States Taxes on Interstate E-Commerce
worried for exactly the same reason. Given the fact that per capita state and local spending have been increasing faster than the inflation rate, neither the Liberal dread nor the Conservative hopes are yet justified.
For now, it seems that electronic commerce is not depriving states of necessary income and prudence dictates that we should, like the physician, first do no harm. Though it is possible that the future dynamics of electronic commerce will change that in unexpected ways.
Conservatives and Libertarians should be cautious about what they wish for with respect state sales tax collections. If sales taxes do indeed become a less lucrative source of state funding because of electronic commerce, that fact alone may not inhibit spending. Rather, it may induce greater state reliance on far more intrusive personal income taxes.
On the other hand, Liberals should think twice about the privacy concerns involved in insuring compliance with laws to enforce interstate state sales tax collection. It might prove profitable and simple to circumvent sales taxes by using third party purchases from low tax states. The information necessary to insure compliance may become unwarranted invasions of privacy.
For some items, like digital sound or video recordings, sales tax collection would be particularly easy to circumvent. Servers could be set up in offshore areas. It will prove difficult to compel Switzerland or Hong Kong to collect taxes for Iowa on a digital recording easily downloaded from the Internet.
It appears that the only certainty is that there will be unintended and unseen consequences of tax policy on interstate electronic commerce.
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