By Jeff Dircksen, Director of Congressional Analysis for the National Taxpayers Union and Foundation.

Well, at least he liked my tie. If you had a chance to catch Wednesday’s Senate Commerce Committee meeting, you would have heard Senator Byron Dorgan of North Dakota and me discussing my taste in neckwear and its potential tax implications. The topic of the hearing was not trends in men’s fashion but instead communications, taxation, and federalism. My full testimony may be viewed here.

As most people who follow telecom issues know, the federal Internet tax moratorium is set to expire Nov. 1st of this year. The moratorium is what keeps most states from imposing fees and taxes on Internet access.

NTU believes that rather than passing another short-term moratorium on these taxes, Congress should adopt a permanent ban. Taxpayers already face sizeable taxes, fees, and other charges for telecommunications services. Some consumers are paying effective tax rates for telecom services that are double those for other goods and services subject to traditional sales taxes. Consumers don’t need to pay more to access the Internet.

Adding new taxes and fees to the Internet or other communications services would be counterproductive for consumers and service providers. The U.S.
currently ranks 15th among OECD countries in broadband penetration per 100 inhabitants. More taxes will further distort the market for these technologies and further delay their widespread adoption.

Senator Dorgan says that he doesn’t want to tax Internet access. He doesn’t think that anyone really does. Of course, he also said this in
2001 when I testified the first time before the Commerce Committee.
Unfortunately for taxpayers, Senator Dorgan sees this issue, in his words, “linked� with the remote collection of sales and use taxes – or sales tax simplification and harmonization. Dorgan believes that states should be able to come together and simplify their sales tax schemes so that vendors outside of the state where the product will be used will have to collect and remit use tax to the purchaser’s home state.

Currently, if I had ordered my tie online from a store in California, I would have been liable for use tax in the Commonwealth of Virginia. The vendor is not required to collect and remit use tax on my behalf. Senator Dorgan favors the creation of a database that would force this storeowner to impose the correct tax from and then remit it to the appropriate tax authorities in Richmond.

NTU is concerned that harmonizing taxes will kill tax competition among the states and lead to a “race to the top.� Forty-five states and DC levy a sales tax. In 34 states, localities are allowed to levy an additional – or “add on� – tax. It seems unlikely that the local officials will allow their state legislatures to wipe out their piece of the sales tax pie.
Instead, if the base rate is 6 percent and localities can impose another 2 percent, then it seems probable that the new rate will be higher than the base.

NTU highlighted several low-tax, pro-free market suggestions for the Committee, including permanent bans on Internet access and cell phone taxes. As for me personally, I told Members of the Committee that a few years from now, hopefully Senator Dorgan and I could discuss the benefits that these pro-taxpayer proposals had created, rather than talk about how my neckwear purchases should be taxed.

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