Ban on Internet Access Taxes Should be Retained

by Matthew Glans, Heartland Foundation, October 9, 2014

The Permanent Internet Tax Freedom Act is common-sense Internet policy that is a long time coming. Internet access taxes are particularly damaging to the growth of the Internet economy by placing an unnecessary burden on consumers. A permanent Internet access tax moratorium would help broadband access and development expand while reducing the need for government broadband spending. The moratorium is currently set to expire November 1, but legislation is now moving through Congress that would permanently extend the moratorium.  The bill, titled the Permanent Internet Tax Freedom Act (PITFA), was written by Judiciary Chairman Bob Goodlatte (R-VA) and co-sponsored by 138 Republicans and 76 Democrats.

While most states are currently covered under the moratorium, taxpayers in the states currently imposing these taxes could see their Internet bills decrease. If passed and signed into law, PITFA would make the ITFA moratorium permanent and force these seven states to cease imposing taxes on Internet access. These states are able to impose these taxes due to a “grandfather clause” in IFTA that allowed the states that already imposed the tax to keep them. These seven states, include Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas and Wisconsin.

While the seven states will see a drop in tax revenue, experts do not expect the end of the tax to be a budget busting problem. According to Stateline, the seven states and their local governments stand to lose about $500 million annually in revenues, which while not insignificant only represents a small portion of most state budgets. Wireless services are already taxed higher than almost all other goods and services, the Tax Foundation found that almost half the states nationwide now imposing a wireless tax above 10 percent. The wireless consumers in seven states that would be freed from Internet access tax under PITFA, allowing them to expand their Internet services or use the savings elsewhere in the economy.

Making the Internet access tax moratorium permanent is a necessary step in promoting wider access to the Internet while keeping the cost down and eliminating discriminatory taxes. As the Internet has become one of the driving forces behind economic growth across the United States, ensuring affordable access for businesses and consumers is crucial. The Internet Tax Freedom Act Coalition, a group including telecom companies, tax watchdog groups and free market think tanks sent a letter in June to Chairman Goodlatte supporting his work to pass the Permanent Internet Tax Freedom Act.

Dear Representative Goodlatte,

The Internet Tax Freedom Act (ITFA) Coalition, a group of communications and technology companies, business associations and consumer groups, applauds the House Judiciary Committee for taking the first step to avoid new Internet access taxes on millions of Americans across the country with today’s markup.

We greatly appreciate your continued leadership on this issue, and stand ready to work with you and your colleagues to ensure swift passage of a clean bill to make the moratorium on taxes on Internet access and multiple and discriminatory taxation of Internet commerce permanent before the current Internet tax moratorium expires on November 1, 2014. With strong bipartisan support in both chambers of Congress, these bills should be considered for passage without unnecessary delays to protect American consumers from new taxes on their Internet access.

Again, we thank you for your leadership on this issue, and the ITFA Coalition looks forward to working with you to achieve the goal of making the Internet tax moratorium permanent for all Americans.

Sincerely,

The Internet Tax Freedom Act Coalition

Andrew Lundeen of the Tax Foundation noted in an article on PITFA that no real policy purpose exists for a tax on Internet access. “Additionally, there doesn’t seem to be a good reason to tax internet access in the first place. Governments tend to levy taxes on goods or services as a way of correcting for an externality or paying for the costs of a provided service.” “The internet does not create any evident externalities and may, in fact, have positive externalities associated with it. Additionally, state and local governments don’t seem to be providing any services associated with internet access.”

In a separate letter to the House of Representatives, Americans for Tax Reform takes the argument even further, pointing out that communication taxes are in many instances far worse than other sales taxes.

“Taxation of communications services is punitive and discriminatory. The average sales tax rate on voice services is 17 percent, and 12 percent on video services, while the average general sales tax rate is 7 percent. PITFA would at the very least prevent targeted taxes on Internet access, and disproportionate sales or other taxes on ecommerce.

Increased costs hinder continued growth in the digital space. As reported by the FCC’s National Broadband Plan, the largest barrier to consumer adoption and expanded use of Internet based services is cost. Allowing higher costs through Internet access taxes, which increase consumer cost and affect the rate of adoption, undermines America’s economic competiveness.”

While supporters of increased access taxes have argued that the taxes are needed to fund programs to help expand broadband to underserved areas, broadband coverage is already widely available and these programs may be unnecessary. Internet access taxes place an unnecessary burden on consumers in order to do something the market is already handling quite effectively. The current system is a hodgepodge of state and local access taxes competing against states without a tax. Making the Internet access tax moratorium permanent and ending the grandfather clause would help broadband access and development expand while reducing the need for government broadband spending.

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