Internet law provision threatens millions in revenues for seven states

Seven states could soon see hundreds of millions of dollars in annual revenues dry up if U.S. lawmakers prevail in closing a legislative loophole.

The issue hinges on a provision to make the federal Internet Tax Freedom Act permanent.  The provision would remove a grandfather clause that has allowed Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas and Wisconsin to levy taxes on citizens’ Internet bills.  The text of a bill, introduced by Rep. Bob Goodlatte, R-Virginia, was folded into a conference report on unrelated customs legislation that passed the House last week.

If passed, the law would make permanent a temporary ban Congress put in place in 1998 that prevents states from taxing Internet access or placing multiple or discriminatory taxes on e-commerce, and lawmakers have extended it multiple times since then. Efforts to keep the Internet tax-free have generally garnered bi-partisan support in Congress, in part to promote innovation and in part to avoid instituting another layer of taxes on the public.

“It’s estimated that Internet access tax rates could be more than twice the average rate of all other goods and services,” Goodlatte wrote in a statement. “To make matters worse, low-income households could pay 10 times as much as high-income households as a share of income. The last thing that Americans need is another tax bill on their doorsteps.”

The permanent extension of the Internet tax ban would give the seven states until June 2020 to phase out their Internet taxes, but critics warn that the change would put a significant financial burden on states.

The Center on Budget and Policy Priorities, a think tank working to analyze how budget policy affects low-income Americans, estimated in a report that the closing of the loophole would cost the seven states and their localities roughly $500 million in annual revenue “that helps pay for education, police, and other services.” With that money gone, researchers believe “these states would have to reduce services or increase other taxes to offset the revenue loss.”

Additionally, the group charges that the permanent ban would deny the other 43 states the chance to collect almost $6.5 billion in taxes each year, and believes that “allowing states and localities to collect this revenue would enable them to reduce taxes and/or improve education, health care, roads, and other services and infrastructure.”

The National Governors Association and National Conference of State Legislatures also released a joint statement decrying the move, writing that it “ignores both regular order and the calls of businesses, states and local governments to level the playing field for all retailers.”

The groups are also urging lawmakers to consider a different way forward, separating the tax ban from the trade legislation.

The bill will now head to the Senate for consideration.