Even though the tax burden — federal, state, and local — is the highest it has been since 1776, forty of the nation's governors don't think you are paying enough. State income tax, property tax, school tax, vehicle license and registration fees — not to mention state and local sales tax — are clearly insufficient. Those tax-free Internet purchases you make are slipping through their fingers, and they aim to stop it. Say you live in Salt Lake City, and buy a book from amazon.com (first clicking through claremont.org, of course!). Amazon won't charge you sales tax, because they don't have a "nexus" — a physical presence — in Utah. But Governor Michael Leavitt wants Amazon to collect the tax anyway, and remit it to Utah.
This week, Leavitt and 39 other worthies signed a letter urging Congress to end the current moratorium on Internet taxation. First passed in 1998, the moratorium is scheduled to expire in October unless Congress acts to extend it. With the expiration of the moratorium, tax-advocates hope to advance what is called the Streamlined Sales Tax Project. This plan would simplify the myriad of America's 7,500 sales tax jurisdictions for the purpose of making it easier for businesses to collect taxes from purchasers living in another state.
One of the few governors not to sign was California's Gray Davis, who favors extending of the moratorium "at least in the short term," according to his press office. Lord knows, we have enough criticisms to make of Mr. Davis and his administration. But on this matter we congratulate his decision not to join the overwhelming number of his colleagues. To be sure, interest must be at work as much as principle; California is home to many of the nation's high-tech firms, which have a financial interest in free and unfettered online commerce.
A few other governors, most notably James Gilmore of Virginia, favor the continuation of the moratorium, as does President Bush. Perhaps they recognize that one of the marvels of the federalist system is that it encourages competitive tax and regulatory policy among the states. Because American citizens and businesses can move with relative ease from one state to another, low tax rates and lighter regulatory burdens in New Hampshire, for instance, keep a lid on Massachusetts' tax-and spend impulses.
Proponents of the streamlined tax plan recognize that any such plan must have the approval of Congress, which is given the constitutional authority to regulate inter-state commerce under the Commerce Clause. What they fail to recognize, however, is that the purpose of this clause is to promote free and open trade, as well as commercial competition among the states; i.e. to promote interstate commerce, not interstate tax collection.
Digital commerce may or may not be a great boon to the American economy. But it certainly has made the practice of collecting sales tax increasingly complicated. First, the entire global marketplace is available to any consumer with Internet access. In addition, even the definitions for taxable "products" — which are more often than not electrons transferred over modems — are becoming increasingly baroque. States have at their disposal any number of options for raising revenue, and indeed are hardly as strapped as they suggest. The still-emerging world of e-commerce should be allowed to mature unfettered. More dramatically — and to prove that the Claremont Institute is no enemy of change — we suggest it may even be time to reconsider the notion of online taxes entirely. The Constitution is fine the way it is, but our politicians ought to catch up to the 18th century, not to mention the 21st.