Seven states to lose millions from Internet tax ban

Seven states to lose millions from Internet tax ban
© Anne Wernikoff
At least seven states are expected to lose hundreds of millions of dollars in revenue when a permanent tax ban on Internet access closes off a loophole they have relied upon for more than a decade. 

A temporary ban that prevents states and local governments from taxing the monthly bills that customers pay for Internet service has been around since 1998. But a handful of states have been able to get around that because of a grandfather clause that allows any tax in place before 1998 to continue.  

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But the temporary ban is soon expected to become permanent, and it will also cut off the grandfathered clause after 2020. 

“Even though there is a four-year lapse, you are grandfathering this, and my own state of Texas will lose $358 million,” Rep. Sheila Jackson LeeSheila Jackson LeeLawmakers press CDC for guidance on celebrating Halloween during pandemic Sharpton, police reform take center stage at National Mall Sheila Jackson Lee presses Congress to pass reparations bill at DC march MORE (D-Texas) said Friday, before the House overwhelmingly passed a deal that included the permanent ban.  

The National Governors Association and the National Conference of State Legislatures on Friday expressed disappointment and called on Congress “to honor state authority and preserve the revenues of those states grandfathered under the bill.”

Their long-held position had been that the revenue lost from a permanent ban and the end to the grandfather clause should be made up by tying it to a more controversial proposal that would give states increased authority to tax purchases made online. 

“The point is, are we going to replace those monies from the federal government?” Jackson Lee asked. “What are we going to do to the retail industry that has bricks and mortar [stores]?"

Critics say the two bills have distinct policy implications and should be debated separately. 

“I’m telling my colleagues to keep these issues separate. Now’s not the time to risk steep new taxes on the growing digital economy," said Sen. Ron WydenRonald (Ron) Lee WydenGOP senator blocks Schumer resolution aimed at Biden probe as tensions run high Republican Senators raise concerns over Oracle-TikTok deal Hillicon Valley: TikTok, Oracle seek Trump's approval as clock winds down | Hackers arrested for allegedly defacing U.S. websites after death of Iranian general | 400K people register to vote on Snapchat MORE (D-Ore.), ranking Democrat on the Finance Committee and a major advocate for the permanent ban.  

The permanent ban was wrapped into an unrelated conference report on customs legislation this week, which passed the House Friday. It is expected to soon get a vote in the Senate and make it to President Obama's desk. 

"Right now is the best chance in years to make the ban on Internet taxes permanent," Wyden said. 

In total, Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas and Wisconsin have Internet taxes that are exempt from the current ban. All will be phased out if the proposal passes. 

The Center on Budget and Policy Priorities estimates that cutting off the loophole would amount to $561 million in aggregate lost revenue for those states a year. The report’s author, Michael Mazerov, has even warned that removing the grandfather clause "could cost all states money, not just the seven states that the clause authorizes to continue taxing Internet access services directly."

Even though many of those states are hesitant about losing a revenue stream, the permanent ban has been supported by some lawmakers from the grandfathered-in states. 

Senate Commerce Committee Chairman John ThuneJohn Randolph ThuneWhat Senate Republicans have said about election-year Supreme Court vacancies The Hill's 12:30 Report - Presented by Facebook - Don't expect a government check anytime soon The Hill's Morning Report - Sponsored by The Air Line Pilots Association - Trump contradicts CDC director on vaccine, masks MORE (R-S.D.) has sponsored stronger stand-alone legislation on a permanent Internet tax ban, which would cut off the grandfather clause immediately, rather than in 2020. 

However, his office said the senator was happy with the four-year reprieve included in the customs bill. 

Three other senators who hail from a grandfathered-in state have also sponsored the legislation: Sens. Ted Cruz (R-Texas), Rob Portman (R-Ohio) and Ron Johnson (R-Wis.). In the House, 32 members who hail from one of the seven affected states sponsored similar legislation in the House, including Speaker Paul Ryan (R-Wis.). 

Other members such as Ohio Sen. Sherrod BrownSherrod Campbell BrownBipartisan praise pours in after Ginsburg's death Emboldened Democrats haggle over 2021 agenda Hillicon Valley: Russia 'amplifying' concerns around mail-in voting to undermine election | Facebook and Twitter take steps to limit Trump remarks on voting | Facebook to block political ads ahead of election MORE (D) are wary of a permanent ban. Similarly, Thune's state colleague, Sen. Mike RoundsMarion (Mike) Michael RoundsChamber of Commerce endorses McSally for reelection Senate GOP eyes early exit Senate Republicans signal openness to working with Biden MORE (R-S.D.), will not help advance the customs deal because of the permanent ban, according to his office, and he would support raising a point of order against it.