The Scandalous Proposal of New York’s Anti-Tech Governor

In an effort to tackle New York’s nearly US$15 billion budget deficit, Governor David Paterson has proposed taxing downloads of software, music and other content, including pornography.

This proposal comes at a time when the economy is in freefall and the so-called “stimulus” package is going to cost taxpayers much more than they expect. Gov. Paterson seems unaware that his tax proposal will have the same effect.

Just after President Barack Obama signed the mammoth stimulus package into law Tuesday, Wall Street tanked, with the Dow Jones industrials average closing less than a point above its lowest level in five-and-a-half years. This show of despair over the federal government’s big spending plans is no surprise, given that the only way to pay for the stimulus is through greater debt.

According to the Pacific Research Institute’s Jason Clemens and Adam Frey, the $787 billion dollar package will actually grow to at least $1.34 trillion over the next 10 years, due to the fact that the government will need to borrow money not only to cover the stimulus, but also the interest on that debt.

That means taxes are going to go up, and New York’s additional proposals to tax the technology sector will be a true anti-stimulus. They will not only create a disincentive to buy, but also push businesses to relocate and thus destroy jobs in New York — for years one of the unfriendliest states to private enterprise, consumer choice and the Internet.

New York already has a law — likely unconstitutional — that requires out-of-state companies to collect sales taxes. That motivated Internet company to notify more than 3,400 New York-based independent advertisers that it could no longer engage the services of New York-based Internet advertising firms.

Indeed, “many retailers have added language into contracts stating that affiliates cannot have corporate or personal property in New York,” noted Matthew Cheng, founder and president of

It’s hard to see how an iPod tax helps a distressed state that is already pushing online business away.

Lost Jobs, Lost Revenue

Perhaps the current anticapitalist zeitgeist is responsible for the apparent disregard for incentives and the universal reality that they matter a great deal. It shouldn’t take a rocket scientist to recognize that incentives to purchase goods directly affect producers’ incentives to hire employees or lay them off.

What Governor Paterson clearly hasn’t considered is that by penalizing sales of digital goods, he will discourage employment — and his state’s tax revenues could actually decrease.

A study I coauthored when California was considering Internet taxes empirically demonstrates a significant trade-off between sales-tax revenue collected and number of jobs in the economy.

For instance, if California had applied sales tax revenue to all Internet purchases in the year 2000, California would have gained $184 million in additional state revenue — but it would have lost 45,207 jobs in 2001. The loss of jobs impacts tax revenue in many forms, mainly in terms of lost income tax and sales tax. This finding is in line with other such studies and was even recognized as a potential result of taxation by John Maynard Keynes in his landmark book, The General Theory of Employment, Interest, and Money.

Given the financial crisis, now is not the time to raise taxes, particularly in a sector that, unlike others, is still driving the economy. Those who support so-called “sin taxes” may be happy to see pornography included with music and software as items New York hopes to tax, particularly given the escapades of Eliot Spitzer, the state’s previous governor. Such an outlook, however, obscures the real issue of burdensome and ever-encroaching government.

It is not only dangerous but downright scandalous to target the digital economy with new taxes. If he wants to resolve New York’s $15 billion deficit and improve the dismal fortunes of the Empire State, Gov. Paterson should click on this proposal and slide it into the trash.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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