Six Months Until the Internet Tax Moratorium Expires

May 02, 2014

We’re about 6 months away from the day when the internet tax moratorium expires on November 1st.

The Internet Tax Freedom Act was first passed by Congress in 1998 to prevent taxes on internet access from state and local governments. It has been extended three times since, in 2001, 2004, and 2007.

The often cited reason for the Internet Tax Freedom Act is to prevent harm to a growing sector of the economy. The internet boosts productivity, creates jobs, and is a key drive to economic growth, and taxes often have the effect of slowing growth.

But while economic growth is one of the most important considerations for good tax policy, it is not the only consideration with the internet tax moratorium.

Governments levy excise taxes on things like cigarettes and sodas because there is a perceived negative externality. If people who smoke or drink soda get sick, they say, then the rest of us pay part of the cost. The excise tax is to help correct for the cost borne by society. Internet access doesn’t seem to have any negative externalities associated with it, and in fact, may have positive externalities (spreading of information, rapid communication, etc.), thus internet access would not be taxed for this reason.

Another reason the government might levy a tax or fee is to help defray the cost of a service that the government is providing. This comes from the benefit principle that says the person who receives a benefit or service should pay for the benefit or service. In the case of internet access, state and local government don’t appear to provide a service specific to internet users. An internet user does not create any costs that need to be defrayed, and thus should not be taxed as such.

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