Seven states to lose millions from Internet tax ban

At least seven states are expected to lose hundreds of millions of dollars in revenue when a permanent tax ban on Internet access closes off a loophole they have relied upon for more than a decade. 

A temporary ban that prevents states and local governments from taxing the monthly bills that customers pay for Internet service has been around since 1998. But a handful of states have been able to get around that because of a grandfather clause that allows any tax in place before 1998 to continue.  

{mosads}But the temporary ban is soon expected to become permanent, and it will also cut off the grandfathered clause after 2020. 

“Even though there is a four-year lapse, you are grandfathering this, and my own state of Texas will lose $358 million,” Rep. Sheila Jackson Lee (D-Texas) said Friday, before the House overwhelmingly passed a deal that included the permanent ban.  

The National Governors Association and the National Conference of State Legislatures on Friday expressed disappointment and called on Congress “to honor state authority and preserve the revenues of those states grandfathered under the bill.”

Their long-held position had been that the revenue lost from a permanent ban and the end to the grandfather clause should be made up by tying it to a more controversial proposal that would give states increased authority to tax purchases made online. 

“The point is, are we going to replace those monies from the federal government?” Jackson Lee asked. “What are we going to do to the retail industry that has bricks and mortar [stores]?”

Critics say the two bills have distinct policy implications and should be debated separately. 

“I’m telling my colleagues to keep these issues separate. Now’s not the time to risk steep new taxes on the growing digital economy,” said Sen. Ron Wyden (D-Ore.), ranking Democrat on the Finance Committee and a major advocate for the permanent ban.  

The permanent ban was wrapped into an unrelated conference report on customs legislation this week, which passed the House Friday. It is expected to soon get a vote in the Senate and make it to President Obama’s desk. 

“Right now is the best chance in years to make the ban on Internet taxes permanent,” Wyden said. 

In total, Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas and Wisconsin have Internet taxes that are exempt from the current ban. All will be phased out if the proposal passes. 

The Center on Budget and Policy Priorities estimates that cutting off the loophole would amount to $561 million in aggregate lost revenue for those states a year. The report’s author, Michael Mazerov, has even warned that removing the grandfather clause “could cost all states money, not just the seven states that the clause authorizes to continue taxing Internet access services directly.”

Even though many of those states are hesitant about losing a revenue stream, the permanent ban has been supported by some lawmakers from the grandfathered-in states. 

Senate Commerce Committee Chairman John Thune (R-S.D.) has sponsored stronger stand-alone legislation on a permanent Internet tax ban, which would cut off the grandfather clause immediately, rather than in 2020. 

However, his office said the senator was happy with the four-year reprieve included in the customs bill. 

Three other senators who hail from a grandfathered-in state have also sponsored the legislation: Sens. Ted Cruz (R-Texas), Rob Portman (R-Ohio) and Ron Johnson (R-Wis.). In the House, 32 members who hail from one of the seven affected states sponsored similar legislation in the House, including Speaker Paul Ryan (R-Wis.). 

Other members such as Ohio Sen. Sherrod Brown (D) are wary of a permanent ban. Similarly, Thune’s state colleague, Sen. Mike Rounds (R-S.D.), will not help advance the customs deal because of the permanent ban, according to his office, and he would support raising a point of order against it.