As Americans stretched to pay the tax man this week, California Assemblyman Charles Calderon (D-Montebello) was working on the sly to institute a new digital tax. Such a move is not only short-sighted, but also could seriously harm the state’s competitiveness.
It’s no secret that the digital economy is a key driver of California’s economic growth, so it is shocking that some political leaders seek to increase the regulatory and tax burden on the tech sector. In the short term, new taxes might help battle California’s massive US$8 billion deficit, down from $16 billion through borrowing and accounting tricks. In the long term, however, the results would be disastrous.
Taxes do more than raise money; they also act as a disincentive for economic activity. For instance, so-called “sin” taxes on alcohol and cigarettes are meant to raise prices and decrease sales of the potentially harmful products. A similar effect would occur if Calderon’s digital goods tax (AB 1956) was approved, and along with it would come multiple ripple effects.
Not Uplifting News
For instance, the Motion Picture Association of America worries that a new digital tax would “encourage more digital piracy.” Indeed, the recording industry is already taking a big hit because of the digitization of its market, and such a tax could cause irreparable damage in terms of fewer sales, lost jobs and thereby less tax revenue. However, Calderon’s tax ambitions are aimed at more than the music industry. He was also looking to tax “electronic transmissions of information.”
That definition could include movies, e-books, online courses, financial information, research data and any other online revenue generating activity. “even filing your tax return would incur a tax under AB 1956,” according to Daniel Ballon, an analyst at the Pacific Research Institute. That’s not exactly uplifting news for those who use online services, such as TurboTax, to make paying taxes easier.
A new digital tax would also put California companies at a serious disadvantage. The California Chamber of Commerce, which opposes the bill, points out that because of a Supreme Court ruling on mail-order companies, “in-state companies will be required to collect the new Internet tax while out-of-state companies will not.” That would make being located in California a disadvantage and drive high-paying technology jobs out of state, ironically resulting in fewer tax revenues.
Hiding the New Tax From Voters
However, perhaps the worst thing about Calderon’s bill is that he tried to circumvent the regular process for creating a new tax, which requires a two-thirds vote of the legislature. Instead, he attempted to hide this new tax from voters by giving a bureaucratic agency authority to enact new rules. Fortunately, legislators like Assemblywoman Fiona Ma (D-San Francisco) rejected this madness, but the fight may not be over.
The Committee on Revenue and Taxation rejected the bill this week, but Calderon, who conveniently chairs that committee, was granted a “reconsideration” vote that could change the bill’s status. Meanwhile, here are some points for legislators to reconsider: The argument that government is going broke is a bad excuse to saddle overtaxed Americans and tech companies with new burdens. The tech sector provides high-paying jobs, which in turn reward the state with tax revenues. Ever since the Internet came into commercial existence, bureaucrats and big-government types have been trying to milk it for new revenue. Instead, states should cut wasteful spending, fix inefficiencies and become more accountable to their constituents.
Tax day may have come and gone this week, but new tax threats have not. Calderon should be ashamed for using trickery to target one of California’s most productive sectors.