Internet Tax Freedom Act Extended in the Omnibus Spending Bill

December 16, 2014

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 Tax 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 tax on internet access. The internet is not a negative externality; 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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