Net Tax Panel Failed to Resolve a Crucial Issue

FRAMINGHAM (04/18/2000) - Presidents are frequently displeased to discover that their U.S. Supreme Court appointees turn out to be real people with their own minds, and not doctrinaire automatons who vote as the White House desires.

Leaders of Congress learned a similar lesson recently with the Internet Tax Commission, which wrapped up its work last month with a muddled whimper instead of the expected antitax diatribe.

Even after stacking the commission with antitax zealots and technologists whose businesses would gain in a no-Internet-taxes environment, Congress didn't get the two-thirds "supermajority" it had demanded in any final recommendations.

Only by a thin margin, and only after endorsing specific tax changes that - by amazing coincidence - worked in favor of the technology-industry members of the commission, did the panel even muster a slight majority in favor of keeping the Net a tax-free haven for the time being, if not forever.

What happened? Common sense began to assert itself.

There's little debate about parts of the report, such as a formal recommendation to study how new kinds of sales taxes on online purchases might invade consumers' privacy. That's a clearly necessary step.

But the overall question of Internet sales taxes defied resolution. The antitax crowd is delighted with the current situation, which gives Internet merchants a huge advantage over Main Street merchants through the use of a long-standing catalog-sales loophole to offer tax-free goods outside their home states.

But the tax-fairness side says the loophole not only undermines Main Street but will also surely lead to a loss of revenue for vital government services.

One of the more fascinating - and politically courageous - members of the commission was Utah's Republican governor, Michael Leavitt, who is hardly a card-carrying tax-and-spend liberal. Yet he emerged as the principal voice for the side of tax fairness. On the other hand, Virginia's Republican governor, James Gilmore, made no secret of his antitax fervor from the start. Give him credit for consistency, even if his policy would undermine communities all across America. The lack of a two-thirds majority didn't faze Gilmore. He figured, probably correctly, that the Republican-controlled Congress would simply accept the report and treat it like an official recommendation.

The requirement for a supermajority was sensible in the first place. This is a topic that needs overwhelming consensus. If we're going to set policies that will ultimately hollow out the tax bases of many states and cities, we should do so with our eyes open. We need equal forethought if we decide to put in place a system of Internet sales taxation, which won't be as simple as fair-tax proponents claim.

Instead, we've opted for paralysis. The negative effect won't be obvious during the current economic boom, when sales tax revenues aren't dropping in major ways, and not at all in most jurisdictions. But when the next economic downturn hits, we'll regret our refusal to face up to a serious issue.

DAN GILLMOR is technology columnist at the San Jose Mercury News. Contact him at dgillmor@sjmercury.com.

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