The debate over online taxes has divided Democrats and Republicans along unfamiliar lines. Two of the most vocal supporters of the bill in the Senate are Dick Durbin (D-Ill.) and Mike Enzi (R-Wy.). They see it as a way to support small and local business against an unfair competitive advantage held by online retailers, who can charge lower effective prices because online sales are not taxed.
Naturally, a number of brick-and-mortar retailers have lobbied Congress to pass the bill. This coalition's position, summarized by the Vice President David French of Government Relations for the National Retail Federation, is basically based on the principle of marketplace fairness. Indeed, that is the official name the bill's authors have given the measure, which passed with strong support in the Democrat-controlled Senate.
The truly interesting thing about this bill (and the clear indication that this probably won't be a big win for small business) is the huge level of support retail giants like Wal-Mart, Gap, Best Buy, J.C. Penny, and even the king of online retail, Amazon, have shown for the measure. Despite the uncomfortable alliances the bill has forged, it has the potential to be a major positive if local, state, and federal governments incorporate it into a larger strategy for reforming the tax code.
Those who oppose the bill, most notably and vociferously, the online auction house eBay, have argued that the bill would hurt small businesses by burdening them with the costs associated with calculating state taxes. These costs, argues eBay, threaten to negate the fastest growing retail market for most sellers, even small businesses. Big retailers with their own accounting departments would be able to take on these costs without much disruption to their business models, giving them yet another advantage over mom-and-pop shops that hope to utilize the on-line marketplace to sell their goods.
While those concerns are legitimate, here's how the bill could end up helping the economy. If the federal government mandates an online sales tax, it could simplify the rules across states. In fact, the bill requires states to develop free software to simplify the process of calculating state taxes. If such software were developed, it would help reduce the burden of complying with state tax law for all businesses.
The biggest potential positive, however, would come from the additional $23 billion states could collect in revenue. Indeed, some states have already incorporated the windfall resulting from online sales taxes into their budgets. Some state governments aim to use the money, which states that charge sales tax already are entitled to by law, to invest in local infrastructure and improve public services vital to the economy, while others hope to reduce income taxes while maintaining revenue through the increase in sales taxes.
Democracy functions best on a local level, where people understand the issues and can allocate resources more efficiently. Each state probably has a different plan for utilizing the additional revenue generated from the online sales tax, and that's a good thing. The revenue could help save essential programs threatened by the decrease in funding from the federal government due to budget cuts, lessening the short-term societal costs of reducing the federal deficit.
The Marketplace Fairness Act is full of potential, both political and economic, but that doesn't guarantee that it will fulfill it. If lawmakers can build on the bill to overhaul the American tax system, give more power and autonomy to state and local governments, and allow the federal government to operate more efficiently, we will look back fondly on the unlikely partnerships the online sales tax debate forged.