Last week, the Advisory Commission on Electronic Commerce met in San Francisco to discuss taxing the Internet. One of the more prominent proposals, submitted by the National Governors’ Association (NGA), has been hailed by local government lobby groups as the “fair” course of action. But sweep away the rhetoric, and what consumers are left with is actually a triple tax grab in disguise.

Packaged as a plan to privatize and equalize state sales tax collection, the NGA’s “Streamlined Sales Tax System for the 21^st Century,” is nothing more than a new, grand tax scheme in sheep’s clothing. If implemented, it would stifle growth of the economy, widen the digital divide, and reduce consumer choice.

The NGA proposes the creation of “Trusted Third Parties” (TTPs) which would act something like private collection agencies. These organizations would create and maintain a technologically-feasible national tax collection system for on-line businesses and offer incentives to those businesses to join the system. Incentives for businesses are needed because, according to the NGA, the new tax regime would be “voluntary.” Each TTP would then charge each state for these services, passing the costs along to consumers.

Here’s how it would work: Jane would purchase an item on the Internet, and included in the purchase price would be her state’s sales tax, the TTP fee to collect it, and the “incentive” fee for each business that integrates with the TTP. Essentially that amounts to three taxes where previously there was one, or none at all. That’s hardly what most people would describe as “fair” and “streamlined.”

Maybe the governors endorsing the proposal think it’s fair, but from the perspective of an on-line shopper with limited means, it is extremely unfair and makes it difficult to shop on the Web. If governments impose two more taxes in the on-line world than exist in the real world, then who will shop on-line? The answer is the wealthy, who care more about convenience than price. That’s hardly fair to those of moderate means. Instead, this is what some would call “taxing lower-income people off the information highway.”

The end result is yet one more case of governments harming the very people they propose to help. NGA’s triple tax system will serve to widen the digital divide, rather than close it. And the timing of the plan couldn’t be more ironic.

The tax grab is being pushed at a time when state officials are swimming in surplus. The NGA’s own study reported that state governments had an $11 billion surplus in 1998. In California, where on-line sales have exploded, sales tax revenues grew 28.6% between 1994 and 1998.

These figures demonstrate that state and local governments are wrong when they argue that they will lose tax dollars to a tax-free Internet. Instead, studies show that as the economy does well, government revenues rise. And the economy will only do well if greedy government officials don’t tax it out of existence. As the old proverb goes, “don’t kill the goose that laid the golden egg.”

Finally, Internet taxes reduce consumer choice. As governments make it more expensive to purchase goods on-line, the number of transactions will drop. One study by the National Bureau of Economic Research shows that applying sales taxes to the Internet would cut sales by 24 percent. That’s 24% fewer customers, businesses, and choices—a bad deal for everyone—but there is a better way.

The Advisory Commission should recommend that Congress leave the Internet tax-free, thereby maximizing economic growth and consumer choice while minimizing the digital divide. This move would introduce healthy competition into the tax regime and allow consumers to opt out of repressive tax systems. A tax-free, unregulated Internet is a truly fair and streamlined alternative to the government greed of the NGA plan.

Sonia Arrison is director of the Center for Freedom and Technology at the California-based Pacific Research Institute. She can be reached via email at sarrison@pacificresearch.org.