Why does Virginia Governor James Gilmore oppose the National Governors' Association (and Governor Engler's) approach to taxing the Internet?

Governor Gilmore says the only explanation for the behavior of his fellow chief executives is that they have an insatiable desire "to tax anything that moves." The editors of The Wall Street Journal agree: "The drive to squeeze every last tax dollar out of Internet shopping isn't about voters, fairness, simplification, harmony or financing highways. It is about public power. Right now, the Governors and their friends at the National Association of Counties and the U.S. Conference of Mayors have a lot of power, a good share of it derived from sales tax revenues. Naturally, they want more."17

We, like Governor Gilmore, second the Wall Street Journal's recommendation, made in that same editorial: "As long as we as a nation do not embed in federal law a general limit to the public-sector's tax take, we will constantly be fighting off money grabs like the Governors' . How about a commission on the proper role—and size—of government in the 21st century?"

Governor Gilmore explains his perspective this way:

By burdening Internet consumers with new tax burdens, by imposing new tax collection millstones upon Internet-based entrepreneurs, or reporting all sales transactions to third-party tax collection agents of the government who would view the private purchases of each consumer, the evidence is clear that government would severely inhibit the economic growth of the Internet economy and particularly impact small Internet entrepreneurs and consumers.

University of Chicago Professor Austan Goolsbee presented to the [Advisory] Commission [on Electronic Commerce] compelling evidence that the volume of sales over the Internet would decline 30 percent if sales taxes were imposed on Internet commerce. That impact is confirmed in survey after survey . . . .

In return for inhibiting the growth of the Internet economy, governments would increase their sales taxes by approximately 1 percent of the sales tax base over the next four to five years. Professor Goolsbee estimates that by 2003, sales taxes on Internet-based sales would amount to no more than 1.4 percent total sales taxes collected nationally. To the extent many on-line consumers are switching from catalogues to the Internet, the 1.4 percent largely reflects a revenue-neutral shift for state and local tax collectors.

But the costs of impeding the Internet economy's growth and the public and private benefits attendant to that growth could be far greater than an addition of 1.4 percent in sales tax collections for governments. Therefore, government has sound public policy reasons to free the Internet and the commerce it generates from taxes and the regulatory burdens and privacy intrusions necessary to enforce a sales tax system at its inception . . . .

Professor Goolsbee estimates that a substantial portion of on-line shoppers are new shoppers and concludes that, at present, research 'does not seem to point to intense competition between retail and online commerce at present—consistent with the notion of Internet as trade creator.' Thus, there is little evidence that shopping malls and Main Streets will be put out of business by the Internet in the same way malls put Main Streets out of business over the last three decades. According to the evidence, it is just as likely that purchases in stores will continue to increase. It is equally evident that sales taxes on purchases in stores will continue to increase and that proposals to tax Internet commerce represent an effort to tax new commercial activity (or at least commercial activity shifting from catalogues to the Internet).

In any event, tax freedom on Internet-based transactions regardless of where a business has physical nexus will create an even playing field for all retailers, even those national chains that adapt to a 'click and mortar' model. All businesses will compete equally when they compete on the Internet.

Failure to provide tax-free trade over the Internet within the United States will necessarily lead to businesses locating offshore to gain an advantage over domestic businesses, especially in the service, digital goods and information sectors . . . . Congress should consider the probability that some Internet merchants, especially those who sell digital goods, would simply locate off-shore somewhere in a place that doesn't require them to ask consumers questions about where they live or to collect sales taxes.

For all of these reasons, American public policy should embrace the Internet and the borderless economy it creates rather than impose old ways of thinking and antiquated locus-based tax structures upon it.18

Massachusetts Governor Paul Cellucci joined Governor Gilmore in taking a similar position when he testified on February 2 before the Senate Budget Committee.

"Government has sound public policy reasons to free the Internet and the commerce it generates from taxes and the regulatory burdens and privacy intrusions necessary to enforce a sales tax system."

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