The Internet Sales Tax: Another Assault On The Constitution

Can a last minute conservative backlash stop the anti-consumer bill from being rammed through Congress?

It’s amazing how fast Senate Majority Leader Harry Reid (D-NV) can act when he wants to. Having doodled and dawdled for about four years without even producing a budget, Reid suddenly shed his torpor during the last two weeks in April. So eager was he to pass a bill authorizing state governments to collect tax on interstate Internet sales that he bypassed the normal committee process of holding hearings so senators could examine the pros and cons. The bill was introduced (actually, reintroduced) on April 16, and if Reid had gotten his way, it would have passed already. Opponents barely managed to postpone the vote on it until May 6.

One of the interesting aspects of this bill (known by the Orwellian title of “Marketplace Fairness Act”) is that 27 Republican senators currently favor it. Only 24 or 25 senators currently oppose the bill—a bipartisan combination of senators from the five states that do not have a sales tax, plus some economic conservatives from the Tea Party wing of the GOP, such as Marco Rubio, Mike Lee, and Ted Cruz.

The reason so many senators favor the Marketplace Fairness Act is simple: State governments are desperate for revenue to fund their ever-escalating expenditures, and their allies in the U.S. Senate are trying to help them collect it. Internet sales in the US totaled $226 billion last year, and a revenue stream that large easily becomes a tempting target for big spenders.

Proponents of the tax focus on “fairness.”  They claim that out-of-state online vendors enjoy a competitive advantage against local brick-and-mortar companies that must pay sales tax to their state governments, and that this inequitable situation must be corrected. This is economically ignorant. The whole point of economic competition is that some businesses have competitive advantages over others. This gives consumers choices and they end up buying from the businesses that give the most value for the least money.

There are, of course, two possible ways for state governments to eliminate the existing disparity: Impose the same tax burden on out-of-state Internet-based competitors, or remove the sales tax burden under which in-state businesses labor. The problem with eliminating the sales tax for in-state firms is that those firms consume various government-provided services (roads, courts, state police, perhaps even business subsidies) and it is only right that the businesses pay for those benefits. The problem with initiating taxes on out-of-state firms is: Why should out-of-staters pay taxes to a government when they consume none of the services or wealth transfers provided by that government? Why should they pay taxes to political entities for whom they are not eligible to vote and who are completely unaccountable to them? That is taxation without representation—a major principle for which American patriots fought the Revolutionary War—and there is nothing fair about it (hence, the Orwellian character of putting “fairness” in the name of the bill).

Allowing state governments to begin imposing sales tax on out-of-state businesses is worse than unfair: It’s unconstitutional. The federal government has no such authority. Article I, Section 9, Paragraph 5 on the United States Constitution stipulates, “No Tax or Duty shall be laid on Articles Exported from any State.” Article I, Section 10, Paragraph 2 of the Constitution states, “No state shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports…” The constitution created the world’s first large free-trade zone—the United States of America—and for a majority of United States senators to place expediency above constitutional integrity is unconscionable.

One of the sadder aspects of the move to rush this new form of taxation through the Senate was that supply-side guru, the famous economist Arthur Laffer, quickly jumped on board. Laffer and his supply-side allies deserve great credit for reviving an understanding of how marginal tax rates create incentives for individuals, and for showing how some government taxes are less harmful than others. However, the Achilles’ heel of the supply-siders always has been their tendency to focus more on taxation than on the fundamental economic danger: Government spending. Laffer repeats that error today by endorsing the Marketplace Fairness Act.

Writing in The Wall Street Journal on April 18, Laffer cites data showing that state governments could have garnered at least $23 billion in 2012 by taxing Internet sales. He laments that this “lost” revenue resulted in marginal tax rates being raised. While Laffer is correct that raising marginal tax rates is harmful, he is too quick to assume that state governments will lower them if they gain the power to tax Internet sales. Worse, he doesn’t even attempt to make the case that state governments should spend less as the optimal way to stimulate the economic growth that he wants. When it comes to spending, Laffer takes the road of least resistance and comes down on the side of the status quo—clearly a political decision more than an economically sound one.

Indeed, on an economic level, it is amazing that so many senators feel safe in supporting the Marketplace Fairness Act. Having states add a tax to interstate Internet sales will raise the prices that consumers pay. Of course, that is SOP (standard operating procedure) for government; after all, government's war against higher standards of living by imposing higher prices on consumers in a multiplicity of ways—e.g., subsidies, quotas, tariffs, business taxes, antitrust law, hyper-regulation, et al. With all those policies, government makes economic goods more costly to consumers.

At the time of this writing, it looks like the expansion of states’ taxing power is a done deal. One can only hope that the Supreme Court will uphold a challenge to the Marketplace Fairness Act’s constitutionality later on. However, in 2009 the Supremes declined to hear a case challenging a Massachusetts law taxing out-of-state corporations that generated sales in Massachusetts. Add to that the contorted verbal gymnastics that were used to uphold the Affordable Care Act last year, and it is hard to feel optimistic about our constitutional rights being safe. It appears to me that federalism is dying and state and national legislators are colluding to extract more money from the private sector.

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