Grover Norquist is Right to Oppose Internet Sales Taxes

When I visited my brother in London a few years back, I toted a suitcase packed with tennis balls. I paid New York City’s 8 ½ % sales tax to help my brother’s tennis-mad family avoid the UK’s 20% value-added tax, or VAT, Europe’s big brother to our sales tax.

In the last 40 years, mostly at Republican initiative, many US states and localities have dramatically increased sales taxes at the expense of property taxes. Only four states, Delaware, New Hampshire, Oregon and Montana, have no sales taxes; southern states generally charge the most. (Arizona tops out with a combined state and local rates up to 13.7%). Europe’s VAT, introduced by France in 1954, is a national tax. European Union “tax harmonization” rules require member countries to charge a minimum of 15%; most EU members charge over 20%. (Hungary wins with 27%.)

So far the US has resisted a national VAT, despite support from both right (businessman Steve Forbes) and left (economist Robert Frank). That may change with the expansion of sales taxes on internet sales.

The US Senate just passed the Marketplace Fairness Act, enabling state governments to make internet companies like Amazon collect sales taxes from their customers—just as local businesses have long done. Is this truly a victory for tax fairness? While Grover Norquist, the Heritage Foundation, and other extreme anti-tax ideologues continue to oppose the measure, many Republicans are waffling. Many good liberals positively jump with enthusiasm. New York Times business columnist Floyd Norris writes (5/13/13):

“It is nothing short of amazing to me that this proposal is controversial…What this would do is make tax compliance easier and provide badly needed revenue — from their own citizens — for struggling states and cities. It would also mean that local merchants — the ones who pay property taxes — would find it a little easier to be competitive with Internet merchants.”

Alas, Floyd Norris misses the big picture: Sales taxes are simply terrible taxes. As Europe’s gasping economy sinks into another recession, I think there’s good case that the VAT aggravates the damage of misguided austerity policies.

As most of us know, sales taxes are “regressive.” That is, when sales taxes are “passed on,” they fall harder on poorer customers than on richer ones. That’s why many states exempt food and medicine, as does New York, (except for restaurant food). But sales taxes are also “passed back” onto retailers and service providers. In fact, sales taxes are shared between customers and retailers in inverse proportion to their ability to shop or sell elsewhere.

It’s the “passed back” portion of sales taxes that do the most damage, because—unlike profit taxes—they take a bite from gross revenues before expenses. Moreover, a uniform tax rate does not mean uniform impact. (As Anatole France wrote, “The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread.”) Sales (and VAT) taxes fall hardest on small, labor-intensive retailers, with high volume and low profit margins.

Consider two New York City businesses: One is a furniture store; the other is a Sabrett’s hot dog cart. Assume for simplicity the “passed back” portion of the 8 ½ % sales tax is 5%. The furniture store invests $9000 a year in an inventory of sofas, which it sells for $10,000, earning a $1000 before-tax profit. 5% sales tax is $500, half of profit, and 5.5% of the $9000 investment. The hot dog cart invests $200 a day in buns, dogs and labor. It earns $210 a day, or $76,650 a year in sales and $3,650 in profit. A 5% sales tax collects $3,833, wiping out profit and amounting to 1916% of the $200 investment! Moreover since most of the cost of the cart is labor, the tax adds 5% to the 18% or so in payroll taxes! In short, sales taxes kill small businesses—precisely the kind which provide the most jobs per dollar invested. And by killing competition, sales taxes may drive prices up by more than the tax rate.

Sales taxes are also insidious—it’s always so tempting to politicians to raise them another quarter cent, and hope no one notices. Up to now, the threat of tax competition from neighboring states and localities has kept those politicians in check. That is, as long as customers can easily shop elsewhere, most of the tax will be “passed back” onto merchants—whose complaints will make politicians think twice about increases. The European VAT has crept so high precisely because shoppers can’t avoid it by crossing borders. (Tennis ball smuggling isn’t cost-effective).

