Times Up For States' Authority to Tax the Internet

Times Up For States' Authority to Tax the Internet
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As millions of Americans continue to shift their work, social, and private lives online as a result of the coronavirus, internet access has become more essential than ever. Thankfully for internet users, the last remnants of states’ ability to tax this access is, after years of extensions, finally set to expire this summer. Congress should make sure to allow these carve-outs to expire and ensure tax-free access to the internet for all consumers.

The Internet Tax Freedom Act (ITFA) of 1998 imposed a moratorium on state taxes on internet access, as well as discriminatory taxes against internet commerce. Though the original ban lasted only three years, it was repeatedly extended through new legislation until finally being made permanent in early 2016.

However, earlier iterations of ITFA included a grandfather clause to allow states that had internet access taxes in place before the bill was passed to keep enforcing those taxes. Over time, states that voluntarily repealed their internet access taxes were steadily removed from this grandfather protection.

Today, just six states — South Dakota, Texas, Wisconsin, Ohio, New Mexico, and Hawaii — continue to tax internet access. Fortunately for consumers in those states, that special dispensation is set to end July 1 of this year based on a provision in the 2016 bill that gave them until 2020 to phase the taxes out.

Budget officials in those six states estimate that taxpayers will save just under $1 billion with the newly universal enforcement of ITFA, with Texans and Ohioans alone saving over $700 million. That’s great news for taxpayers who need internet access more than ever, though tax officials in these states will likely try to fight tooth and nail for this revenue.

States are rarely known for giving up revenue sources without a fight under the best economic circumstances, but they are likely to be under significant budget pressures in this hibernating economy. States can expect revenue sources to dry up very suddenly this year, which, combined with expanded demand for state services such as unemployment, will make budget math very difficult. And unlike the federal government, all states effectively operate as though bound by balanced budget requirements. In other words, the budget math has to work somehow.

But taxpayers should not pity these six states’ revenue departments overmuch. Though $1 billion sounds like a lot of money, it represents just around 2 percent of these six states’ sales tax revenue alone. As a percentage of total state revenue in these six states, the revenue lost would be significantly less than one penny for every dollar they raise. While states may be desperate for whatever revenue they can get their hands on over the next few months, their budget woes will hardly be attributable to lost internet tax revenue.

And even if the loss of ITFA’s grandfather protections caused a significant impact on these six states’ budgets, it would still be the right policy. In this time of crisis, Americans are seeing how crucial access to the internet is. States should not have the right to restrict this access and undermine interstate commerce by taxing it.

More than two decades ago, Congress acted to prevent states from getting in the way of innovation of modernization through internet access taxes. In just two and a half months, the last vestiges of these taxes are set to expire. This Congress should follow up on the wisdom its 1998 predecessor showed and allow ITFA to finally protect taxpayers in every state in the country.

Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government. 

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