Senator George Voinovich, who earlier this year irritated many conservatives with his opposition to the President’s tax cuts is at it again, this time fighting to tax Internet-access. The Wall St. Journal takes him and Senator Lamar Alexander to the woodshed for their inability to act like Republicans!

Point, Click and Tax

The effort to make permanent a temporary ban on Internet-access taxes has stalled in the Republican-controlled Senate. But don't blame the Democrats.

Fault instead two GOP Senators, Lamar Alexander of Tennessee and George Voinovich of Ohio. Both are using procedural legerdemain to prevent a vote on the Internet Tax Nondiscrimination Act, a provision that not only keeps the taxman away from your AOL or EarthLink account but also bans "multiple or discriminatory" levies on electronic commerce. A temporary Internet tax moratorium, in place for the past five years, expired on November 1. If Congress doesn't act to extend it before winter recess, don't be surprised by a yuletide e-mail tax.

Former governors themselves, Senators Alexander and Voinovich are being pressured by state and local tax collectors, who throw around terms like "cash-strapped" and "revenue shortfalls." Except that the data all suggest the real problem is too much spending, not too little revenue.

Commerce Department figures released last month show that second-quarter state and local revenue was up for the fifth straight quarter. States saw revenues rise in every category, including federal aid, which is up 14% over last year thanks to the $20 billion they received through President Bush's most recent tax-cut package. States and municipalities are on pace to collect $1.4 trillion in taxes this year, up from a record $872 billion in 2002. Clearly, the taxpayers are doing their part.

In a floor speech last week, Senator Alexander said the Internet is "a grown-up business" and "not a baby in a crib anymore." Really? According to the Census Bureau, e-commerce accounted for a grand total of 1.3% of total sales last year. And while about half of the country is now online, the fastest-growing segment is among low-income households. Mr. Alexander wants to let the states impose regressive Web-access taxes on those least able to afford them. That's no way to close a "digital divide."

In a recent letter1 to the Journal, the Senator went so far as to say that not allowing states to tax the Internet constitutes an "unfunded mandate." He hangs this argument on a rather fanciful reading of the Unfunded Mandates Reform Act, a toothless 1995 measure aimed at curbing Washington's habit of imposing expensive affirmative duties on states through legislation or regulation (particularly in environmental and entitlement programs) and then forcing the states to foot the bill.

Mr. Alexander's interpretation turns any Federal pre-emption of state law into an "unfunded mandate." But clearly that wasn't what Newt Gingrich and Dick Armey had in mind. Are FCC spectrum licenses "unfunded mandates"? After all, the states could be licensing radio and television airwaves but for Federal laws that stop them. How about airline tickets, another thing states are prohibited from taxing? Mr. Alexander's tortured reading of the law shouldn't trump the Constitution, which clearly says Congress is pre-eminent on matters of interstate commerce.
Instead of the permanent ban being pushed by GOP Senator George Allen and Democrat Senator Ron Wyden, Internet tax proponents are now offering a two-year moratorium extension with murky language that state and local officials hope will allow for some hidden taxation. Their ultimate goal is to label as much Internet activity as possible with the term "telecommunication services." This would allow them to tax the Web at phone service rates. Which is where the money is.

A 2002 Council on State Taxation report found that the average combined state and local tax burden on telecommunications is 13.9%. Add the 4% federal burden (which includes a 3% excise tax), and you're pushing 18%. The National Governors Association, the National Conference of State Legislatures and others whispering to Senators Voinovich and Alexander would like nothing better than to tangle up the Internet in this nightmare tax web. If they can get the Internet categorized as one big telephone service, state and local governments can start applying existing telecom taxes to the Internet administratively, without any debate or votes.
Inexplicably, these tax proponents seem to have found another ally in Senate Majority Leader Bill Frist. He could end the debate and move for a cloture vote any time he wants. Proponents of the permanent ban, which is supported by the White House, say they have the votes to pass it. Senator Frist has not hesitated to file for cloture on judicial nominees, so what's with this soft spot for Internet taxes?


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