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Should Internet sales tax pass, who should benefit?

3rd June 2013   ·   0 Comments

By Christopher Tidmore
Contributing Writer

Next time you buy an item on the Internet, you may have to pay sales taxes. At least, that is how the U.S. Senate voted a month ago. The Marketplace Fairness Act would to legislatures to apply sales taxes on online retailers from other states, if those companies earned more than a million dollars in sales. Still, the measure faces an uphill fight in the U.S. House—at least if it is not connected with another tax cut.

The four cents on the dollar tax that the Pelican State would be able to levy on online purchases promises to generate $250 million for the Louisiana Treasury alone, eliminating a large portion of the state’s looming deficit. Supporters of the Act, including U.S. Sen. Mary Landrieu, maintain that allowing the tax would level the playing field of countless retail establishments that have to pay sales taxes where their Internet competition does not. And, that argument convinced a supermajority of 69 Senators to approve the measure on May 6, 2013.

Yet, such an Internet sales tax would also constitute a massively regressive tax hike on the nation’s poorest consumers, countered her colleague David Vitter. He joined twenty-two Republicans in voting no, including Minority Leader Mitch McConnell of Kentucky and Marco Rubio of Florida, and five Democrats from states without sales taxes like Montana, New Hampshire, Delaware, Alaska, and Oregon.

“Today the Senate is voting on whether to take a few more inches off the little guy,” said Sen. Ron Wyden (D-Oregon). “I fear that what we’re going to do is crush some of those start-ups. … This is a deeply flawed piece of legislation, [and] this debate will continue.” (Delaware also levies no sales tax, but both of its Democratic senators supported the bill, stating that it would drive consumers into the “First State” to shop.)

“This is really states’ rights legislation,” countered Act backer Republican Sen. Lamar Alexander of Tennessee, hardly a liberal. “It allows state legislatures to require out-of-state sellers to do what they already require of in-state sellers.” That reasoning convinced the GOP Senate caucus to split with Republicans 19 voting yes.

The bill was supported by the National Retail Federation, which includes Wal-Mart and other large brick-and-mortar retailers. Amazon switched sides on the issue after losing political and legal battles over taxation in key states like California and New York. eBay is leading the opposition among online retailers. “The contentious debate in the Senate shows that a lot more work needs to be done to get the Internet sales tax issue right,” said eBay in a statement released after the vote.

Bobby Jindal initially wanted Vitter to vote in favor when the Louisiana governor pursued a higher state sales tax in exchange for an end to income taxes. When that measure died at the dawn of the legislative session, Jindal then switched to the opposition, urging Vitter to vote against what he now calls “a tax increase”.

And, Jindal is not the only Republican who has suddenly ruled the Act an anathema just as the U.S. Senate voted. The U.S. House of Representatives is packed with conservatives who were initially were either in favor or undecided, who now are coming out against the Internet tax. The Marketplace Fairness Act may have an uphill climb, unless it is tied to another measure—perhaps the Debt Limit increase, perhaps another tax cut, and perhaps as means to keep rising health insurance premiums from impacting most Americans. The revenue from such a tax could fulfill a promise of the 2010 Affordable Care Act that increasingly seems more and more elusive. And, do it in a way the GOP might accept.

The Uphill Climb to the House of Representatives
Some leading groups on the right, like Grover Norquist’s Americans for Tax Reform and Heritage Action, have slammed the online sales tax proposal, arguing that it should be viewed as a tax increase on consumers. That alone would make most Repub­licans, signers of the “No New Taxes Pledge” utterly nervous. However, those that might be sympathetic that it simply extends existing sales taxes have increasingly bent to pressure that the Act would open businesses to more audits and higher compliance costs.

“If you’re an online seller in Louisiana and you sell to a couple of thousand different zip codes, You’re going to have to remit the tax to each one of those jurisdictions represented by each different zip code,” argued Louisiana State Treasurer John Kennedy.

That’s a huge compliance cost for small retailers, enough that supporters of the House companion measure HR 684, have said that the sales threshold for business could be raised to $10 million. Such an amendment would exempt most small businesses, yet the concession has not gone far enough to convince GOP House Speaker John Boehner to fast-track the bill.

