Should Internet shopping be taxed? Your editorial, "E-Commerce and taxes" (March 11), expresses concern about potential revenue losses from the growth of untaxed Internet shopping, and calls for "a level playing field" between electronic and traditional retailers. Presumably, this would mean allowing states to tax out-of-state sales, which they currently are prohibited from doing in most cases.
There are several reasons why this would be bad policy.
First, there is no immediate danger of large revenue losses for traditional retailers, and by extension, for state tax authorities. Local stores will probably always dominate retailing because shopping is for many people a pleasurable social experience that cannot be duplicated online.
Second, it's not fair to force out-of-state firms to act as tax collectors when they don't benefit from state services. Local firms benefit from police and fire protection, roads, waste collection, and other state services, so it is proper that they help cover those costs. Remote sellers, on the other hand, don't enjoy those advantages.
Finally, differentiated tax rates create healthy competition that helps keep local rates under control.
Let's be honest: Allowing states to tax out-of-state electronic commerce would be the equivalent of a tax increase. States would fatten already overflowing coffers without ever having to bring the issue to a vote at home. That's a dream scenario for state legislators, but a nightmare for taxpayers.
If states are concerned about local retailers, they can effectively address the issue by harmonizing tax rates downward. To improve their business climates states should cut taxes, not scheme to collect more.
Aaron Lukas Washington Trade policy analyst, Cato Institute Center for Trade Policy Studies