by Alex Nowrasteh
October 1, 2007

Expanding the current Internet tax moratorium should be a congressional priority.  The current moratorium, which expires November 1, prevents state and local taxation of Internet access, multiple taxes on a single e-commerce transaction, and taxes that discriminate against online transactions.   Given the extraordinary growth of the Internet over the last decade, imposing new barriers on development would be shortsighted.

There are already several proposals to make the current tax ban permanent. The chairman of the House Judiciary Subcommittee on Commercial and Administrative Law, Rep. Linda T. Sanchez (D-Calif.), is working on a compromise bill. While the details have yet to be worked out, the Don’t Tax Our Web coalition, a lobbying group comprised of both businesses and nonprofits, believes that a permanent tax ban on the Internet will likely be passed. But a lot can happen between now and November 1. 

A permanent tax ban for the Internet would be the best possible outcome.  Instead of Internet companies traveling to Washington every few years to fend off the taxman, they could spend time building their businesses and expanding services.  When entrepreneurs waste time begging governments to leave them alone, consumers end up paying the cost. 

Avoiding Internet taxation is that it will encourage current Internet users to upgrade to broadband.  The more people that are connected to the Internet with high speed connections, the more effective a tool the Internet will become. A tax affecting broadband installation or maintenance would retard this development. The damage that this would do to our economy—already so heavily dependent on Internet connection—would only increase as the role of the Internet in business becomes ever more entrenched. 

The arguments for taxing the Internet have never been weaker. The financial condition of the states has improved much over the last few years through restrained spending, tax reform, and other measures.  State governments do not need a chunk of the Internet’s commerce to balance their books. 

Some state governments are seriously off-base when they argue that Internet access should be treated like some sort of public utility (Listen to a debate here)—regulated, taxed, and controlled by the state.  State and local governments fund extensive library, public school, and university systems for the express purpose of expanding the knowledge of the citizenry. Yet there is no better tool to more easily disseminate information than the Internet. Viewed this way, taxing the Internet would be like taxing knowledge itself. 

The Internet has been the great leveler.  Companies have grown to great size from humble beginnings, some have failed spectacularly, and some have evolved into essential services.  The common denominator for success has been entrepreneurship, the ability to respond to market trends, and a bit of luck.

As an emerging industry, the Internet is still relatively young, but has evolved in remarkable ways since its infancy. Transactions costs for communications are down, bumps in the road of innovation like privacy concerns are being alleviated, and security is constantly improving.  The Internet is truly accessible to every American who wishes to connect.  Being unrestricted by tax burdens has allowed maximum innovation and profitability.

For the Internet to continue develop, political interventions should be minimal or non-existent. While a permanent Internet tax ban would not end all political intervention into the online world—witness the debate on net neutrality, for example—it would substantially diminish it.  Congress should not throw sand in the wheels of innovation.