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June 26, 2001
There's an extraordinary plot afoot in the nation's capital to stifle tax competition among states, reverse Supreme Court precedent, circumvent constitutional limitations on states' taxing authority and seriously undermine federalism. At the dawn of the 21st century our elected officials have stooped to conniving ways to do exactly what the American revolutionaries beat the brains out of King George for doing at the end of the 18th century. It's called taxation without representation, and today it's being accomplished by state politicians and national legislators busily forming a state-level tax cartel to allow individual states to reach beyond their borders and levy sales taxes on the residents of other states. The Four Horsemen of the U.S. Senate ride again, and their names are Byron Dorgan, Ron Wyden, John Kerry and John McCain. They have joined forces to forge, euphemistically speaking, a ''compromise'' on the extension of the Internet tax moratorium. Under their reported agreement, the extension of the Internet tax moratorium is being held hostage by these senators until they can reach agreement on how to assist state governments to overcome Supreme Court precedent and the Constitution to collect sales and use taxes from non-residents. Worse yet, the agreement would pre-authorize the states to create an interstate tax cartel to collect taxes on online sales even if less than a majority of states harmonize their existing sales tax laws, which is probably unconstitutional. Make no mistake about it, if this plan is implemented as envisioned by the senators, it will lead to a uniform national sales tax. It will be levied collectively by all the states and be unalterable by individual state legislatures. In order to alter their sales taxes, states would have to get the approval of a ''consensus board'' of nonelected bureaucrats. So much for local control of taxation in America. Supporters of the agreement will tell you it's a matter of fairness. They ask why federal law should put brick-and-mortar companies at a disadvantage relative to Internet companies? Well, for one thing, federal law doesn't. The Internet tax moratorium only bars access fees and new and discriminatory taxes on the Internet. So, the restrictions on the ability of state and local governments to tax remote sales are imposed by the U.S. Constitution, not the moratorium. State and local governments are just as free under the moratorium to collect their sales and use taxes as they would be in its absence. Thirty years ago state governments made the same arguments about catalog sales that they're making about Internet taxation today; they were losing revenue and if they couldn't tax remote sales, then life as we know it would end. It didn't. The real reason they seek authorization to tax remote sales is that current law prevents politicians from shifting their tax burden to out-of-state residents who are unable to kick them out of office. The real issues in this debate are not state revenues, but freedom from overreaching politicians and from state tax practices that would harm the national economy. Congress has a constitutional responsibility under the Commerce Clause to prevent this kind of collusion among states to enrich their own treasuries at the expense of the national economy, and federal legislators would be derelict in that duty if they assist the states in this unsavory tax grab. I have seen many nations, states and locales expand their economy with tax rate cuts. But, I have yet to see a single case of a jurisdiction taxing its way to prosperity. Now is a time for action; it is time to enact a clean and permanent moratorium on new and discriminatory Internet taxation and it's time to unseat the Four Horseman of the Senate. However, if the price of extending the moratorium is a deal to authorize a state cartel, then I say no deal. I would rather live to fight another day. But if a deal has already been struck, then at a minimum, authorization of any state compact should require the approval of three-quarters of the states and specific approval of the compact by Congress, not the blank-check approach currently in play. Isn't it ironic, that just when Treasury Secretary Paul O'Neill courageously told the EU the United States would not help create an international tax cartel to eliminate tax competition among nations, our own federal legislators are conspiring to construct a similar state-level cartel to eliminate tax competition among the states? And so we come back to the age-old question: Quis custodiet ipsos custodes? Who will guard the guardians? In Federalist No. 32, James Madison gave us the answer when he spoke of the ''prudence and firmness of the people.'' If politicians aren't careful, that prudence and firmness may bounce them all from office which, come to think of it, might not be such a bad result. Jack Kemp is co-director of Empower America and Distinguished Fellow of the Competitive Enterprise Institute.
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