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Republicans Should Fight the Democrats’ iTunes Tax

Republicans and Democrats agree: you’re not paying enough taxes. And they have a way to make sure you pay more: taxing all those songs you buy on the internet.

A wave of states, including Virginia, have passed laws that will require consumers to pay sales tax on all Internet purchases as soon as next year. Other states and the District are pursuing similar measures. And in Maryland, [head of the Democratic Governors Association] Gov. Martin O’Malley (D) wants to go further and levy a tax on songs and other digital products bought through popular sources such as iTunes.

This is bipartisan delusion. iTunes taxes and Amazon taxes are not the source of revenue groups like the NCSL claim they are, and what’s more, acceptance of them represents Republican surrender on the battle against the growth of government.

The Republican push on internet sales taxes is a good example of how most politicians in both parties are unwilling to alter the growth in the size of government at the state and local level. This growth has been on a steady rise until the most recent recession, with only one prior downturn in the past half century. Red is local, green is State, blue is Federal:

Democrat and Republican governors alike don’t want to disturb this, but need dramatic revenue increases in order to meet the obligations of state pensions and other expenditures.  One of the obvious sources of revenue: online sales taxes, which have always been on the books, but the collection of which is nearly impossible in the internet era. So Senate Republicans have gone further than even their Democrat partners on this issue in proposing harsh caps and requirements on collections, even for companies with as little as a half million in gross annual receipts. 

This is why Republican governors – including Chris Christie, Nikki Haley, Paul LePage, Mitch Daniels, Rick Snyder, and Terry Branstad – have all endorsed the idea of internet sales taxes.  Most are seeking a federal solution, because state level responses haven’t been able to withstand constitutional challenges.  (The North Carolina law, which was tossed in October 2010, required Amazon to report on every purchase made by North Carolina residents to the government.) Amazon itself supports the federal solution, because they’ll actually make a tidy profit off of it. These governors (and their big-box store supporters, primarily Wal-Mart) point again and again to the idea of tax equity – that it’s unfair for physical locations in their states to have to charge higher prices, collecting sales taxes, while online retailers underprice them.

The other argument Republican governors have advanced is that they need these revenues to keep other taxes from going up. Jeb Bush recently endorsed the idea for this reason:  “It seems to me there has to be a way to tax sales done online in the same way that sales are taxed in brick and mortar establishments,” Bush wrote to Scott. “My guess is that there would be hundreds of millions of dollars that then could be used to reduce taxes to fulfill campaign promises.”

That sounds nice. It is also something that, in practice, has never happened. The revenue has gone straight back into state coffers… when there’s been revenue at all.  

“Contrary to the claims of supporters, Amazon taxes do not provide easy revenue. In fact, the nation’s first few Amazon taxes have not produced any revenue at all, and there is some evidence of lost revenue. For instance, Rhode Island has seen no additional sales tax revenue from its Amazon tax, and because Amazon reacted by discontinuing its affiliate program, Rhode Islanders are earning less income and paying less income tax.”

There are three major flaws with what Republicans are doing here. First, they’ve accepted the Democratic definition of “cuts”, as if expectations were more than dots on a chart.  Second, they’ve implicitly bought into the factually bereft Niskanen/Hayward opinion that “raising taxes may be the most effective way to reduce government spending” – as if there will be no future administrations to spend this new revenue on new projects, putting states back in the same predicament.  And third, they’ve accepted their role as tax collectors for the pension/entitlement state, unwilling to take political penalties from cutting government employment or Medicaid.

One more thing: if tax equity were the true goal of any of these governors, wouldn’t a much easier step toward it be following the approaches of the five states which eliminated sales taxes entirely? But no state, under Republicans or Democrats, has ended a major tax since 1980. Oklahoma came closest, this past year, but failed to do so. I wouldn’t expect any other state to do so, any time soon. And state governments will continue their growth pattern, perhaps with a major bailout from the federal government.

  1. Indaba

    The Amazon link reveals an alarming outcome for the small business owner. The little guy gets squeezed again. I was listening to the podcast called The Fall of Rome where they listed reasons for the decline, one being taxes paid by the small companies but not the big.

  2. BrentB67
    Ben Domenech:

    …The Republican push on internet sales taxes is a good example of how most politicians in both parties are unwilling to alter the growth in the size of government at the state and local level.

