A new study argues that the misnamed Marketplace Fairness Act (MFA), better known as the Internet sales tax, would be good for economic growth. But the argument is premised on something that isn’t in the bill.
The study says that because the MFA would allow states to enforce their sales tax rules and regulations on e-businesses outside their borders, which would allow them collect more taxes from their own residents, they could use that extra revenue to lower other taxes such as the income tax. Wisconsin Governor Scott Walker (R) has pledged to take such an approach if the MFA becomes law.
The argument goes that because the income tax is more economically destructive than the sales tax, this revenue-neutral tax swap would be good for growth. Nothing wrong with that. In fact, the push for tax reform at the federal level is based on similar logic—that the income tax is economically harmful, so it would be best to minimize its economic drag in a revenue-neutral way.
The problem with the analysis in context of the MFA, however, is that nothing in the bill requires states to lower their income tax (or other taxes) with the extra revenue they would raise from their sales tax if the MFA passes. The study’s finding that the MFA would be pro-growth is more wishful thinking than sound economic analysis.
The report also ignores the very reason that states are in favor of the MFA: They want the cash to spend. States and localities have time and again stated that is the reason they want the legislation. They aren’t going to give up the extra money they would raise. Governor Walker’s approach is undoubtedly the exception to the rule.
The MFA would subject online retailers to the sales tax rules and regulations of states in which they have no physical presence. It would be “regulation without representation” that would swamp online retailers with the burden of complying with the rules of every sales tax jurisdiction in the country. Brick-and-mortar stores would go on collecting sales tax only in those places where they are physically present.
That is not leveling the playing field, and it is not fair. All the wishful thinking in the world can’t change that.