cable modem, or impose a higher sales tax for online purchases than those made in a typical brick-and-mortar store.

Over the past few years, the Internet has been rife with rumors of e-mail taxes (search) that would in effect become the “postage stamps” of the Internet. Until now, it has been easy to dismiss these absurd hoaxes as just that. If a handful of politicians get their way, these and other discriminatory Internet taxes could see the light of day. And those e-mail tax rumors might be a hoax no more.

Jim Prendergast is the executive director of Americans for Technology Leadership.