Jewish World Review Nov. 17, 2003 / 22 Mar-Cheshvan, 5764

Diane Katz

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Consumer Reports

Little known commission lobbies for Internet tax using tax dollars | A bill to bar permanently some taxes on Internet access is stalled in the U.S. Senate, despite swift passage by the House. Predictably, states and localities, ever eager for more revenue, are fighting the measure. But unbeknown to millions of taxpayers who benefit from an online tax-free oasis is the fact that they are funding the lobbying effort for higher taxes.

Congress issued a three-year tax moratorium on Internet access in 1998. A two-year extension was approved in 2001, which expired last week. The bill now before the Senate would establish a permanent ban against taxes on access services such as cable broadband and digital subscriber lines.

Among the most vocal opponents of this tax relief is the Multistate Tax Commission, a Washington-based group representing 45 states, which promotes tax uniformity and more rigorous collections. Member states finance the commission based, in part, on the amount of revenue each collects from income, sales and other taxes.

This funding formula means that the commission gains financially by advocating policies that increase taxes. Citizens would do well to question whether their interests are best served by this use of their tax dollars.

In essence, the MTC is a perpetual tax machine, spending taxpayer dollars in pursuit of higher taxes. And for all its emphasis on taxpayer accountability, the commission itself has failed to submit annual reports to the states as required.

In the case of Internet access, the commission has lobbied hard against lower taxes as ruinous to state budgets. A study issued by the MTC claims a revenue loss to states of $22 billion.

Such a substantial loss of revenue could indeed deliver a blow to the budgets of states unwilling to control spending. But experts dispute the commission's findings as flawed.

Scott Mackey, former chief economist for the National Conference of State Legislators, told The Wall Street Journal "those numbers are not very believable."

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In contrast to the MTC's grossly inflated projections, the Congressional Budget Office estimates a loss of $80 million to $120 million - principally among the few states that collected access taxes before the moratorium was enacted.

This is not the first instance in which the MTC has indulged in economic scare tactics. A study released by the group in July claimed that corporate tax shelters were costing states more than $12 billion annually. The findings generated headlines nationwide, prompting demands for corporations to pay their "fair share."

In fact, the MTC study's methodology has since been challenged as substandard by economists, including Robert Cline, former director of tax research for the state of Michigan.

Moreover, the study focused on corporate income taxes, which comprise only 9 percent of all business taxes. The actual share of state and local taxes paid by businesses totaled $400 billion in 2003, or 43 percent of all state and local taxes, according to the Council on State Taxation. Indeed, businesses have shouldered 80 percent of the total increase in state and local taxes in the past three years.

In general terms, the fundamental goal of the MTC - uniform tax laws across states - is antithetical to the core principles of state sovereignty and American federalism. Competition among states is a vital form of discipline that punishes misguided policies and rewards sound governance. Without it, citizens are precluded from voting with their feet.

The commission touts uniformity as necessary to achieve tax simplification, an appealing objective given the current tax code. But uniformity sustains higher tax rates by foreclosing opportunities for citizens to escape from adverse tax policies.

Competition between states, on the other hand, tends to drive down tax rates. And lower taxes actually create simplicity by reducing the myriad loopholes that generally result from impossibly complex tax laws.

Ironically, the commission was established in 1967 to prevent Congress from imposing tax simplification on the states.

The commission's allegiance to state sovereignty was eloquently expressed by former Commission Chair Elizabeth Harchenko, in testimony before the Senate Commerce, Science and Transportation Committee: "The genius of our system of federalism is that our nation relies on states and local governments to tailor vital services of national benefit to fit local circumstances."

Unfortunately, the commission now appears to regard higher taxes as the ultimate goal. But this is hardly a vital service of national benefit. So, why are taxpayers being forced to finance it?

Diane Katz is director of science, environment and technology policy at the Mackinac Center for Public Policy (, a research and educational institute in Midland, Mich. Comment by clicking here.


© 2003, Mackinac Center for Public Policy