There’s Gold in That Net: Golden State’s Legislators Could Let Special Interests Mine the Internet

On February 22, the last day to introduce new legislation in the 2007-2008 session, California’s lawmakers unleashed more than 650 bills. In this barrage, legislators seek to derail one of the state’s thriving industries: the technology sector. This bipartisan agenda targets e-commerce, arming bureaucrats with vast new authority to monitor, regulate, and tax the Internet.

A recent survey of the Silicon Valley’s economy reveals that policy makers should study and replicate this unique environment, not smother it. As Daniel Weintraub noted last week in the Sacramento Bee, the state’s hub for high-tech innovation “is humming along,” even as “much of the rest of California braces for what looks like a slowdown.” Silicon Valley flourishes by attracting 30 percent of the nation’s private investment in new technologies and startups.

Venture capitalists, however, only take bold risks when the reward for success is substantial. The absence of burdensome regulations on the Internet allows creative products to ascend rapidly, making Web-based ventures attractive to investors. Unfortunately, lucrative technologies also attract zealous politicians.

Senator Jenny Oropeza (D-Long Beach) introduced SB 1743, a one-sentence declaration of her “intent” to “enact legislation specific to the regulation of technology.” This could encompass nearly limitless authority to shape the future of developing technologies. Sen. Oropeza’s office would not elaborate on the scope of this legislation, but the preamble invokes state power to regulate “advertising.”

The worldwide market in online advertising is projected to triple to $147 billion over the next five years. Silicon Valley pioneers such as Google and Yahoo rely on these profits to design and provide innovative free online services. Likewise, countless startups now build their business models around Internet advertising strategies. Each time a user “clicks” an online advertisement, the advertiser pays the Web site. Therefore, the state cannot collect taxes on this revenue without broad authority to track every “click.”

In January, the Franchise Tax Board met to discuss how the state can obtain this ability to tax “revenue from online advertising and other non-printed sources.” If Sen. Oropeza allows bureaucrats to strip-mine the foundation of e-commerce, this unprecedented engine of economic growth could grind to a halt. Any effort to regulate and tax Internet activities will require vast new surveillance powers. These powers have been proposed by Assemblyman Cameron Smyth (R-Santa Clarita), whose new bill would for the first time allow “regulation of Internet service providers.”

In particular, AB 2735 would force companies to keep records of their customers’ online activities, and hand them over to state officials “upon request.” While intended to protect children from online predators, this bill actually allows lawmakers to prey on the Internet, imposing taxes and censorship to pad the state’s coffers and appease special interests in Sacramento.

In addition to facilitating the taxation of online advertising, this agenda will empower tax agents to prowl the Internet, levying state sales tax on goods and services purchased online. Not only will AB 2735 result in higher taxes, but the price of Internet access will also rise as service providers pass on the costs of compliance to the consumer.

Why would a lawmaker who last month declared higher taxes “simply irresponsible” seek to pile new regulations on e-commerce, a sector which contributes $2 trillion annually to the U.S. economy? Last year, the recording and film industries spent nearly half a million dollars lobbying state officials to help crack down on the piracy of copyrighted media. Assemblyman Smyth’s district depends heavily on the film industry, and in May he helped create the Assembly’s Select Committee on the Preservation of California’s Entertainment Industry.

When this committee met last month, industry representatives appealed for help in fighting movie and music piracy to protect “these valuable state resources.” Assemblyman Smyth’s surveillance bill would provide a key mechanism to prosecute those who share media online, or censor the Internet to prevent unauthorized distribution.

If the state gains jurisdiction to regulate the Internet, every “click” could be subject to the whims of California’s 300 boards and commissions, 11 agencies, and 79 departments. The cost of conducting business online will skyrocket, driving innovators and investors out of Silicon Valley. To remain the world’s pioneer for new technologies, California cannot afford to build fences on the frontier.

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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