Green Room

Will the internet doom an economic recovery?

posted at 2:32 pm on March 2, 2012 by

What is the greatest danger to any possible, sustained economic recovery? Obama’s regulatory policies? Unrest in the global energy market? Increased taxes squelching productivity and investment? How about… the internet.

The recession and the early, brittle years of the economic recovery absolutely shredded state budgets. With growth now returning to healthier levels, this should be a time for relief legislators. Unfortunately, as USA Today reports, they might have to face another sobering reality: The system most states rely on to generate sales tax revenue could become obsolete.

The paper writes that last year, state sales taxes claimed the smallest fraction of overall consumer spending since 1967. Americans paid an average tax of 4.27 percent on purchases, down from 4.63 percent five years before. While overall consumer spending rose 4.7 percent in 2011, collections grew by a mere 1.2 percent.

To put it mildly, this is no good. States are desperate for money. And in parts of the country that lack an income tax, such as Texas and Florida, sales taxes are crucial for funding a basic level of government services.

This article from The Atlantic touches yet again on a currently pending bill, the Marketplace Fairness Act, which we’ve written about here before. But it does highlight a larger question of state economies vs. the national economy as a whole. If those numbers from the USA Today report are accurate – and I see no reason to doubt them yet – then this trend represents a pretty big hit to the coffers of the individual states just as some of them are starting to climb out of the hole.

This is one aspect which I hadn’t considered earlier regarding the Marketplace Fairness Act. Apparently, given the SCOTUS ruling in question, there are already some states which are collecting taxes from online retailers (in states where they have a physical, brick and mortar presence) but others which can not. That type of imbalance, if it gets to a significant level, could begin spurring population creep between states.

I’m still on the fence about this legislation. Let’s collect some other opinions and data on it here.

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I don’t care how the states work this out, so long as the retailers are only taxed once.

Asurea on March 2, 2012 at 3:02 PM

Gee, in the real world when a company experiences a decline in revenue they either reduce expenses (downsize) or become more efficient. I’m tired of how the only answer is to grow or replace lost revenue. I lost my job last year and guess what I did with a reduction in revenue? (I’ll give you a hint, I didn’t increase spending in order to grow out of my circumstances)

el hombre on March 2, 2012 at 3:23 PM

There are a variety of reasons why sales taxes are a pain. First, they are an administrative nightmare. If you do business in California, for instance, there is an four-page form to file each quarter that allocates funds between the 80 or so special districts that clamor for them. For people who live here, there may be some familiarity with the names of these places…..for people in other states, not so much. Multiply this by 40 or so, and you’ve got a full-time job that doesn’t contribute a dime to the bottom line.

Next, you have the way that sales taxes skew your business operations. In general, you have to pay sales taxes to states based on when a sale is invoiced, not when it is collected. In many cases, then, you may have to put actual cash out — that you don’t necessarily have — when a sale is made. You’ll be much more likely to avoid extended payment terms, installment sales, or rent-to-own deals.

Third — and this is where the state is notably unforgiving — many businesses start out for a bit in “proof-of-concept” mode. They don’t get all the licenses and permits, they don’t file taxes, they don’t have a lot of QA and formal agreements. Not because they’re intentionally being scofflaws, but because on a small scale they’re trying to find out if there’s something there in the market. Many of these companies go out of business in a year or so; some few become “real companies”, make some money, and “go legal” with all the regulatory and tax burdens that go with it — becoming that all-important “small business sector” where so many jobs are. By clamping down on tax-free internet sales, the government makes it just that much less likely that the business will succeed….or even start.

Oh, and the leading case for this is Quill v. North Dakota.

cthulhu on March 2, 2012 at 4:14 PM

Nominated for “worst title ever”. How does the Internet doom an economic recovery? It doesn’t. It creates wealth through increased productivity and efficiency.

Okay, but what about a loss of tax revenue for state and local governments?

Again, this seems a good thing to me. As taxpayers, we want to pay less taxes. Same as conservatives. And Jazz thinks this is an issue? Why are you writing for Hot Air?

FYI, a de facto reduction in tax revenue can prompt one of two things. A reduction in spending, which is what all fiscal conservatives should be rooting for (but apparently not Jazz) or an increase in taxes. I welcome a referendum on that, its to the core of what we are fighting for. This forces that referndum, possibly on favorable terms if we don’t let Democrats distract us into “Marketplace Fairness”.

If that phrase isn’t a red flag like social justice, then frankly you are asleep at the wheel. At the end of the day, states can shift their tax regimen without opening the door to interstate commerce. That is what we want, as conservatives, is competition amongst the states.

Opening the door to a whole new tax and regulatory regime that is a stepping stone to a VAT is insane. And by the way, the notion that selling something over the Internet without sales tax “unfair” to local merchants is ridiculous. There is an excellent parody of this position, that talks about how unfair local merchants are to Amazon that is worth a read :-)

Next up, we should be so thankful that Clinton did not regulate – strangulate – the Internet economy in the 90s. Thus flourished the last truly free and open market area in America. We should fight figuratively to the last bit every effort to let government take over this area, a sector that was a true driver of wealth, productivity, and growth over the last two decades.

Finally, reduction in government spending can seem like it would contract an economy, but it isn’t. The reduction in GDP by government spending is more than offset by private sector increases … its a simple Keynesian fallacy. In the very, very short run the private sector will not always immediately make up for the spending, but it will in short order. So the economy being imperiled by a reduction in government spending is almost oxymoronic, although it is usually ought to go hand-in-hand with a regulatory reduction too, so that capital has a place to be deployed.

If conservatives don’t address their own economic follies, the Democrats will frame the issues and eat our lunch all day long.

Its a lopsided proposition, in the sense that there are an infinite number of ways to be wrong – the Democrats never have to get anything right, each over regulated step or over taxed-step is a step in the wrong direction. However, the principle of fewer taxes, less regulation is simple.

Keep to it. And if you think that more is necessary, then attach a ‘D’ to your name when posting here. :-)

PrincetonAl on March 3, 2012 at 8:37 AM

States having less tax revenue does not mean the economy can’t recover…

DavidW on March 3, 2012 at 8:55 AM

States having less tax revenue does not mean the economy can’t recover…

DavidW on March 3, 2012 at 8:55 AM

Amen! And population creep between states isn’t bad either. The exodus of right-thinking (pun intended) folks from the coasts to flyover country is long overdue. Let the shitholes crumble.

gryphon202 on March 3, 2012 at 11:59 AM