If you’re going to tax internet sales, make it a federal tax

The U.S. Senate recently passed an online sales tax bill. At this point it is not certain whether it will become law, because there are many Republicans in the House who oppose such a tax. The taxes would go to the states even though the bill would apply to interstate transactions. This presents a bit of a conundrum because on the one hand the federal government oversees interstate commerce but on the other hand there is no such tax as a federal sales tax. It is not surprising that Congress would consider a bill to provide more revenue for the states because (a) all members of Congress have a set of obligations to their home states and (b) Republicans are dead-set against supporting any measure that increases federal revenues. However, this might be time for Congress to exercise a technique that it rarely uses, thinking outside the box. There are compelling reasons why making it a federal sales tax would be a preferable policy to sending the money to state capitals. This is not the first time that a federal consumption or value-added tax has been suggested.  Fred T. Goldberg, former commission of the IRS (appointed by George H.W. Bush) has proposed this in the past. But first a little more on the bill:

The Hill reported on May 6, 2013,

The 69-27 vote is a major victory for retail groups and state governments, who for years have fought to close what they see as a loophole that allows as much as $23 billion in annual taxes from online sales to go uncollected.

The measure split Republicans senators, as 22 Republicans voted no in addition to five Democrats. Nineteen Republicans supported the measure.

The bill, which is backed by online powerhouse Amazon, empowers states to collect taxes on purchases made online by consumers in their states from out-of-state retailers. Under current law, states can only collect from companies that are physically located within their borders.

It’s interesting that Amazon supports the bill, perhaps it is because the mechanics of collecting the tax will be much easier for larger on-line businesses with sales in all 50 states. The collection process will be much more of a headache for smaller businesses which would have to accommodate the needs of all forty-five states that have sales taxes (states without a sales tax are Alaska, Delaware, Montana, New Hampshire, and Oregon).

The estimated $23 billion that the states would receive from this bill is a considerable sum. Some states would receive more than a billion dollars alone. However, a key question remains: would the states do a better job of managing new revenue than the federal government would?

The states do not set the bar very high for the federal government to surpass. Consider what has happened over the past twenty years. States have looked at a multitude of ways to raise revenue without instituting new taxes. Primarily what they have done is accumulate a pile of broken promises.

Lottery-Balls-aEvery state has either a lottery or casino gambling. In many states, a promise was made to voters that if they approved the establishment of these enterprises they would have more money to fund their schools and they could do it without raising taxes. It is remarkable how many state governments have had to sheepishly go back to voters to ask for tax increases because the “funny money” didn’t meet their expectations. If the state didn’t have to do it, then the local school district did.

States are in competition with one another to have the lowest taxes because they compete against one another for businesses and residents. They often play havoc with money that is passed along to them from the federal government such as Medicaid funding.

If the estimated $23 billion per year from an internet sales tax went to the federal government, it could completely fund NASA. It would provide enough money to fund both the E.P.A. and the Department of the Interior (all national parks).

In recent years the federal government has proven to be a much better steward of our money than the states. It’s certainly not foolproof, but it is generally reliable. There appears to be little or no public debate about the option of instituting an online sales tax with revenue going to the federal government. It would do us all well to at least raise this idea up the flagpole and give it due consideration.