For Immediate Release
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The Internet: To Tax or Not to Tax

With the unparalleled proliferation of technology and the Internet, there can be little doubt that much of the next legislative session will be spent addressing issues relating to the use and regulation of the Internet. Terms such as "e-commerce," "Internet privacy rights," "Internet parental control" and "digital imaging" are now commonplace in our vocabulary and they will likely be debated in the 77th Session of the Texas Legislature. How your legislators address these issues will define Texas' "e-future."

In December, Lieutenant Governor Rick Perry created the Council on the Digital Economy. It is made up of legislators, industry leaders and citizens. Its purpose is to explore the myriad of issues associated with the Internet. I am extremely proud that Lt. Governor Perry appointed me to this Council. Recently, we began to address the issue of Internet taxation. Should Internet transactions be taxed in the same manner as those sales made in the brick-and-mortar stores found on Main Street? What should the role of the policymaker be in the formulation of such an important tax decision? Would legislating policy now tie the hands of legislators down the road? These were some of the questions we addressed. While much is unknown about this burgeoning industry, one thing is clear. The decisions we make today will have a profound effect on the lives of all Texans and the future competitiveness of Texas' businesses.

It is with this caution that policymakers must approach these issues with an eye toward avoiding potential unintended consequences. Let us start with what we know. It is clear that the future of our state and, indeed the entire United States, will hinge on the technological conveniences that the Internet has to offer. We cannot ignore the fact that we, as Texans, have benefitted greatly in recent years by keeping taxes low and by avoiding the implementation of a personal income tax. It is not disputed that businesses which choose to locate here, rather than in other states, do much to add to our tax base. Our workforce also benefits when high tech jobs move to Texas.

Because Internet commerce is such a new phenomenon, it is inherently volatile. It is largely agreed upon that Internet growth is positive and diminishing its growth is negative. The concern that the imposition of strict regulations now may cause a chilling effect on future Internet commerce must not be ignored. In fact, a recent study by the Information Technology Association of America suggests that 34% of adults would be less likely to purchase a product online if it were subject to the sales tax. The ultimate effect that taxing the Internet may have is still unclear. What is evident is that we should carefully study a proposal that may be premature or have a potentially negative impact on this industry. Countless jobs, opportunities and revenue are at stake and knee-jerk decision-making is ill-advised.

Prior to making any decisions as to the validity of taxing Internet sales, another issue must be resolved. Our current mechanisms for collecting sales taxes clearly did not envision the complexities of electronic commerce. Almost every person who testified before the Council on this issue emphasized the need for streamlining and simplifying our current sales tax collection system.

Proponents of taxing Internet sales cite the fact that in Texas, because we do not have a state income tax, we are especially dependent on the state and local sales taxes and local property taxes. If the current trend of purchasing over the Internet continues to grow exponentially, and sales taxes are not being collected and remitted to the state, over the next decade, we may see a dip in revenues which fund things such as new roads and fire stations. Sales tax collections in Texas represent 55.4% of total tax collections. One thing that was evident from testimony was that we are truly in the dark about the magnitude of Internet commerce as it relates to Texas. Will it be one-tenth of one percent of our total revenue, or will it be 25 percent in five years? We really have no clear picture of its impact. At the very least, the Legislature must have clear numbers regarding the impact that electronic commerce will have on our state's tax collection.

As you can see, both sides make strong arguments. This is an issue which will be on the political forefront nationally as we near the presidential election, and on the state level as the next legislative session approaches. Before we condemn either side, let's think very carefully about the ramifications of any proposal. The key to any future legislative change is knowing the rate at which Internet sales are predicted to grow, the degree to which these sales will displace the more traditional brick-and-mortar sales, and most importantly, the certainty with which these predictions can be made. I think we should all carefully review proposed policy options with these goals in mind. Only then can we make sound policy decisions which will benefit Texas.