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Marketplace fairness is a dead letter

I was interested to read this piece [1] about the so-called Marketplace Fairness Act. Or rather I was amused, because it ignores the issues that rest at the heart of the bill the lobbyists and interest groups supporting it are unwilling to address.

The biggest is politics. And for a look at that, let’s turn to the RTD’s Jeff Schapiro [2], who provides us with a quick refresher on how the online tax debate in Virginia became somewhat relevant:

Last year, lawmakers passed, and Gov. Bob McDonnell signed, a measure that bravely relied on the cowardly: that the Congress, rather than the General Assembly, would get its mitts dirty by voting on a clean, straight-up increase in taxes that Virginia, in turn, would plow into transportation.

This is the same bunch that in the bitter standoff this year with Democratic Gov. Terry McAuliffe steadfastly refused to take from Congress billions of dollars that it has already appropriated to Virginia and other states to expand Obamacare.

The oft-spouted line from House Speaker Bill Howell, Senate Majority Leader Tommy Norment and other Republican Cassandras: The Congress on which they are relying to finance highways can’t be relied on to finance health care for uninsured Virginians.

Howell’s spokesman, Matt Moran, declined comment Tuesday on whether the boss is lobbying Goodlatte to retreat on the stalled Internet sales tax proposal. Moran also was silent on the perceived contradiction in looking to Washington for a handout on transportation but refusing one on health care.

And with good reason. Any one who harbored a belief that Congress would pass the Marketplace Fairness Act was kidding themselves. Or was trying to gull others into thinking such a thing was possible. The General Assembly knew their brethren in the House of Representatives would never pass such legislation. So did former Gov. McDonnell.

Rep. Bob Goodlatte, who has become a bogeyman of sorts for Marketplace Fairness Act advocates, is even less charitable:

“The General Assembly was shortsighted in passing a transportation package with funding dependent upon the assumption that fundamentally flawed federal legislation would be enacted,” Goodlatte said in an email Tuesday.

The legislation authorizes the states to impose their sales taxes on Internet purchases. Unless it becomes law Virginia will automatically increase its sales tax on gasoline, boosting what motorists pay at the pump.

So now the sales tax on gas will rise, and, MFA backers warn, gas prices will rocket and punish the masses. How much of an increase? About a nickel a gallon.

As for gas prices nationally, they appear to be continuing their downward slide [3]:

Drivers paid the lowest September gas prices since 2010 with the monthly average at $3.39 per gallon, which was about 13 cents less than last year and 44 cents less expensive than 2012.

As I attempted, unsuccessfully, to tell transportation tax advocates about the scheme Gov. McDonnell and the General Assembly were backing, changing the tax rate would make little difference in pump prices. Broader considerations went into pump prices than just the tax per gallon. Consider this chart [4] of gas prices over time:

two year gas chart [5]

Can you spot when Virginia went from a tax at the pump to the wholesale tax scheme? No. Gas prices follow larger trends, and gas prices in the southeastern states tend to be lower than they are nationally because of refinery and distribution access.

So let’s drop the canard that unless we expand the sales tax to out-of-state retailers, Virginia drivers are going to take it in the neck.

But as to the larger issue of “fairness…” the poor word has been terribly abused by MFA backers.

What we need to consider is tax competition. Take it away, Dan Mitchell [6]:

…the fight is really about whether a state government has the right to force out-of-state merchants to act as deputy tax collectors [7]. If you believe that borders should limit the power of governments, the answer is no.

But that rubs politicians the wrong way.

…some governors and state legislators don’t like this system because many states don’t bother imposing any tax on sales to out-of-state consumers. And even if states levied taxes on sales to out-of-state consumers, what about the five states that don’t have any sales tax? Wouldn’t those states become “tax havens” for Internet sales? For these reasons, some politicians fret that the Internet will put competitive pressure on them to keep their sales tax rates from getting too high.

But this is exactly why politicians shouldn’t be allowed to tax beyond their borders. We want tax competition in order to limit the greed of the political class [8].

States with no payroll income taxes, such as Nevada, Florida, Tennessee, Texas and New Hampshire, help restrain the greed of politicians in states that have punitive income tax systems, such as California, Illinois, New York and Massachusetts. And if politicians in the high-tax states refuse to adjust their bad tax policies, then people should have the freedom to escape and earn income in other states. The same principle applies to sales taxes. If politicians in, say, Arizona are worried that consumers will go online or travel across the border to avoid the punitive sales tax, then they should reduce their sales tax rate.

If we want to talk about taxes on all online sales, it’s a debate worth having — if it’s centered on the concept that taxes should be as low as possible. We do not need to carve out special, tax-exempt niches for online sales if the tax is applied broadly and at a low rate. And while we’re at it, let’s revisit the dizzying array of products, services and industries [9] Virginia lawmakers have exempted from sales taxes. If we have any energy left after that, let’s also take a hard look at the billions Virginia hands out in corporate welfare. [10]

But we do need to guard against a “tax cartel” that exports a state’s tax policy choices to consumers across the country. It not only encourages bad political behavior, it all but guarantees it.

Virginia could set a sales tax that was much lower than surrounding jurisdictions. That would encourage tax competition at the margins, and be good for all Virginia retailers, whether online or at the mall. Instead, some, including our resident political class, opted to have Congress allow Virginia to export our poor tax policy.

Congress, or at least the House, has said no, and is unlikely to change its mind any time soon. And so it is Virginians who will have to pay the price for the policy the General Assembly embraced, in bipartisan fashion.

That’s fairness. And it will hurt.