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CBO: Digital Goods Bill Would Cost States and Localities $3 Billion a Year

Federal legislation that would restrict state and local governments’ ability to levy sales and gross receipts taxes on fast-growing categories of consumer and business purchases like downloaded music and movies, online photo storage, and payroll processing would cost state and local governments $3 billion year in forgone revenues, the Congressional Budget Office (CBO) now estimates.

That’s equal to the salaries of 53,000 public-school teachers — and it’s a loss that states and localities can hardly absorb, since they’ve already cut more than 700,000 jobs for teachers and other workers in the past four years and are struggling to restore deep cuts in state aid to local schools and other vital services.

The House Judiciary Committee has approved the legislation — the Digital Goods and Services Tax Fairness Act (DGSTFA, H.R. 1860), about which I’ve written previously — and it could come to the House floor at any time.

As CBO suggested in its estimate of last Friday, the $3 billion figure is conservative.  For one thing, related revenue losses would grow over time as more types of entertainment, information, and business-to-business services shift to online technologies.  For another, DGSTFA would likely lead businesses to change the form of their sales transactions and their legal structures to take advantage of the new tax provisions, which would cost states even more.

As CBO’s analysis confirms, the bill would adversely affect state and local revenue systems in ways that I described in a detailed analysis last year.  For example, it would preempt states from imposing many taxes on the sale of computer software, and it would prevent them from closing a tax loophole that has allowed online travel companies like Expedia to avoid charging the proper tax on hotel rooms that they book.

DGSTFA is almost completely unnecessary, as I have also explained.  Its proponents say it would prevent “multiple” and “discriminatory” taxation of consumer downloads of things like e-books and movies, but the 1998 Internet Tax Freedom Act already prohibits such taxes.

To be sure, we need greater clarity and interstate uniformity in how states will tax the new “cloud computing” storage and data-processing services that companies like Amazon Web Services now offer, but states have already started working with the industry to resolve these issues.

DGSTFA’s proponents claim that it’s an innocuous attempt to head off future problems.  But, as CBO’s estimate makes clear, it actually would be a massive windfall for certain corporations at the expense of schools, health care systems, and other state and local services.