CBO: State, Local Jurisdictions Could Lose Millions From Internet Tax Bill

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June 27 — Legislation that would make permanent a ban on taxing Internet access would leave the federal government untouched but cut hundreds of millions in income for a handful of state and local jurisdictions, a Congressional Budget Office report said.  

The Permanent Internet Tax Freedom Act (H.R. 3086) would make permanent a moratorium on state and local taxes on services that provide Internet access as well as some taxes on electronic commerce. The moratorium is set to expire Nov. 1.

In its revenue estimate, released June 27, the CBO said that enactment would mean a small number of jurisdictions in which the moratorium doesn't apply could lose “more than several hundred million dollars annually.”

House Judiciary Committee Chairman Bob Goodlatte(R-Va.), who introduced the bill, says H.R. 3086 enjoys bipartisan support on the Hill and the backing of the communications industry. State and local governments are less supportive, saying that it would close off a possible source of revenue.

Grandfather Clause

For some states, however, that revenue isn't hypothetical. Jurisdictions in seven states—Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas and Wisconsin—currently collect Internet access taxes because their tax laws existed before the initial moratorium, enacted by the 1998 Internet Tax Freedom Act, according to the CBO.

Goodlatte's bill, in addition to making the moratorium permanent, strikes this “grandfather clause.”

“Eliminating the grandfather clause would result in direct costs (in the form of forgone tax revenues) to those state and local governments that are currently collecting such revenues but would be precluded from doing so after H.R. 3086 is enacted,” the CBO said.

The National Conference of State Legislatures has called on Congress to pass another temporary extension that would allow states already levying an Internet access tax to continue.

The CBO also said that if the moratorium were allowed to expire, some state and local governments would create new taxes or apply existing taxes to Internet access within the next five years.

That is why the CBO didn't consider potential revenue from allowing the moratorium to expire into its calculation—because of the difficulty of predicting such income, the report said.

H.R. 3086 was approved by the House Judiciary Committee on June 18. Goodlatte has said the bill may receive a vote on the House floor in July.

Text of the CBO report is at http://www.cbo.gov/sites/default/files/cbofiles/attachments/hr3086.pdf.