Art Laffer Boosts E-Commerce Sales Taxes

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Art LafferSupply-side economist Art Laffer says in a new study that if states taxed e-commerce sales, they could use the extra revenue to reduce or eliminate more economically damaging taxes.

A 1992 Supreme Court ruling held that states could only collect sales taxes from businesses that maintain a “physical presence” in the state, but explicitly maintained that this restriction could be overturned by act of Congress.

A bill to do just that, called the Marketplace Fairness Act, was passed by the Senate in 2013 but has languished in the House ever since.

Assuming the legislation eventually passes Congress, Laffer outlines how Texas could use the additional revenues from taxing e-commerce to reduce or eliminate the Franchise Tax, which is widely viewed as punitive and arbitrary by the business community.

In 2011, according to data from the U.S. Census Bureau, state and local sales taxes in Texas produced $27.25 billion in revenue, and an estimated 9.6 percent of retail transactions took place online. From this, Laffer deduces that Texas would stand to collect $2.88 billion in additional revenue from taxing e-commerce.

Taken alone, the new revenue would not completely offset the Franchise Tax, which raised $4.8 billion in 2013. However, Laffer predicts that eliminating the Franchise Tax would provide a major boost to the state economy, allowing it to grow $76 billion (about 3 percent) larger by 2023 than it would under current policies.

If no further changes were then made to tax rates, this growth would produce another $2.5 billion in tax revenue by FY 2023. Adding this to the revenue from e-commerce sales taxes, Laffer concludes that Texas would actually be able to collect more tax revenue under this arrangement than under existing policy.

According to the Pittsburgh Tribune-Review, Idaho, Ohio, Utah, and Wisconsin have already passed bills to lower income tax rates once e-fairness is passed, and 12 other states are considering similar measures.

Laffer’s views are not universally shared by supply-siders. Anti-tax Grover Norquist opposes the Marketplace Fairness Act, which House Republicans have declined to pass.

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