BUSINESSWEEK ONLINE : JANUARY 17, 2000 ISSUE
NEWS: ANALYSIS & COMMENTARY Commentary: No Net Taxes: A Break for the Well-Off At this point, it's safe to say that America has embraced online retailing. Cybershoppers snapped up some $10.5 billion in goods in November and December alone, according to Boston Consulting Group Inc. and researcher shop. org. That's only 2% of all U.S. retail sales. But at this rate, online sales could top $144 billion in 2003, says Forrester Research Inc. E-commerce is no passing fad: It is stealing significant business from bricks-and-mortar stores and catalog merchandisers. But since most e-tailers don't collect sales taxes, that's not such good news for the coffers of state and local governments. Scott R. Mackey, chief economist for the National Conference of State Legislatures, figures e-commerce may have cost states close to $1 billion in lost revenues in 1999. BAD POLICY. That's a blip in the $175 billion states collect each year in sales and excise taxes. And with state treasuries in surplus, there's no threat to public finances. But by 2003, the cut could be much deeper--as much as $14 billion, according to the Center on Budget & Policy Priorities, a Washington think tank. Yet many politicians, including Presidential candidates John McCain and Steve Forbes, continue to insist that the Net must remain tax-free to ensure continued growth. ''We dare not smother this infant of progress in the cradle,'' said Forbes in a Nov. 10 statement. The problem is that Net tax leniency, while it may help spread e-commerce more rapidly, is bad social policy. Why? Because the people who now shop on the Net come disproportionately from the upper rungs of the economic ladder--and are the least in need of a tax break. According to Forrester, online shoppers have household incomes averaging $56,320, vs. about $34,000 for the nation as a whole. For families that lack PCs and Net access, the figure is $22,940. The implication is stark. Tax-free Net shopping benefits mostly well-off people and makes the already-regressive structure of sales taxes even more unbalanced. To compensate for the loss in tax receipts, which contribute about 40% of state revenues, governments may have to raise sales taxes. The burden would fall most heavily on people who don't shop online: The poorest 20% of Americans--those earning less than $25,700 per household--which already pay about 3.5% of their income in sales taxes. By contrast, the top 20% earners, who make $75,000 or more, pay just 1.3%. The more these upper-income shoppers buy at the virtual mall, the less they'll contribute to the cost of running public schools, hospitals, and police departments. Advocates argue that collecting sales taxes on Net commerce could choke off its expansion, but the data are far from clear. A 1999 study by Austan D. Goolsbee of the University of Chicago business school calculates that taxing Net sales might reduce the number of e-shoppers by up to 24%. But while many surveys show that saving money is the No. 1 attraction for online buyers, recent Ernst & Young research finds that price ranks well below other factors, such as convenience and selection. Indeed, in a poll by CIO magazine released on Dec. 20, 71% of e-shoppers said they would buy the same amount even if they had to pay taxes. SIMPLIFY. Most tax experts argue that the artificial inequity of a tax-free Net can't be allowed to continue. ''Sales taxes should be levied the same online as they are on Main Street,'' says University of Tennessee economics professor William F. Fox. But forcing Net merchants to levy taxes won't address a more fundamental problem: the patchwork quilt of laws that make calculating and collecting sales taxes difficult for catalogers and e-tailers alike. That's why Fox, Goolsbee, and 112 other academics have called on Washington to lead a simplification of sales taxes--then ensure that they're applied equally to all commerce. That would ease the burden of compliance while leveling the playing field. The Net tax holiday is industrial policy writ large. Some might even call it corporate welfare--this time for tiny startups with gigantic market capitalizations. But the Net Economy has enough traction that such a policy seems too generous a helping hand, especially when it's the poor who carry the load. By Andy Reinhardt Reinhardt is deputy bureau chief of BUSINESS WEEK's San Mateo office. To read a letter to the editor about this story, click here. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS B2B: The Hottest Net Bet Yet? TABLE: E-Commerce Reduces the Cost of Doing Business INTERACT E-Mail to Business Week Online

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