The Internet Tax Freedom Act (ITFA), the moratorium on taxing internet access, was given a year-long extension when the Senate passed the omnibus spending bill this past Saturday. This is the fourth extension of the bill, first passed in 1998.
This means a continued, yet not permanent, ban of taxes on internet access. While a permanent solution would have been preferable, considering the impasse and polarization in Congress during 2014, an extension of ITFA was the most plausible outcome and, all told, a positive development.
Initially, ITFA was considered a standalone bill, capable to pass with relative ease despite gridlock in Congress. However, a decisive October and November push for combining a version of the Marketplace Fairness Act (MFA) with the Internet TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Freedom Act delayed the discussion. This ultimately led to ITFA, alone, being included in last week’s omnibus spending bill.
A much discussed permanent ban on levying excise taxes on internet access, through the Permanent Internet Tax Freedom Act (PITFA), did not gain the requisite political momentum. However, ITFA’s original sponsor, Senator Ron Wyden (D-OR), expressed determination in passing a permanent piece of legislation next year.
Permanently eliminating a tax on internet access could prove an important next step for the internet economy. In addition to permanently banning excise taxes on internet access, the Permanent Internet Tax Freedom Act would eliminate Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas, and Wisconsin’s grandfathered right to levy such a tax. These states are, under the grandfathered clause, allowed to tax internet access because they implemented a tax prior to October 1, 1998.
Arguably, there is no justification for an excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. on internet access. The internet is not a negative externalityAn externality, in economics terms, is a side effect or consequence of an activity that is not reflected in the cost of that activity, and not primarily borne by those directly involved in said activity. Externalities can be caused by either production or consumption of a good or service and can be positive or negative. ; its effect, on the contrary, improves productivity, equality, and economic growth. In fact, an excise tax on a positive externality contradicts economic principles. Additionally, there is no specific service related to internet access that state governments provide, thus there is no need to raise revenue from internet access.
Although ITFA’s recent extension represents a step in the right direction, a permanent ban of excise taxes on internet access should be a key item on policymakers’ agendas in 2015.
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