    Nor is there any plan to do anything but expand the federal government. It is tiresome to hear so many republicans claim the words of President Reagan that government is the problem and then they immediately sign up to increase the size and scope of government at every level and opportunity.

  3. Ben Domenech
    C
    Indaba: The Amazon link reveals an alarming outcome for the small business owner. The little guy gets squeezed again. I was listening to the podcast called The Fall of Rome where they listed reasons for the decline, one being taxes paid by the small companies but not the big. · 32 minutes ago

    Because only Big Business can afford to pay off Big Government.

  4. Tim Wright

    I could not agree with you more. Politicians will spend the money available and if you give them plastic, then god help you…However…

    Your chart does not include any adjustment for population growth. US population in 1960 was about 179 million and in 2010 was 308 million. That’s a 72% increase. Federal and state workers look to be in line with that, but local governments have gone wild.

    Is my thinking wrong on this?

    tim

  5. PracticalMary
    ‘…Chris Christie, Nikki Haley, Paul LePage, Mitch Daniels, Rick Snyder, and Terry Branstad…’  Can we please quit calling these people (among others) for Pres. or VP picks, now? 
  6. The King Prawn
    Ben Domenech

    Indaba: The Amazon link reveals an alarming outcome for the small business owner. The little guy gets squeezed again. I was listening to the podcast called The Fall of Rome where they listed reasons for the decline, one being taxes paid by the small companies but not the big. · 32 minutes ago

    Because only Big Business can afford to pay off Big Government. · 29 minutes ago

    And it’s not like the payoffs go to government. Rather, they go to government officials.

  7. Ben Domenech
    C
    Tim Wright: I could not agree with you more. Politicians will spend the money available and if you give them plastic, then god help you…However…

    Your chart does not include any adjustment for population growth. US population in 1960 was about 179 million and in 2010 was 308 million. That’s a 72% increase. Federal and state workers look to be in line with that, but local governments have gone wild.

    Is my thinking wrong on this?

    tim · 29 minutes ago

    Tim, it’s mostly the explosion of teachers. Andrew Coulson has a piece about that here.  “Since 1970, the public school workforce has roughly doubled—to 6.4 million from 3.3 million—and two-thirds of those new hires are teachers or teachers’ aides. Over the same period, enrollment rose by a tepid 8.5%. Employment has thus grown 11 times faster than enrollment. If we returned to the student-to-staff ratio of 1970, American taxpayers would save about $210 billion annually in personnel costs.”

  8. KarlUB

    Sorry, but no sale.

    Stubborn insistence that states should not pursue sales taxes on internet purchases is as much a subsidy to internet-based businesses as the opposite is a subsidy to big-box stores (or any other brick and mortar retailer.)

    If people have a beef with their state sales tax, that beef should be taken up at the election precinct. Advancing the anti-sales tax position by specially favoring a particular class of business is not the transparent way to fix this problem.

    I feel semi-strongly about this, btw, because sales taxes are not my bête noire. Property taxes are. If a senior citizen that owns his or her home outright can be forced out by the State for being unable to pay the appropriate graft, in what sense can anyone be said to own his or her home? We are all renters from the State. This is Feudalism.

    Anything that can theoretically advance the case of abolishing property taxes, then, is something I support. Appropriately scaled– and enforced– consumption taxes are a part of this.

  9. Eric Wallace

    KarlUB has a good point, I think: the argument against online sales tax is just as good an argument against taxes on brick-and-mortar sales. If sales taxes are justified at all, the online-offline distinction doesn’t change that.

    There are sensible ways to establish an online sales tax, promoting competition between state policies and beneficial to consumers. Of course, those solutions are not the ones being pushed by the politicians of either party.

    This paper helped me work through the topic.

  10. Rudolf Halbensinn

    A liberal fighting to right wrongs lives a frustrated existence.  I’ve talked with one on the state of affairs in the US and he was quite vigorous, almost desperate,  in his arguments;  speaking as if there wasn’t presently a liberal in the Whitehouse. 

    Fighting for the poor in the USA who only own one car and one TV is a thankless job.  Getting up to two-car status, as every citizen has a right to, is a long trek.  No wonder liberals are unhappier. Their goals and concepts of utopia are unrealistic so they will naturally be unhappy.

    As a conservative I feel like I sit in a warm cabin and must just keep the wolves away.  Liberals are trying to break in demanding I spread the wealth of my cabin to others.  They have it harder.

