Wednesday, October 24, 2007

Why Congress Keeps Voting On Internet Taxes

By James L. Gattuso, Guest Blogger

As the days tick down to Halloween -- and the formal expiration of the Internet tax moratorium -- there’s a strong feeling of deja vu in Washington. It’s like we’ve all been through this before.

We have. In 2004. And 2001. The periodic last-minute extension of the moratorium has become a regular feature of Washington’s political life. Which leads many to wonder: Why not just make the tax ban permanent?

The arguments for restrictions on state and local taxes are strong (they are summarized in a new Heritage Foundation paper just released this week). But still, policymakers seem reluctant to take the plunge toward permanence, with the House voting last week for yet another temporary extension.

Opponents -- such as Tennessee’s Lamar Alexander -- have argued strenuously against anything more long-lasting. With the Internet changing so quickly, it doesn’t make sense to write Internet tax policy into stone, they argue.

But it’s hard to believe that many are actually convinced by this. After all, with nine years’ experience with the moratorium, this is hardly an experimental policy. And Congress always keeps the option of changing things if the needs arise. Just look at the amount of tinkering that goes on with the rest of the tax code.

So why so much support for yet another temporary suspension? It’s certainly not because Internet taxation is popular -- there just aren’t a lot of voters out there demanding more fees on their DSL lines.

Strangely, the problem may be the opposite: The idea of taxing the Internet is unpopular, and members get a boost from voting to ban them. And temporary extensions let them vote to ban them again and again and again. A permanent ban would stop the fun.

Far-fetched? Perhaps. But it wouldn’t be the first time such a thing has happened. For years, Congress put off indexing income taxes for inflation -- preferring instead to pass grand income tax "cuts" every few years. Finally, in 1981, indexing was adopted, and the game was ended.

But Congress may be playing it again with Internet taxation. If so, it leaves some interesting strategic choices for advocates on both sides of this issue. Should proponents start arguing that Internet taxation is popular? Will state tax collectors be heard explaining that voters want them to keep their hands off the Internet?

Not likely. But the possibilities are interesting.

Gattuso is a senior research fellow in regulatory policy at the Heritage Foundation.