Editor’s note: Solveig Singleton is a senior analyst for the Competitive Enterprise Institute.

WASHINGTON,Washington D.C.’s marble floors and columns evoke images of ancient Rome, and the rhetorical flourishes at RECENT The Heritage debate between Senators George Allen and Lamar Alexander left it to the imagination to supply only togas.

Senator Alexander posed the question of whether to make the federal ban on special Internet taxes permanent as a conflict between federalism and unfunded mandates or even subsidies; Senator Allen, co-sponsor of a bill that would do so (S. 150), posed it as a question of a conflict between federalism and freedom. What issues underlie the terminological gap?

Senator Alexander’s central concern seemed to be to preserve existing states’ rights to tax traditional telephone service, and to allow states that are already doing so (about 20) to continue to tax broadband access…and maybe even Internet telephony. He would be willing to extend the current moratorium on discriminatory Internet taxes for two years as a cautionary measure, and has co-sponsored a bill to do so.

The broadband debate

Senator Allen wants to make the moratorium on discriminatory state Internet taxes permanent to avoid discouraging broadband deployment. Many states have already piled hefty special taxes on communications services, taxes amounting to as much as a quarter to a third of one’s phone bill. S.150 is intended to leave that status quo untouched, but to protect the Net from similar rapacious impulses, extending the moratorium to cover broadband and DSL taxes.

One puzzle was Senator Alexander’s description of a ban on Internet taxes as a subsidy to broadband or unfunded mandate on states. From the standpoint of a budget bureaucrat, letting people keep their own money is no different from a subsidy; there’s less money for the government. But from a private citizen’s perspective, there is a huge moral and economic difference between getting somebody else’s money (with a cut taken off the top by government agencies) and keeping more of one’s own earnings. Whatever the ultimate verdict on the tax moratorium, a subsidy it is not. And if it satisfies some dry, technical definition of an unfunded mandate, the tendency of some legislators to sympathize more with local governments for potential loss of revenue than with consumers for the hefty tax burden they are carrying is an extremely alarming one.

The real problem

A real problem with the original federal moratorium on state Internet taxes (sales taxes in particular) is that it spawned proposals for a uniform national tax collection system. That would likely mean higher taxes overall. States with high tax rates would squall if the national tax were set lower; states with low taxes would be unlikely to complain if they were set higher. Here, taxing and spending authorities have a conflict of interest with their own citizens.

Now, Senator Allen’s bill is intended as permanent protection of interstate commerce from special taxes, not to support a state tax cartel. Does it unfairly restrict the ability of states to protect their revenue base? Not really. States have options; they just don’t want to use them. For example, they might enforce “use taxes”…use taxes are the often-not-collected taxes that states impose on products that their citizens have bought out of state. They might try to raise income taxes or general business taxes. States resist this because voters are likely hold them accountable for these direct taxes and force them to discipline spending, the real solution to state budgetary woes. All in all, this is probably not a bad thing.

But how can we help ensure that federal legislators will hold to a moratorium? That is the ultimate question, and there are no answers yet.

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