California dreaming: “Let’s tax the internet!”

I want what these guys are smoking.

Desperate for revenue and unwilling to cut spending for fear of alienating their union donors, the progressives who control my beloved state’s legislature have revived a dumb idea thought dead: taxing Internet commerce. In this case, by requiring Internet merchants who advertise through California-based businesses to collect sales tax on all transactions made within the state.

It takes a special kind of dumb to come up with this, friends:

Nonetheless, those tracking the debate say that Democrats in the legislature could attempt to push it through in the coming weeks and months, playing off of widespread concern about the state’s fiscal mess and inability to cover its financial obligations.

Just this month, Americans for Tax Reform (ATR) issued a letter to California legislators noting that a vote in favor of the plan, which was rejected by Gov. Schwarzenegger last year, would be scored by the organization “as a tax increase.”

Other opponents meanwhile are speaking out against the proposal, noting that California is unlikely to in fact collect additional tax revenue, should the plan move forward. In North Carolina, where such legislation was recently instituted, opponents say online retailers stopped advertising with in-state marketing affiliates, such as blogs and websites, rather than collecting and remitting the tax. That example has marketing affiliates themselves arguing that were this tax increase pushed through, not only would it damage their businesses, but it would actually have a negative, as opposed to neutral or positive, impact on the state budget.

Mattias Larsson of Marina Del Rey, California, who runs the website DefinitiveDeals.com, opposes the plan, arguing that his business “will be devastated by the sales/use tax nexus bill,” and adding that he paid “well over $50,000 in California personal income tax last year”—a tax bill that could be lower in future were retailers to yank ads from his site, as has occurred in North Carolina.

Ryan Owen of Santa Monica and Savings.com meanwhile believes that in addition to threatening California’s existing revenue stream from him business, were the proposal to move forward, it would threaten jobs. “Not only will the major merchants not collect the use tax for California, but 25,000 small businesses will suffer, hire less people and pay less income tax,” he said in a statement.

There’s also a constitutional question based on a court decision holding that a business has to have a physical presence in the state, which is the reason Dell, for example, collects tax on its Internet sales – they’re also available at the local Best Buy.

But, constitutional questions aside, this is just bad policy that will make a bad situation worse. As the examples above make clear, e-merchants who advertise through California companies will have a great incentive to switch their businesses to states that don’t force them to collect sales tax (which, don’t forget, is an added expense for the business). I’m sure low-tax Nevada, for example, which is suffering from some of the highest unemployment in the nation, would love to have the jobs.

And, back here in the Golden State, how much sense does it make to give businesses further incentives to flee the state? It’s not as if we’re flush with jobs as it is.

Californians and California businesses are taxed enough already, and there are only three real solutions to the state’s budget crisis:

• Raise revenue by exploiting the vast resources we have. Assemblyman Chuck Devore has proposed renewed licensing for offshore drilling using safe slant-drilling technology. With over $120 billion in proven resources off the coast, royalty fees could generate tens of billions in new revenue without raising taxes.
• Cut taxes on businesses and cut back on the bureaucratic impediments to business expansion in the permitting and environmental review processes. This would give businesses an incentive to come here, instead of leave, and to hire more people.
• Cut spending. I know, with our legislature, it’s like asking a wino to put down the bottle. But it has to be done, absent new revenues. And, thanks to the profligate ways of the legislature and, yes, the People, who approved bond issue after bond issue, the necessary cuts will be painful. But they’re also very much needed, if this problem is ever to be fixed.

But, I don’t hold my breath in hope that Assembly and Senate Democrats will come to their senses; they’re professional legislators who see the enactment of patronage programs and the donations they get in return as their whole reason for being. Recovery will be a long, slow process of legislative and fiscal reform, unless a crash forces their hands.

Until then, California keeps doing it’s best impression of Thelma and Louise:

(Crossposted at Public Secrets)