Can Communities Survive Electronic Commerce?
by David Morris
Institute for Local Self-Reliance
February 10, 1998 – published in St. Paul Pioneer Press
Can strong communities survive in the age of electronic commerce? Not if we continue in the direction in which we are presently headed.
That electronic commerce is here to stay is undeniable. At the end of 1997 Internet business sales surged past the billion dollar level, four times higher than 12 months before. Over 15 percent of Net visitors made purchases on-line last year. By 1999, almost two-thirds of all U.S. retailers plan to sell on-line.
America’s Choice Mall’s on-line window boasts more retail outlets than the Mall of America in Minnesota, the nation’s largest free-standing shopping center. Wal Mart’s, the nations largest retailer, has established the nationÕs largest on-line store. Egghead Software announced last month it is closing its retail stores and will sell solely over the Net beginning in 1998.
To most Americans, this is a welcome prospect: more convenience, more choice, more information. But to local businesses and local governments the picture is less bright. For they have already witnessed the negative impacts of one form of electronic commerce: mail order, a rapidly growing industry with sales of $80 billion a year, over 2 percent of U.S. retail sales.
In 1992, the Supreme Court stripped states of their authority to impose a sales tax on goods purchased via the phone or mail from out-of-state companies. The result was to give these companies a 6-8 percent cost advantage over Main Street firms. The Court, in essence, told states they can impose higher costs on their own businesses but cannot level the playing field by imposing an identical sales tax on businesses with no commitment to the communities in which they sell their goods or services.
The Court ruling has resulted in dramatic and growing losses to local and state treasuries, exceeding $4 billion in 1997 alone.
The mail order experience is just a taste of things to come. By some estimates, Net sales could exceed catalog sales in three years and continue to soar thereafter. By the year 2005, for example, 25 percent of all world book sales could occur through the Net.
To Deputy Undersecretary of the Treasury Lawrence Summers, this prospect marks the “end of geography”. It may also mark the end of local business and local government.
States have become increasingly reliant on sales taxes. In 1970, about a third of their total tax revenues came from sales taxes. By 1996, this had risen to 49 percent. In an electronic world, income and capital and business sales are all mobile and hard to verify and tax. If sales tax revenue disappears, where will we get the funds to support our schools, our parks, our public services?
Unfortunately, the U.S. government appears unwilling to acknowledge or grapple with the threat that electronic commerce poses to our local economies and communities. Bill Clinton and Newt Gingrich both support a congressional effort to strip state and local governments of their taxing authority over electronic commerce. They argue that we need uniform taxation, not a hodgepodge of thousands of individual jurisdictional taxes. Yet in 20 years Congress has been unwilling to resolve the mail order taxing dilemma that has increasingly burdened local and state governments.
Clinton’s support of uniformity was tested when several European countries proposed a workable, uniform, global tax on each parcel of electronic information dispatched, a bit tax. Communications companies already possess software programs that measure how many bytes of information flow over what distances. The U.S. lobbied hard against it. As Ira Magaziner, Clinton’s point man on electronic commerce is explicit in his intentions, “The Internet should become a duty-free zone for all goods and services.”
The duty-free proponents argue that taxing electronic commerce will stifle the Net’s spectacular growth. Nonsense, respond Canadians Arthur Cordell and T. Ran Idle in their recent book, The New Wealth of Nations-Taxing Cyberspace, “Did gasoline tax and vehicle license fees slow the development and diffusion of the automobile?”
If surveys are accurate, more than 50 percent of the readers of this column use the Net. Many will be outraged at the suggestion that they should pay any tax on their commercial transactions. The White House and their fellow travelers, the global corporations are counting on that outrage to stifle any local or state initiatives. Yet I hope that those of us who firmly believe in the benefits of a global information economy can also work to develop the rules that will make that economy compatible with strong communities, viable local businesses, and adequate public services. For this may be on the most important policy challenge confronting us at the dawn of the twenty first century.
