Has the growth of tax-free Internet sales hurt state revenues or education funding?

There is no sign of it. At the time of this writing, Michigan is enjoying a budget surplus in excess of $1 billion, after enacting numerous tax cuts in previous years. Governor Engler, in his State of the State Address on January 19, even called for further tax cuts. State spending is expected to rise in the next fiscal year at twice the rate of inflation and the budget is anticipated to remain in surplus after additional tax cuts this year. The "Rainy Day Fund" has grown so large—well in excess of a billion dollars—that the governor is proposing spending some of it on new programs. Moreover, Michigan's School Aid Fund is at record levels. Spending per pupil in Michigan public schools has never been higher.

A recent analysis by Dean Stansel and Stephen Moore of the Cato Institute² reveals that Michigan's budget experience mirrors that of other states. State tax collections grew at nearly twice the inflation rate between 1992 and 1998. State governments are "awash in tax revenues," with a total surplus this year in the neighborhood of $36 billion. Investor's Business Daily notes that state revenues grew 227 percent and local revenues grew 193 percent between 1980 and 1995.³ A report by Michael Flynn of the American Legislative Exchange Council finds states to be "in their best financial health in over a decade."⁴

Predictions about "lost" future revenues if the Internet remains untaxed are almost always vastly inflated. Typically, such forecasts include business-to-business sales as well as business-to-consumer sales even though business-to-business sales are mostly exempt from sales taxes—and they comprise a much greater portion of Internet deals than do those by businesses to consumers.

Factoring out that and other dubious assumptions built into the inflated forecasts, two economists—Austan Goolsbee of the University of Chicago and Jonathan Zittrain of Harvard Law School—figure that nationwide, the tax revenue "lost" in 1998 totaled about $430 million. That amounts to "less than one quarter of one percent of total state and local sales tax revenues." Goolsbee and Zittrain calculate that the revenue "lost" over the next five years will be about $3.5 billion, which is still less than two percent of the sales taxes state and local governments are expected to collect.⁵

Cato's Aaron Lukas adds that

In an era of almost no inflation, state budgets grew by 5 percent in fiscal year 1997 and by more than 6 percent in fiscal year 1998. The last fiscal year ended with about $21 billion more in tax collections than originally anticipated. It appears that states will enjoy a sizable revenue windfall this year as well. If electronic commerce is undermining state revenues, it's an undetectable trend."⁶