Boehner referred reporters at a news conference to the chairman of the House Judiciary Committee, Rep. Bob Goodlatte (R-Va.), who has expressed concerns about the Senate bill.

“I think they have jurisdiction over this. I’ve not talked to him about it,” The Speaker told The Hill newspaper. “I don’t know what his intent is, in terms of whether he’s interested in moving it through his committee or not.”

“I’m for regular order,” Boeh­ner added, when pressed about whether he is personally interested in the bill. Still, with retail groups and state governments salivating over $20 billion in new revenue each year under the bill, Democratic Minority Whip Steny Hoyer believed GOP leaders will find themselves under intense pressure to bring the bill to the floor.

“I think the overwhelming number of Democrats are for this bill, I think a large number of Republi­cans are for this bill,” Hoyer told reporters shortly after Boehner’s comments. “I think they’re going to get a lot of pressure from retail people in their states who are having to compete with online sellers who don’t pay tax. I think that this is a bill that Boehner’s going to find — or [Majority Leader Eric] Cantor — find difficult not bringing to the floor for a vote. And I think that when it’s brought to the floor for a vote, it’ll pass — pass handily.”

Not so fast, Chairman Goodlatte said in a statement about the Senate bill. “While it attempts to make tax collection simpler, it still has a long way to go. There is still not uniformity on definitions and tax rates, so businesses would still be forced to wade through potentially hundreds of tax rates and a host of different tax codes and definitions.”

Goodlatte, though, also said that he understands the concerns of brick-and-mortar retailers, an argument that has cut through to many (normally) anti-tax Republicans. The Chairman noted that his committee would consider alternative legislation that would allow states to collect sales taxes “without opening the door to aggressive state action against out-of-state companies.”

That could prove legally complicated, triggering constitutional challenges under the interstate commerce clause. Moreover, such technical amendments could create even another web of regulations burdening for small companies. Some, recognizing this fact, have suggested a simpler solution. The federal government should simply collect—and keep—the four to five cent sales tax.

Suggested uses for the money include fulfilling President Obama’s requirement for higher revenues under any bipartisan entitlement reform proposal. Of course, that assumes the President can even convince Hill Democrats votes to raise the retirement age, or fundamentally change Medicare as Budget Committee Chairman Paul Ryan has proposed.

Even if he could, Republicans will not tolerate any tax increase for the Federal Treasury, no matter how generous the entitlement reform offered in exchange. (This opposition has grown to such a fever point that the GOP proposal to adjust the Consumer Price Index, slowing the growth of Social Security and Federal benefits, has gone out of favor in Conservative circles since it would also adjust the income tax brackets, creating a $160 billion middle-class tax hike.)

Others, however, see the Inter­net sales tax debate as the means to achieve a practical form of federal tax reform. Yale Professor Michael J. Graetz in his essay “100 Million Unneces­sary Returns: A Fresh Start for the U.S. Tax System”, proposed that middle income tax payers be exempted from federal income taxation. Instead, their tax burden would be paid from a low rate sales tax, with higher income brackets paying—say those over $100,000 per year—and corporations paying a flat rate. A flat rate higher, on the other hand, than Steve Forbes and his allies have proposed, at least 25 percent, so as to be revenue neutral.

Graetz suggested that this could be achieved rather painlessly by converting the current eight percent payroll tax rate into a sales tax of a similar or lower rate. That would collect more revenue than the current labor based system, allowing middle income taxpayers to be exempted from the income tax system altogether, while keeping high earners still supporting the system.

From its proposal in 2002, the idea went exactly nowhere. GOP leaders feared that such a hybrid system of income and sales tax could provide government with a limitless source of income. It was a step too far, yet now, as Congress openly hungers for tax reform ideas, the Internet Sales Tax serve as a consumption compromise, providing a back door into fundamental tax reform. Were it even to fall short of such a heady goal, the new revenue could still provide the funds for another needed tax reform. It might be the easiest way to underwrite a tax credit that enjoys some support in both the Obama Administration and on Capitol Hill, ironically with some of the loudest advocates of purging most credits from the tax code.

This article originally published in the June 3, 2013 print edition of The Louisiana Weekly newspaper.

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