Politics / Regulation / Tax / U.S. Senate

$15 Billion Tax Prevented by PIFTA

If the Senate opts in for H.R. 3086, the Permanent Internet Tax Freedom Act (PIFTA), $14.7 billion in taxes will be averted every year. During the Internet boom of the 1990s, Congress passed the Internet Tax Freedom Act (IFTA), which prevented state and local governments from collecting Internet specific taxes. Sponsored by Senate Finance Committee Chairman Ron Wyden, the legislation was relatively uncontroversial. On the contrary, while some liberal parties are not leaning as much towards a permanent action now, many more conservative parties have called for an irreversible ruling.

The reason for this is due to the new PIFTA, sponsored by Representative Bob Goodlatte (R-VA-06). If endorsed, it will amend IFTA by establishing a permanent ban on state and local government taxation on Internet access as well as discriminatory taxes on electronic commerce. Furthermore, a grandfather clause allowing seven states to levy taxes on Internet access will be expunged.

After its endorsement in 1998, the IFTA moratorium has been extended three times, in 2001, 2004, and 2007, because it expires every three years. Since the ban would have rendered null in November, Congress passed a short-term Continuing Resolution introduced by House Appropriations Chairman Hal Rogers (R-KY), extending its expiration date to December 11. “We have reached the point where a Continuing Resolution is necessary to keep the government functioning and avoid another shutdown. It is a crucial piece of legislation,” stated Rogers.

According to a recent study conducted by Will Rinehart at the American Action Forum, if IFTA is allowed to sunset this December, the new taxes harnessed will total $14.7 billion, $10 billion in personal taxes, and $4.7 billion in business taxes to Internet consumers. This is assuming that state and local governments in the U.S. begin taxing Internet access at the same rate of mobile communications.

The new PIFTA bill rapidly circulated through the Republican-controlled House of Representatives and was ratified on July 15 without amendment. On July 16, it was received in the Senate, which has yet to pass the document. Although the permanence of IFTA is extremely important to the House, it is vital to understand why this issue has become so crucial.

The cited rationale behind IFTA is that tax impositions would “interfere with the free flow of commerce via the Internet.” Additionally, in his study, Rinehart implies that “Sales taxes often hit the poorest the hardest and that is where the burden of new Internet access taxes would fall.”

Often, governments impose excise taxes on products that have negative externalities to help rectify costs born to society or to defray the toll that government incurs due to a service provided. Since the Internet is generally not seen as a negative externality, the necessity for taxation on Internet access is not necessarily fitting. Additionally, concerning Internet access, it is not apparent that state or local governments offer any type of service. Thus, taxation on access seems utterly absurd to many.

With positive externalities such as accelerated communication, streamlined information access and ability to work from home, the Internet economic sector is expected to continue to flourish in forthcoming years. By 2016, the Internet economy will account for 5.4 percent of U.S. GDP, according to the Boston Consulting Group. Economic growth has undeniably been related to Internet innovation. Proliferation of jobs, online purchases, advertising, productivity, and worldwide communications has been incentivized by the Internet.

It is now only 62 days until the IFTA ban expires and, although PIFTA passed in the House, it remains to be seen whether or not the bill will pass the Democrat-controlled Senate. Those worried about the acute taxes that may follow the expiration look to Senate Majority Leader Harry Reid to bring the legislation onto the Senate floor in order for a vote to be cast. Perhaps voters supporting the bill should require their senators running for re-election to promise they will support PIFTA.