Numbers Games
Today's Tennessean carries a story that says Tennessee state government stands to lose $360 million a year in tax revenue if a bill now pending in Congress passes that extends a ban on state taxes on Internet access to the handful of states, including Tennessee, that previously were allowed to keep such taxes under a "grandfather" clause in the Internet Tax Freedom Act, the federal law banning such taxes.

The number is just hype and scaremongering from some folks who would prefer to fund state government via a personal income tax. As The Tennessean notes in its second paragraph, Tennessee currently gets only about $18 million a year from the tax.

What about the other $342 million? An organization called the Multistate Tax Commission, whose biggest agenda item right now is convincing Congress to authorize states to levy sales taxes on purchases its residents make in other states via the Internet, in clear violation of the spirit of the Commerce Clause of the U.S Constitution, says in an alarmist report that the bill not only extends the ban to the states where such taxes "grandfathered in." The MTC contends that, the way the bill is written, it would also eliminate all taxes on any service provided over the Internet. Their view is getting a lot of media play.

The MTC says that if all Internet services are exempted from taxes, telecommunications providers likely will move many services to the Internet to make them exempt. If all such services were moved the Internet, the MTC says, the states would lose up to $22 billion a year - not just the $500 million or so that the states would lose by extending the ban on Internet access to the grandfathered-in states.

But backers of the bill said the MTC is misreading the legislation, reports IDG News Service.

The bill bans only taxes unique to the Internet, such as bit taxes or Internet access taxes, but it does not roll back any property or income taxes telecommunication carriers now pay, said a spokesman for Representative Christopher Cox, a California Republican and prime sponsor of the bill in the House. "That's completely false," Cox's spokesman said of the bill's potential to ban property or income taxes. "I don't know why they think that. I think they just don't understand the bill."

As for banning taxes on telecommunications services such as voice over IP (Internet protocol), the bill doesn't attempt to address that issue, Cox's spokesman said. Such services represent a small portion of telecommunication services at this point, and Congress has not yet decided how to tax voice over IP services, he added. "We're not trying to solve all the problems or the debates of the telecom industry in this bill," the spokesman added.

I haven't seen the MTC's study, but I'm dubious about their claims. I've written before about the organization's bias and its shoddy work, most recently when the Tennessee Department of Revenue flogged a press release repeating the MTC's claim that corporate tax shelters are "costing" Tennessee $280 million a year in tax revenue. The MTC's work and conclusions on that issue have been challenged and rebutted by the Council on State Taxation. Details here and here. Make sure to follow the links to blogger Chip Taylor, the blogosphere's best source for coverage of the MTC/COST debate.

Why does the Tennessee Department of Revenue continue to rely on the MTC's work? Simple. The MTC's work supports the bureaucracy's desire to institute an income tax.

As for the legislation pending in Congress, fairness requires that Congress end the "grandfather" clause and extend the ban on state taxes on Internet access to all states.