Proposed Legislation Would Threaten State and Local Revenues

Congress is expected soon to consider legislation that would restrict state and local governments’ ability to levy sales and gross receipts taxes on fast-growing categories of consumer and business purchases like downloaded music and movies, online photo storage, and payroll processing.

As we explain in a revised analysis, the Digital Goods and Services Tax Fairness Act (DGSTFA) would undermine state and local tax collections, and the revenue losses would grow over time as more types of entertainment, information, and business-to-business services shift to online technologies.

This bill would kick states, cities, and counties when they’re down:  to close their budget gaps that the recession caused, they’ve already cut more than 600,000 jobs (including teachers), closed fire stations, reduced library hours, scaled back medical care, hiked community college and state university tuitions, and delayed road and bridge maintenance.

All of the major organizations that represent state and local officials — including the National Governors Association, the National Conference of State Legislatures, and a coalition of local government groups —oppose or express serious reservations about the bill as it’s currently designed.

What’s more, this legislation is unnecessary.  DGSTFA’s congressional sponsors and industry supporters say its goal is to prevent “multiple and discriminatory taxation” of digital goods and services.  Been there, done that.  As we’ve previously explained, the Internet Tax Freedom Act, enacted in 1998, already bans multiple and discriminatory taxation of “electronic commerce,” including all digital goods and services that DGSTFA covers.

To be sure, some real problems have emerged in the taxation of digital goods and services, and Congress can encourage industry and government to constructively address them.  In this case, federal policymakers could achieve a better result by engaging stakeholders, rather than acting alone.

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