| March 9, 2010

Proposed Internet tax harms Oklahomans

[Guest post by Eric M. Staib, economics major at the University of Oklahoma]

As part of the effort to balance the Oklahoma state budget for fiscal year 2011, Governor Brad Henry has proposed a harmful new sales tax on items purchased online. Though a balanced budget is a requirement, raising taxes during an economic downturn is hardly a prudent strategy to enrich the state.

According to the governor's budget book, the collection of sales tax on purchases of physical goods ordered over the Internet will create $95 million in tax revenue. Additionally, the collection of sales tax on electronically delivered goods, such as software that is downloaded directly to a consumer's computer, will add $3.5 million in tax revenue.

Supporters have attempted to portray this proposal as simply an expansion of existing taxes, rather than a creation of new taxes. This argument, however, is inconsequential. Working Oklahomans who will see a higher portion of their family budgets taken away by state sales taxes likely are not concerned with how politicians define a "new" tax.

Some have also argued that collecting sales tax on online purchases will increase the fairness of the tax code. This is because current Oklahoma law does not extend the sales tax to online businesses without a physical storefront within state lines, such as Amazon's online bookstore. Online stores that do have a physical location inside state lines, such as Hastings, are subject to the tax.

It is true that the current sales tax code creates disadvantages for stores within the state at the expense of others. However, this is hardly proves that new sales taxes need to be imposed. To move toward parity, why not reduce current sales taxes?

Any tax, including a general sales tax, creates unnatural advantages for certain goods or services at the expense of others. The proper solution, however, is not to raise taxes on the advantaged, tax-free goods and make them just as expensive as the taxed goods, but to cut taxes on the disadvantaged, taxed goods.

Eliminating sales taxes on Oklahoma businesses that often compete with online stores, such as bookstores and computer hardware stores, would eliminate any unfair advantages and, more importantly, would lower the burden of sales taxes on Oklahomans.

Removing existing sales taxes on these goods that face unfair competition from online stores has another large benefit as well. Cutting these taxes would allow Oklahomans to buy more of these now-disadvantaged goods from stores based within the state, both from their physical storefronts and online.

This increase in sales would help Oklahoma businesses sell off their existing inventories without taking substantial losses, which would allow them to quickly correct their future inventories and adjust their business models.

For stores that are at risk for loan default and bank foreclosure, especially small businesses with limited access to credit, the elimination of sales taxes on their disadvantaged goods would increase the solvency of their businesses.

Another, less obvious, result of the governor's proposal is that it will impede the progress of rural Oklahoma. Rural Oklahomans often live very far from physical stores that sell the disadvantaged goods the governor is attempting to "protect" from out-of-state competition.

For these Oklahomans, online commerce has provided a major boost to their standard of living. Online stores have created many new opportunities to learn and enjoy the comforts of our modern economy while still enjoying country lifestyles. To raise new taxes on such a large portion of the state during a recession would be purely foolish.

Furthermore, the proposed tax is a simple transfer of wealth that does not produce any new good or service for Oklahomans. Unlike taxes on groceries that help fund a food safety regulatory board or fishing license fees in exchange for aquatic wildlife protection, the proposed tax increase does not provide any new good or service for the people of Oklahoma. Rather, it is a pure transfer of wealth from the pockets of working Oklahomans to the hands of existing state bureaucracies.

Oklahoma's governor is required by law to balance state revenues with expenses each year, as Governor Henry notes in his official proposal. The conservative plan for greater fairness and economic freedom I have proposed-reduction of sales taxes on goods that are now subject to untaxed competition-would of course mean lower revenues for the state government.

However, the lost revenue should not simply be replaced by imposing taxes on new goods or transactions. The most prudent fiscal strategy in times of recession, as taught by the late economist and Nobel Laureate Milton Friedman, is for government officials to cut both taxes and spending. Eliminating certain sales taxes would, as long as the balanced budget law is respected, accomplish both.

Cutting state spending during a time of recession runs directly contrary to the path being pursued on the national level with disastrous results. The Washington, DC strategy of increased government spending and economic intervention has proven an utter failure, and should be rejected by Oklahomans.

Instead, state legislators should pursue a rigorous course of cuts in spending and taxes, which will free up working families' budgets and allow them to purchase more of the good they desire as well as to save more money, which in turn allows for profitable investment by the private sector. Allowing for free interaction between consumers and producers is the only path to genuine economic recovery.

The proposed collection of sales tax on purchases made online is not the best method to correct an unbalanced tax policy and is an imprudent course of action during a recession. This tax hurts Oklahomans who are already tightening their budgets, especially rural Oklahomans, for whom online shopping is an incredible resource. Rather than mine the state for new sources of revenue to support state bureaucracies, Oklahoma legislators should eliminate the unbalanced sales taxes and seek broad spending cuts.

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