MEMO: Internet Sales Tax Would Undermine Tax Cut Message

Mar 07, 2018

To:  Interested Parties  
From:  Heritage Action for America  
Date:  March 7, 2018  
Subject:  Internet Sales Tax Would Undermine Tax Cut Message  

“If you look at the rise in the generic ballot over the past six weeks, it corresponds almost directly to the rise in approval of the tax package,” said Josh Holmes, former chief of staff and campaign manager to Senate Majority Leader Mitch McConnell (R-Ky.). The uptick in public support for the Tax Cuts and Jobs Act is well documented. A New York Times poll found a majority of Americans supported the law in February, up from 46 percent in January and only 37 percent in December.

Unfortunately, reports suggest congressional Republicans may consider allowing states to require all businesses to collect taxes on remote sales, commonly referred to as an internet sales tax. If signed into law, it would effectively increase Americans’ taxes while Republicans hypocritically campaign on sweeping tax cuts during the midterm elections.

March Deadline?

According to a Bloomberg report, Rep. Kristi Noem (R-S.D.) believes the Remote Transactions Parity Act of 2017 (H.R. 2193) (RTPA) “needs [to] be enacted before the Supreme Court hands down a decision. It’s unclear if Congress can pass a legislative solution to the digital sales tax dispute after years of stalled competing proposals.” The March 23 omnibus has long been suggested as the last legislative opportunity before a probable Supreme Court decision on South Dakota v. Wayfair this summer.

Unpopular Proposal

A 2017 Rasmussen poll found “that 66% of American Adults oppose a sales tax in their state on items purchased online, even if the store they buy from is not in their state.” Only 21 percent of adults favored “a sales tax in your state on items purchased online even if the store you buy from is not located in your state.” A 2013 Gallup poll found similar results, with 57 percent of Americans saying “they would vote against a law that would allow each state to collect sales taxes on purchases its residents make online over the Internet.” Opposition soared to 73 percent among 18 to 29 year olds, and was 62 percent among 30 to 49 year olds.

Eroding Tax Cuts

Over the next five years, the Tax Cuts and Jobs Act is expected to decrease federal revenue collection from individuals by $744 billion, or $148.8 billion per year through 2022. The implementation of a federally sanctioned internet sales tax regime would effectively increase taxes on American consumers by $40 billion to $115 billion over the next five years. Put another way, a federally sanctioned internet sales tax regime would effectively blunt the Tax Cuts and Jobs Act’s individual tax relief by somewhere between 5.4 and 15.5 percent. 

Bad Politics

President Trump and congressional Republicans deserve tremendous credit for enacting significant tax cuts and rolling back the previous administrations’ regulatory overreach; however, the enactment of an internet sales tax threatens to undermine the political benefits as conservative and small government groups that represent the base of the party and the general public are strongly opposed to expanding taxes on the internet.

The 2017 report from the Government Accountability Office includes a state-by-state breakdown of potential “revenue gains” if states and localities are allowed to expand their tax collection authorities into other states. Put another way, GAO provides state-level data on the effective annual tax increase paid by consumers. For example:

  • Arizona: $156 to $238 million annually
  • California: $1,000 to $1,735 million annually
  • Iowa: $104 to $146 million annually
  • Minnesota: $132 to $206 million annually
  • New York: $510 to $880 million annually
  • Virginia: $188 to 298 million annually

As The Heritage Foundation made clear last year, “If the law is changed to allow states to force out-of-state retailers to collect more taxes, consumers’ will pay more taxes. That is a tax increase regardless of how it is labeled.” Tax increases are bad policy and bad politics.

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