In recent years, the rise of effectively untaxed internet sales has helped check increases of state and local sales taxes. If the Marketplace Fairness Act passes the House, it will release that check on sales taxes, and lubricate our way towards European-style VAT taxes! “Fairness” shouldn’t mean raising sales taxes on internet merchants, but reducing them on local businesses. For once, though for the wrong reason, Grover Norquist is right.

The Monopolists in My Back Yard

When Con Ed dug up West 72nd Street last year to lay new natural gas lines, I thought great, now the apartment buildings on my block can switch their boilers to gas and stop letting off those black farts that sprinkle soot on my windowsill. But then I read David Cay Johnston’s new book, The Fine Print: How Big Companies Use “Plain English” to Rob You Blind. Robbery is the least of it. Utility monopolies—a major focus of the book—increasingly cut corners on safety.

One such corner cut is coming to a neighborhood near me: it is a 30-inch high-pressure gas line passing under the Hudson into the West Village and heading north under Tenth Avenue before branching out. As detailed in Johnston’s book and a recent article, high-pressure gas, gasoline, or jet fuel line explosions kill or injure someone every week. In December 2010, a 30-inch gas line blew up a block in the San Francisco suburb of San Bruno, excavating a 4-story-deep trench, leveling 35 houses, killing 8 people and injuring 60 more. It took Pacific Gas and Electric over 90 minutes to shut off gas to the flames. That was a low-density single-family neighborhood.

Given this history, one would think New York City officials would at least require detailed safety studies before allowing the new 30-inch line. Nope! No special safety requirements for high density, no environmental impact, no inspection requirements. As recently reported in the Village Voice, federal regulations for the Hudson crossing are a joke, and once the gas gets into Manhattan, it’s all up to our friendly local gas, steam, and electric monopolist, Con Ed. Remember that horrendous 2007 steam explosion at 41st and Lexington? But steam isn’t flammable. Now imagine a San Bruno-style eruption in Manhattan: high rise buildings ablaze, cars melting and gas tanks exploding in the radiant heat, power and water blown out, fire trucks unable to get close, and screams of trapped victims drowned in the roar of the towering blowtorch! Hurricane Sandy meet 9/11!

David Cay Johnston is a former New York Times investigative reporter on taxation and regulation, Pulitzer Prize winner, and now a Reuters columnist. The Fine Print is a sequel to his two earlier catalogs of corporate crime, Perfectly Legal (2003) and Free Lunch (2008).

Monopoly is the underlying theme of The Fine Print. We all know, sort of, what monopolists do all day. They charge their customers “what the traffic will bear”, that is, they raise prices until they lose in volume what they gain in prices. At the other end, if they can, they squeeze their suppliers and their workers. As part of the squeeze on both ends, they provide poor service and poor maintenance of facilities. “Natural monopolies” share a key characteristic: high fixed costs that make competition difficult or impossible. That’s the reason the public either owns or regulates “utilities” like water, power, gas, highways, railroads, sewers, waste disposal, subways and buses, cable, air routes and many others.

Johnston documents in detail the misbehavior of utilities and the laxity of their regulators. He includes another monopolist in my back yard, Time Warner Cable. Time Warner and its dancing partner, Comcast, have between them carved up most of the US. Time Warner—grrr! I just had to reboot the cable box for the fourth time this week. Internet crawls compared to Europe. Then there’s that PBS NewsHour sponsor, Warren Buffett’s railroad, BNSF, “the engine that connects us.” It connects to some hapless spur lines at gunpoint—your money or your business! Warren Buffet in fact pops up several times in the book. He owns quite a stable of monopolies; his public-spiritedness clearly doesn’t include reining them in!

If you want to get really mad, read this book. Meanwhile, I’ve learned there are already two slightly smaller high-pressure gas lines in Manhattan, including a 26-inch baby that runs along 75th street three blocks north of me, and then angles across Central Park south of the boating lake to 71st Street on the East Side. I had noticed the little yellow warning posts on my daily walks; now I know what lies beneath!