Net Election

McCain Rides the Internet Tax Issue

{{Industy Standard Gif#34651}} Slate and the Industry Standard join forces to examine the effect of the Internet on Campaign 2000.

{{Slate’s Political Roundup#73099}}

When it comes to tax cuts, John McCain’s strategy is to present himself as more responsible than George W. Bush. But there’s an important exception: McCain’s increasing tendency to tweak Bush for not promising to make permanent the current moratorium on taxation of e-commerce.

While breakfasting last month at the Greater Nashua, N.H., Chamber of Commerce, McCain signed a pledge being circulated by Citizens for a Sound Economy, a conservative anti-tax group, promising to “support making permanent the current ban on Internet access, sales or use taxes.” McCain also placed a campaign ad in Slate urging readers to “Just Say No to Internet Taxes.” (According to a press aide, so far the McCain campaign hasn’t placed this ad on any other Web sites, so the new technique of using a medium to pander to it remains an experimental one.) Bush supports the current Internet tax moratorium, due to expire next year, and has said he “would extend it for several more years to determine the full impact of e-commerce on our society.” For a while he defined “several more years” as three to five years. But a few days after McCain signed the CSE pledge (which had also been signed by Steve Forbes and Gary Bauer), CSE announced that Bush had told the organization, “I believe in a 10-year moratorium.” That would seem to take the current moratorium, passed in 1998, through the year 2008, the final year of a prospective second Bush term. (To read the text of the moratorium law, click here.)

Even though his resolve on this subject appears to be weakening, Bush has the better argument. Although it may make sense to hold off on taxing Internet sales while the industry takes its first baby steps and Congress and the states sort out what the rules for interstate commerce should be, a permanent ban on taxing e-commerce would be unfair to so-called “bricks and mortar” retailers, whose customers have to pay state and local sales taxes. If e-commerce becomes the mass retailing medium everyone expects it to be, the economic disadvantage to offline retailers could prove devastating. Keeping the Internet tax-free could also bleed state and local tax coffers dry, a fact of which Bush, the sole governor in the presidential race, is acutely aware.

McCain’s arguments for a permanent Internet-sales-tax ban tend to contradict one another. On the one hand, McCain describes the Internet economy as a “baby in its cradle” that must not be strangled by taxation. On the other hand, McCain says the Internet is “the greatest economic engine the world has ever seen.” Well, which is it? Is the Internet a fragile experiment, or is it what drives the entire economy? One could argue that it’s a baby now, but it will become a mighty giant later. But that isn’t an argument for a permanent tax ban; it’s an argument for maintaining (and, possibly, extending) the temporary tax moratorium. It’s not even clear that the digital world respects McCain much for pandering on this issue. Technology columnist Dan Gillmor of the San Jose Mercury News—the closest thing the Internet has to a hometown newspaper—recently wrote that McCain’s position on Internet taxes “is intellectually dishonest. He plainly doesn’t care that exempting Internet retailers from collecting sales taxes favors them over Main Street merchants.”

It also favors rich people over poor people, most obviously because the rich have greater access to computers than the poor. This is frequently referred to as the “digital divide.” But even if that digital divide were bridged, past experience suggests that the rich would still be likelier to make purchases online. Consider catalog sales: According to Washington’s Center on Budget and Policy Priorities, households with incomes above $80,000 are more than twice as likely to shop by catalog as households with incomes below $25,000. Even though mail-order purchasing is a highly traditional form of commerce, and even though, as a practical matter, buying things from a catalog shouldn’t be all that difficult for low-income people (even if you don’t have a checking account or credit card, you can always go to the post office and convert some cash into a money order), two-thirds of all households making less than $25,000 never do it. If poor people don’t buy much from catalogs, it seems unlikely they’d buy much online.

Taxing Internet commerce does involve working out some difficult procedural questions. In 1992’s Quill Corp. vs. North Dakota decision, the Supreme Court held that under current law, one state couldn’t tax purchases made in another state unless the company in question had some physical presence there. This was seen as a boon to catalog sales, which for the most part remain tax-free. But there’s no reason why Congress, which after all is charged with regulating interstate commerce, couldn’t pass a new law establishing how both catalog merchants and Internet merchants would tax interstate sales. (One approach, proposed a couple of years after Quill by Arkansas Democrat Sen. Dale Bumpers, would have established a national sales tax to be passed on to the state where a catalog customer–or now, presumably, Internet customer–resides.) McCain, in any event, doesn’t pretend that his opposition to an Internet tax arises from any trepidation about the practical problem of collecting the tax for 50 different states. He’s just looking for a way to argue that George Bush wants to raise your taxes.