Internet Taxes

A number of bills in the General Assembly represent the essential first step in extending the Commonwealth’s sales tax to out-of-state purchases—including those made over the Internet—through the national initiative known as the Streamlined Sales Tax Project (SSTP). There are a number of significant problems with the SSTP.

• In May 2001, a Commonwealth Foundation study found that if Pennsylvania had extended its sales tax to include all remote purchases in 2002, it would have extracted between $102 million and $380 million in net new tax revenues from consumers and businesses—but the state would have lost the opportunity to create between 24,391 and 92,123 jobs.

From 2002 to 2004, Pennsylvania would have reaped between $310 million and $1.16 billion in net new tax revenues—but the state would have forgone as many as 94,794 jobs as a result of the expanded sales tax.

• The SSTP process has been sold as merely a way to allow states to voluntarily “simplify” and “streamline” sales and use tax systems. But in reality, it would require states like Pennsylvania to cede important control over aspects of their sovereign tax systems to a national cartel via a two-step process.

First, a state would be asked to adopt enabling legislation—such as HB 2678—allowing it to enter into a multi-state agreement for the purpose of “simplifying” and “modernizing” its sales and use tax regime. Second, once in the agreement, the state must pass additional legislation conforming its sales and use tax laws to the multi-state plan. With these changes—which will be “significant”—state legislators would need to remain in substantial compliance with the agreement for any future sales and use tax changes.

• Supporters of the SSTP also say that they just want to “level the playing field” for “brick-and-mortar” retailers. However, the real competition is not between traditional and online sellers, but between large and small retailers.

Many large national retailers already use some type of electronic, multi-state tax collection system, so they are in a much better position to absorb any additional “streamlined” collection costs than smaller, less established firms—online or not. Also, the proposal would provide taxpayer subsidies to participating businesses to help them recover these costs.

• There is broad consensus that slow economic growth threatens the commonwealth’s future.

However, this tax increase movement, coupled with the tax increases already signed into law in 2002 and 2003, will, if enacted, bring the precious little economic momentum remaining in Pennsylvania to a grinding halt.

• Supporters of such lawsargue that if Pennsylvania were part of the SSTP, the 10 percent personal income tax increase approved last December could have been avoided. Yet during the last eight-year gubernatorial administration, if General Fund spending growth had simply been limited to the previous year’s inflation rate during each budget year, Pennsylvanians would have seen nearly $7.3 billion more in their paychecks overall between 1995-96 and 2002-03.

These figures clearly demonstrate that Pennsylvania doesn’t have a revenue problem—it has a spending problem.

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The Commonwealth Foundation is an independent public policy research and educational institute based in Harrisburg, PA.