Why Sales Taxes?

     Email bookseller Amazon is squaring off against California in this State's effort to force Amazon -- and all other out-of-state mail-order sellers -- to collect California State sales taxes and remit them to the State Treasury. Learned academicians, media pundits, and talking heads of all kinds are supporting the State as a matter of simple fair competition among retailers. The conformity is herd-like: Amazon is cast as a crafty tax-dodger slithering through a legalistic loophole. No one, to my knowledge, is asking whether state sales taxes are a good idea to begin with. It is time someone did.

 

1.   Most writers and reporters in this new field accept state and local sales taxes as part of the pre-ordained order, dating as though from Adam and Eve.   The predominant attitude is one of how to preserve and raise the state sales tax, by taxing purchases from out-of-state sources, whose exemption the writers regard as a leakage, an unfair special privilege, and a cap on possible state sales tax rates. It is indeed the last of those, but is that bad?

 

A.   Academic sources.  

Modern textbooks on public finance do not treat the general retail sales tax as the historical novelty that it is.   They no longer mention that no state taxed retail sales until 1929 (GA) ^[1] and 1930 (MS), and most not until 1933 (when California joined the movement with a rate of 2%) and the mid-thirties, by which time half the states joined in.   Few books give any weight to the fact that 5 states and one province (Alberta) still have no sales tax at all: the states are Alaska, Oregon, NH, Delaware, and Montana.   The academics treat these states as eccentrics and laggards, and trivialize them for their small populations, but the states in question, which have 10 U.S. Senators among them, do not see themselves that way at all.   One of them, Oregon, in 1980 retired the powerful Chairman of the House Committee on Ways and Means, Al Ullman, because he championed a Federal VAT.   Another, New Hampshire, plays a key role in screening presidential candidates.   Another, Alaska, distributes a generous social dividend among all its resident citizens.   It is rather a matter of some local pride, not to mention commercial advantage.   

People speak casually about a uniform Federal standard for all states (and all cities and counties within states, over 7,000 taxing jurisdictions in all).   But state taxes are a power reserved to each state; not one they will quietly abandon.

Few academics show much concern about the partiality of the sales tax, and its overall non-uniformity.   They enumerate a few exemptions, but then favor it because it allegedly exempts capital formation.

Even some decentralists seem to favor federal action to promote state sales taxes.   Here is the attitude of Charles McLure, who wrote, "I believe sales taxes to be the most appropriate form of tax for state and local govts. to use."   He adds, " ... the ridiculously unfair and distortionary de facto exemption of interstate sales by mail-order houses" should be banned by federal legislation.   (Curiously, the main theme of McLure's article is in favor of intergovernmental tax competition, which would seem to rule out sales taxes.   McLure gives no support for his "belief", nor does he try to reconcile his advocacy of Federal force with his generally decentralist positions.)   McLure is currently active with The Advisory Commission on Electronic Commerce (ACEC), and, not surprisingly, is advising the states to find ways to tax e-commerce. McLure is at The Hoover Institution. This funding source, as its name signals openly, represents people who favor the policies pushed by its namesake, President during and after the Great Crash of 1929.

B.   Even more surprising is the attitude of business sources.    You'd think they'd show some delight that a new way has been found to undercut the sales tax.   Instead, many of these works might as well be written by tax administrators.   Their main concern may be making sure that other firms pay, too. 

2.   My viewpoint is the reverse.   I am here to explore how e-commerce may work as a lever to lower or quash sales taxes, and to show how states may do that without making catastrophic quakes or waves.

3.   The Commerce Clause. 

The U.S. Constitution bans state taxes on interstate commerce.   "The Congress shall have the power ... to regulate Commerce with foreign Nations, and among the several States, and with the Indian tribes; ... " - (Article I, Sect. 8).

"No State shall, w/o the consent of Congress, lay any Imposts or Duties on Imports or Exports, ...   (Article I, Sect. 10).   This reinforces the commerce clause of Sect. 8. 

The Commerce Clause has preserved interstate tax competition.   W/o it, it is likely that state sales taxes would rise to 20% or more in short order, as the wholesome fear of interstate competition was stifled.   It created and has preserved our domestic market, the greatest free trade zone in the world, an essential ingredient of American productivity and prosperity.   It is not something to be thrown away lightly, especially not for the sake of something as baneful as the retail sales tax.