The move is on by state lawmakers across the country to balance their budgets, and the task is proving formidable. In state after state, tax revenues continue to drain away, and after several years of cuts, all of the easy decisions are long gone. The temptation is strong to find new sources of revenue.
High on the list with some lawmakers are digital goods — the movies, the e-books, the iTunes and other pieces of entertainment and information we download routinely but seldom, if ever, pay taxes on. Slap a tax on these transactions, the argument goes, and the budget-balancing problem, or at least a small part of it, is solved.
The problem state legislatures face is real — but they need to resist this easy temptation. Before they create new taxes, states and local governments need to work with Congress to construct a rational, national framework for taxing digital goods.
Every state, every city
A national framework is needed, and soon, or we will end up with 50 different tax schemes in play, all putting a strain on emerging broadband industries and, potentially, taxing them to death, or at least out of the market in some states.
And that’s just at the state level. Municipalities have taxing power, too, and some cities and counties already have dipped their toes in the digital stream. If every local government jumps in, the result could be tens of thousands of different taxes on digital goods, some piled on one another. What industry can grow and prosper under that kind of financial assault and accounting confusion?
There is also the concern that a flood of taxes on digital goods will handicap the push, by the One Economy Campaign and others, to expand broadband into every household. With the cost of broadband already keeping millions of families off the Web, increased costs through a mishmash of taxes could make the problem worse. If the price goes up, some families could disconnect — widening the digital divide.
And then there is the issue of tax equity — how taxes on digital goods and services disproportionately hurt low-income Americans. Studies show that these individuals rely heavily on their cell phones for Internet access. They are already paying high taxes for this access; the taxes and fees on wireless service is more than double (16.3 percent vs. 7.4 percent) the average general sales tax.
That’s a strongly regressive tax policy. It hurts the disadvantaged and it slows the growth of broadband access, which is in the best interest of everyone. If states and municipalities create more taxes on digital goods, they will make these taxes even more regressive.
A system that guards against excess
We need a digital tax strategy that is not regressive. We need to balance our state budgets, and we need to be consistent in our tax policy. Finally, we need to allow broadband and our technology sector to grow strong and create jobs.
That’s where a national framework can help. Congress can establish a system that allows fair and equitable taxes but guards against excesses. We don’t want to see more regressive taxation. We don’t want to see taxes used to promote one competitor against another. And we don’t want to see multiple taxes from different states applied to the same digital transaction. A national framework can prevent such mistakes.
It is important to note that digital goods should not enjoy a tax-exempt status. That’s not an option, given the financial pressures of state governments, and that’s not fair to other industries that do pay taxes. But any taxes should be applied lightly, and uniformly.
In short, we need a tax system for digital goods that makes sense. We need a national framework.
Ava L. Parker of Jacksonville, Florida, is the president of Linking Solutions Inc., a business-development and community-outreach firm, and a partner in the law firm of Lawrence & Parker, PA., and the voice of The AvaView, a blog on digital action and consumer protection.