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Congress Should End, Not Extend, Prohibition on Taxing Internet Access

The House Judiciary Committee will likely approve a bill today to make permanent the Internet Tax Freedom Act (ITFA), which bans discriminatory and multiple taxation of Internet purchases and imposes a moratorium on new state and local taxes on Internet access services.  Rather than make ITFA permanent, Congress should extend its ban on discriminatory and multiple taxes for a few years but allow its prohibition on taxing Internet access to lapse.

That prohibition denies states and localities billions of dollars in potential revenues each year — money that could help undo cuts in education, libraries, and other critical services made due to the Great Recession.  Reversing those cuts would do far more to expand low-income families’ use of the Internet (a recent argument for continuing the prohibition) than keeping Internet access fees a few dollars cheaper each month.

As I’ve noted, ITFA’s justification when first enacted in 1998 was to impose a temporary “time out” on new taxes on monthly Internet access fees while states, localities, and Internet service providers devised uniform rules to tax them under existing taxes.

More recently, service providers have argued that banning these taxes is necessary to close the “digital divide,” or the gap in high-speed (“broadband”) Internet access between low- and high-income households.  Keeping Internet access as inexpensive as possible will encourage low-income people to subscribe and service providers to extend broadband service to low-income neighborhoods, they claim.

What’s wrong with this justification?  Everything:

  • Congress has no business trying to boost consumption of Internet access at the expense of state and local revenues.
  • There’s no significant difference, in either the share of households with broadband or the availability of broadband service, between states that tax Internet access and those that don’t, a 2006 Government Accountability Office study found.
  • Numerous studies find that Internet access costs are a smaller cause of the “digital divide” than illiteracy, unfamiliarity with computers and the Internet, and a belief that the Internet is irrelevant to the person’s life.  Banning a few dollars in taxes on broadband access might encourage some people to subscribe to broadband but it can’t overcome these other major barriers.
  • In the long run, allowing states and localities to tax Internet access and use part of the proceeds to reinvest in schools and universities would likely do more to close the digital divide than banning these taxes.  College graduates are 30 percent more likely to subscribe to home Internet access than people with less education. Yet state cuts in K-12 and higher education in recent years have made it much tougher for working-class students to finish high school and college.  Localities have also made cuts in libraries, another place where many people without computers at home are first exposed to the Internet.

The Internet is no longer a fragile infant industry needing protection from taxes that apply to other services for which Internet access is a close substitute.  Cable television service is widely taxed, for example, but if someone decides to pay Verizon $50 a month so that they can stream Netflix to their TV, ITFA bans the taxation of that charge.  Likewise, sending text messages on your smartphone is taxable, but sending the same messages as emails or Twitter feeds isn’t.

It’s high time Congress recognized that this unequal treatment doesn’t makes sense.