As you could have read yesterday in the Washington County Daily News, here is my column urging Wisconsin’s Republicans to reject a tax increase.
Thanks to a 1992 ruling of the U.S. Supreme Court that said that states could only collect a sales tax on businesses with a substantial presence in their state, consumers have been largely exempt from paying sales taxes for purchases made online. Those days may be coming to an end.
Last week the Supreme Court overturned its 1992 ruling. The new legal landscape means that states can now levy a sales tax on internet sales, but they are not required to do so. States like Illinois and California, with their self-inflicted derelict financial situations, are salivating over the opportunity to capture more tax revenue. What should Wisconsin do?
A report last year from the U.S. Government Accountability Office estimates that the imposition of Wisconsin’s sales tax on online purchases would result in between $123 million and $187 million in annual tax revenue for Wisconsin. The important thing to remember is that this projected tax revenue is not “found” money. It is additional money that would be extracted from the pockets of Wisconsinites by state government. It is not a tax on the online businesses who sell to Wisconsinites. It is a tax increase on Wisconsinites.
That is not to say that imposing a tax increase is necessarily a negative thing. There are some compelling reasons for states to impose a sales tax on internet purchases. The primary reason is for the cause of tax fairness. Wisconsinites pay the sales tax at brick-and-mortar stores without question or debate. The fact that those same Wisconsinites can buy products online without paying the sales tax gives online retailers a material advantage over the brick-and mortar stores. In the name of fairness, government should treat businesses equally regardless of their mode of delivering products.
The problem with that argument is that the unequal treatment of businesses is a consequence of a policy decision. The sales tax is not imposed on the businesses. The businesses are merely tasked as an agent of government to collect the tax. The consumers are paying the tax. The implementation of the sales tax whereby consumers must pay it at a physical retailer but are exempt from paying it at an online retailer is fair. Every consumer — the people actually paying the tax — is being treated equally in this regard.
It must also be acknowledged that the different sales tax treatment of brickand- mortar purchases and online purchases is an extremely small driver of the societal trend toward online purchases. The infinite selection, ease of browsing, competitive prices, easy shipping and the ability for consumers to sit on their couches in their skivvies while they shop are far more powerful disruptive forces than the sales tax. Furthermore, even as online purchases have soared in the past two decades, they still only represent about 10 percent of all retail purchases in America.
Given that the ruling by the court is still fresh, Wisconsin’s political leaders are still pondering the consequences and possibility of imposing the tax increase. Some of them are lusting after the money with an eye to spend it on their priorities. Gov. Scott Walker and other Republican leaders are floating the idea of imposing a new sales tax on internet purchases, but using it to offset state income taxes in accordance with a law that Republicans passed in 2013.
Such a use of new sales tax revenue would be laudable. By using sales tax revenue to offset income taxes, it would keep Wisconsin’s total tax burden static, but shift some of that burden to the broader population of retail consumers and off of the shoulders of income earners.
History tells us, however, that raising one tax to offset another never works over the long term. While Walker and legislative Republicans may set up such a tax offset initially, over time there will be different politicians with different priorities. Inevitably, some future politicians will begin to carve out a percentage of online sales tax revenue for some spending “priority” or “crisis.” Then that percentage will increase over time until the notion of a tax offset is all but forgotten except by crotchety curmudgeons who write columns.
Wisconsin’s Republican leaders should resist the temptation to tax online purchases and make sure the whole nation knows that Wisconsin is the place to live if you want to continue to make tax-free online purchases. The best tax is the one that is never imposed.