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Local Govt Road Kill on the Info Superhighway
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Date: Wed, 16 Aug 1995 13:05:28 -0700 (PDT)
From: Nathan Newman
REPORT RELEASED: =================================================== "PROP 13 MEETS THE INTERNET:
How State And Local Government Finances Are Becoming Road Kill On The Information Superhighway" =========================================================
For Release: August 16th, 1995 For more information, call: CENTER FOR COMMUNITY ECONOMIC RESEARCH Nathan Newman (510) 643-8293 newman@garnet.berkeley.edu Full report located at: http://garnet.berkeley.edu:3333/budget/tax-internet.html
BERKELEY, CA: UC Berkeley's Center for Community Economic Research (CCER), known for its innovative Internet work, released a report today detailing how rising Internet-based commerce is threatening the stability of state and local government finances nationwide.
Getting beyond the hype of media mergers and "cyberporn", the report, entitled PROP 13 MEETS THE INTERNET: HOW STATE AND LOCAL FINANCES ARE BECOMING ROAD KILL ON THE INFORMATION SUPERHIGHWAY, documents how "cyberspace" is undermining regional taxation and development decisions by local and state governments.
The report argues that, with state and local governments already losing $3.3 billion each year to untaxed interstate sales, new standards for Internet-based sales promise a devastating loss in local government revenue. "With companies like Netscape, Intuit, and Mastercard agreeing on new standards for financial payment over the World Wide Web," argues report author and CCER co-director Nathan Newman, "it is only a matter of time before the stream of on-line commerce becoming a roaring river."
The report highlights the irony that Silicon Valley, home to many key Internet companies, is one of the areas where local governments are most vulnerable to revenue losses because of its dependence on sales taxes as a government revenue source. "The thing that scares us is that cities are run on local sales tax," notes Cupertino Mayor Wally Dean in the report; "If stuff is sold on the Internet, there's no sales tax. It's a house of cards for government finances."
The report details the potential tax losses to state governments across the country. In order to highlight the danger to local government, the report lists the "Top Ten Vulnerable California Counties And Cities." Sacramento and Santa Clara counties top the list of counties vulnerable to total loss of sales taxes. The towns of Colma, Bellflower and Cupertino lead the list of cities which receive the highest percentage of tax revenue from sales taxes.
In a desperate scramble for local revenue and jobs, cities and states have ended up offering tax subsidies that further undermine overall revenue for local governments. "As counties like Los Angeles and Orange County teeter on the brink of bankruptcy," notes Newman, "policy makers need to rethink the current fad for decentralization of government responsibilities. In an age of national and international commerce, it is now impossible for local governments to design fair and efficient systems of taxation that serve rational economic development."
To respond to the challenges of rising electronic commerce, the Center for Community Economic Research suggests three broad policy recommendations:- Centralize revenue collection to the state and national levels- Scale back and even eliminate sales taxes as a revenue source- Prohibit "tax subsidy abuse" by local governments in competition for business location
This report is part of long-term research by the Center for Community Economic Research on the social, economic and political effects of the Information Superhighway. CCER is also actively engaged in helping governments, community organizations and educational institutions use Internet technology to enhance civic life. CCER's work has been cited in national periodicals ranging from USA Today to Business Week to the Washington Post. CCER's most recent project, a National Budget Simulator to allow "Internet Senators" to interactively cut the federal deficit on the World Wide Web, has had tens of thousands of visitors since it was announced in June 1995.
CCER has been a consultant to the Association of Bay Area Governments in assisting cities and government agencies in Northern California to get on-line. Its Economic Democracy Information Network (EDIN) project has supported and trained a whole range of community organizations in getting on-line and bringing their voices to the Information Superhighway. PC COMPUTING declared the EDIN server (located at http://garnet.berkeley.edu:3333/) one of the 29 "Highlights of the Internet" in their September 1994 issue.
See attached Executive Summary
=================== EXECUTIVE SUMMARY ===================
State and local government finances are being undone by rapid changes in global commerce and technology, particularly the rise of the Internet. The key revenue base of state and local governments--sales taxes--is being undermined through the rise of untaxed commerce on the Information Superhighway.
THE EMERGING CRISIS:- According to the U.S. Advisory Commission on Intergovernmental Relations, an estimated $3.3 billion in state and local sales taxes are now lost each year due to untaxed mail order sales from out-of-state firms.- While not a large factor in commerce yet--maybe $200 million in direct Internet sales in 1994 by one estimate--commerce listings on the Web are exploding exponentially. The number of "World Wide Web" pages used to present businesses and products is growing at about 12% a month.- Intuit, Inc. and MasterCard International are among companies announcing that they will support new protocols for securing on-line credit card, debit card, charge card, and micro- financial transactions. With this new technology, the floodgates of Internet commerce are about to open.- Because of Proposition 13, state and local governments in California, including, ironically, those of Silicon Valley where the computer technologies fueling Internet commerce were created, are extremely dependent on sales taxes to fund their budgets, so any increase in untaxed interstate sales will be magnified there.
ROOTS OF THE CRISIS: Beginning in the early 1980s, the federal government began to cut funding to the states, forcing states and local governments to pay for more and more services out of local budgets with sales taxes often the revenue of choice. These two trends--more out-of-state sales and a greater dependence by local governments on sales taxes--are now on a collision course.- The Supreme Court in its 1967 National Bell Hess, decision and reaffirmed in its 1992 Quill Corp. v. North Dakota decision, declared that interstate mail-order firms were exempt from state sales taxes.- The technologies of direct marketing, such as use of toll- free numbers, computers, and faxes have allowed companies to dispense with the need for sales personnel, inventory, or showrooms within states. With Internet Web pages increasingly replacing catalogs mailed to people's homes, it is clear that the physical connection between mail order retailers and states trying to tax them will recede even farther.- The irony in the movement towards "local control" and "decentralizing government" is that the increased dependence on local taxes and revenue is pushing governments towards either burdensome taxes on business or more intrusive government on the individual in order to collect those out-of- state sales taxes.
THE BURDENS ON LOCAL GOVERNMENT FROM THE SALES TAX: - Local government competition for retail sales revenues has created a ludicrous distortion of economic development patterns as cities have had to desperately bid for successive waves of retail evolution. Direct marketing through phone, cable or the Internet is pushing this economic cannibalism to a new level.- Governments are being pressured to leave Internet sales untaxed. California passed AB 72 in 1994 which created a sales tax exemption for out-of-state businesses that advertise on California-based on-line services, primarily so Apple Computer's E-world would not lose out to services based in other states.- Another good reason to begin eliminating the sales tax is simple: sales taxes aren't fair and states that depend most on sales taxes, such as Texas and Washington, have the highest tax rates in the country for the poor.
RECOMMENDATIONS: To respond to the challenges of rising electronic commerce, the Center for Community Economic Research makes three broad policy recommendations:- Centralize revenue collection to the state and national levels- Scale back and even eliminate sales taxes as a revenue source- Legally prohibit "subsidy abuse" by local governments in competition for business location
The threatened loss of local sales taxes due to mail-order and on-line commerce should be treated as an opportunity to look more closely at the burdens we put on local and state governments. We should question whether such burdens make sense in a world where multinational corporations often outpower whole states in total assets and can pit such local governments against each other in competition for jobs and local revenue. ```
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