Editorial: It's About Taxes — Yours

Posted on April 15, 2005

It's not the kind of issue that generates lots of public attention or quick understanding. But when Sen. Lamar Alexander, R-Tenn., took the Senate floor this week to discuss it, he wanted to make sure everyone understood that the proposed Internet Tax Nondiscrimination Act involves "an unfunded federal mandate" — which could result in state and local tax losses of $80 million to $120 million a year, that local taxpayers might have to make up. Some time ago, to promote development of the Internet and other electronic communications, Congress banned taxes on Internet access until Nov. 1, 2003, with some exceptions to expire Oct. 1, 2006. The bill now before Congress would make those taxing bans permanent. Since most people don't like any kind of taxes, why shouldn't the ban be permanent? Sen. Alexander explained: "We are not talking about the issue of whether to authorize states to require out-of-state companies, such as L.L. Bean, that sell by catalog or Internet, to collect the same Tennessee sales tax" that local stores must collect. ... "That is an entirely different piece of legislation." (We believe such legislation should be passed to provide more state revenue and thus avoid the necessity of imposing other taxes on Tennesseans.) Sen. Alexander continued: "What we're talking about is whether Tennessee and other states can collect a sales tax from an Internet service provider when it connects my computer to the Internet, just as it collects a sales tax from the telephone company when it connects my telephone or from the cable TV company when it connects my cable." He said some senators seemed surprised when he suggested the proposed permanent ban on state and local taxation is "an unfunded federal mandate." But, Sen. Alexander insisted, it "is an unfunded mandate, plainly in violation of the Unfunded Mandates Reform Act of 1995..." Sen. Alexander said the Tennessee Department of Revenue estimates that making the tax ban permanent would cost Tennessee many millions of dollars a year. With Tennessee finances already pinched, how would that amount be made up without new state taxes? So, said Sen. Alexander, "I am filing tonight an amendment I call the Unfunded Federal Mandate Reimbursement Act. If a majority of the Senate should decide that banning state and local taxation of the Internet is important enough to create an unfunded federal mandate — that is, claim the credit up here (in Washington), but make it be done down there (in Tennessee and other states) — then my amendment would provide a way for Congress to pay the bill for that by authorizing our Department of the Treasury to reimburse Tennessee and Minnesota and other state and local governments each year for the cost of this new mandate." Don't expect Congress to rush to embrace Sen. Alexander's amendment. But he has made a point that deserves serious consideration. If the federal tax ban becomes permanent, state and local governments may have to come up with great amounts of tax money in other burdensome and permanent ways that taxpayers will not like.