Wednesday, April 20, 2005

When Is It OK to Invoke Federalism?

Principles of federalism – broadly interpreted as allowing state and local government entities to assume government functions appropriate to the citizens in their jurisdictions, rather than controlling those functions remotely from Washington, D.C., -- are often associated with core beliefs of political conservatives.

This need not be so. Local communities might choose to legislate based on liberal tenets – for example, a community in Iowa recently went entirely organic within its borders, barring the use of pesticides or herbicides. Those of us who practice chemical warfare against bugs and weeds (or non-cultivated native plant species, as they might be called by more sensitive folk) wouldn’t like such rules. We might move elsewhere, or we might seek to throw the local government representatives out. Alternatively, we might kick the matter up a level and get protection from a more remote government entity. Whether this is proper or not depends not only on one’s political persuasion, but also on one’s personal stake in the outcome.

Just how one responds and the propriety of a response can generate some vastly different reactions from people. Recently some members of the Vermont legislature wanted to lower the drinking age to 18. There is admittedly a lot of crazy, irresponsible behavior by 18-20 year-olds that occurs around alcohol, and the fact that it is illegal may contribute to some of that behavior. The matter is debatable. But as a practical matter, Vermont legislators had to let this debate die in silence, as they could not afford to forego the Federal highway dollars that are attached by Congress to a rule that says “no soup for you” if you have a drinking age below 21. (To those non-Seinfeld fans, sorry for the metaphor. There is really no soup mentioned in this legislation.) In this case, folks who hated the idea of young people drinking got the ear of Congress and imposed their will by making it painful to do otherwise. (Utah is currently thumbing its nose at Congress concerning No Child Left Behind, which involves a similar matter. But more on this later).

In the tax area, we have a bill that also seems to involve Congress in local matters, which involves a ban on taxing access to the Internet. Legislation was introduced yesterday by Senators Allen (R-VA), Wyden (D-OR), and Representatives Cox (R-CA) and Cannon (R-UT) to make the temporary ban on such taxes permanent. (See Today’s BNA Daily Tax Report). The temporary ban got wide media attention when it was first initiated several years ago as the Internet Tax Freedom Act, and again when it was renewed last year. Anti-tax folks look at this as a way to send a symbolic message that we don’t like taxes, period. As Senator Allen is quoted, “We cannot envision any time in the future when it would make sense to let avaricious state and local tax commissars tax the Internet.”

Whoa, Senator. Commissars? What a moniker! (See The definition refers to government officials in the former USSR. Last time I checked, my local representatives were pretty good Americans, though I don't know their views on this tax).

Let’s take this back a notch. The bill in question here – restricting taxes on access to the Internet – was originally sold as a way to protect the fledgling Internet from tax-induced limitations on its growth. But based on what we know today, can anyone really worry about killing the Internet through taxing it? Based on my limited experience with Internet access (including a carrier that has raised my access rates by almost 50%), I would say that the demand curve is relatively inelastic. Few folks will not access the internet if a tax is imposed, and on this basis such a tax may be a relatively efficient way to raise money. There could be enforcement costs (i.e., collecting and remitting those taxes to local jurisdictions could be challenging), but I have not heard that being offered as a basis to stop this tax. Query: Is this a matter that should be left to local governments, who can be voted out if they raise your Internet taxes too much?


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