  11. ConservativeWanderer

    There’s an old economic truism that whatever you tax, you get less of (because the tax makes it more expensive).

    I guess the people pushing this idea want less internet commerce to take place.

  12. KarlUB
    ConservativeWanderer: I guess the people pushing this idea want less internet commerce to take place. · 2 hours ago

    Or the people that like the status quo want less brick and mortar commerce to take place.

    Personally, I think it would be nice if they just played by the same rules. That is one of the requirements for well-functioning markets.

  13. ConservativeWanderer
    KarlUB

    ConservativeWanderer: I guess the people pushing this idea want less internet commerce to take place. · 2 hours ago

    Or the people that like the status quo want less brick and mortar commerce to take place. · 0 minutes ago

    I live in a little bitty town with one bookstore — and that’s not even a dedicated bookstore, it’s a combined book/music/movie/videogame store.

    If I want a book they don’t carry, and don’t want to wait for them to order it and receive it from their distributor, I can either drive to the nearest town with a different book store (at least an hour’s drive)… or I can go to Amazon and get a dead-tree copy overnight or 2nd day air if I want. Or I can do what I did, which is get a Kindle which allows for free instant delivery of books.

    If my local bookstore carried the books I want, I’d be buying more books from them. It’s Business 101. Provide the customer with what they want and they’ll buy it from you. If you don’t, they’ll go somewhere else.

  14. kesbar

    Fixing the tax code before you fix the spending code is just polishing the brass on the Titanic.  It’s backwards and a waste of time.

  15. genferei

    Another analogy: it’s like noticing that the rate crime has soared and making the ‘fair’ distribution of victimhood the policy priority.

  16. KarlUB

    @ ConservativeWanderer:

    Nobody is telling you where to shop. I am just suggesting that different types of storefronts– regardless of their respective merits– ought to be treated the same by the tax code.

    Besides, if Amazon takes good care of you they shouldn’t fear losing their subsidy, right?

  17. ConservativeWanderer
    KarlUB: @ ConservativeWanderer:

    Nobody is telling you where to shop. I am just suggesting that different types of storefronts– regardless of their respective merits– ought to be treated the same by the tax code.

    Besides, if Amazon takes good care of you they shouldn’t fear losing their subsidy, right? · 1 minute ago

    They’re not getting a subsidy. I am paying less by shopping there.

    Taxes are not paid by businesses, they are paid by consumers. That’s Economics 101.

  18. ChrisC
    KarlUB: Sorry, but no sale.

    Stubborn insistence that states should not pursue sales taxes on internet purchases is as much a subsidy to internet-based businesses as the opposite is a subsidy to big-box stores (or any other brick and mortar retailer.)

    If people have a beef with their state sales tax, that beef should be taken up at the election precinct. Advancing the anti-sales tax position by specially favoring a particular class of business is not the transparent way to fix this problem.

    The main issue is that this is a tax on an out of state purchase and therefore is a new kind of tax.  Imagine if I bought something in New Hampshire (no sales tax) and the Georgia tax police stopped me at the airport and wanted me to pay sales tax on that item when I arrived home.  If the vendor has an in state presence, then they are already getting taxes from me for my online purchase.

  19. The King Prawn
    Chris Corrigan

    KarlUB: Sorry, but no sale.

    Stubborn insistence that states should not pursue sales taxes on internet purchases is as much a subsidy to internet-based businesses as the opposite is a subsidy to big-box stores (or any other brick and mortar retailer.)

    If people have a beef with their state sales tax, that beef should be taken up at the election precinct. Advancing the anti-sales tax position by specially favoring a particular class of business is not the transparent way to fix this problem.

    The main issue is that this is a tax on an out of state purchase and therefore is a new kind of tax.  Imagine if I bought something in New Hampshire (no sales tax) and the Georgia tax police stopped me at the airport and wanted me to pay sales tax on that item when I arrived home.  If the vendor has an in state presence, then they are already getting taxes from me for my online purchase. · 2 minutes ago

    Some things are exactly like your border tax police. In Washington I’m required to pay a “use” tax on anything purchased outside of Washington’s taxing authority.

  20. ConservativeWanderer
    The King Prawn

    Some things are exactly like your border tax police. In Washington I’m required to pay a “use” tax on anything purchased outside of Washington’s taxing authority. · 0 minutes ago

    True, but they likely have a heck of a time collecting that, except on things like car purchases, where you still have to license it in your state of residence.