Report: Congressional Legislation Would Prevent MD From Raising Millions in Needed Revenue

The recently approved $84 million in budget cuts amid expectations that the state would not raise as much revenue as expected highlight Maryland’s need to carefully consider how it raises money to pay for services and investments. Adapting the sales tax to reflect changes in the economy and applying by applying them to Internet commerce is a smart way to raise additional revenue. A bill recently passed out of the House Judiciary Committee would prevent Maryland from modernizing its sales tax in this way. According to a new report by the Center on Budget and Policy Priorities (CBPP), its passage could cost the Maryland over $127 million per year in potential sales tax revenue.  

The Internet Tax Freedom Act, enacted in 1998 and temporarily renewed as recently as 2007, imposes a moratorium on new state and local taxes on monthly Internet access fees. The House Judiciary Committee recently approved legislation to completely permanently ban all state and local taxation of Internet access subscriptions. Rather than extend this ban, Congress should allow states like Maryland to adapt their tax systems to the modern economy, in particular the rise of online commerce.

As residents are moving away from services that are currently subject to the sales tax, such as cable television, landline phones, and physical forms of entertainment such as CDs and DVDs to internet-based media such as Spotify or Netflix, it makes sense for state sales tax systems to adapt accordingly. It does not make sense to tax cable TV, phone calls, and text messaging but not the services residents use to stream TV shows, talk on Skype or FaceTime, or send messages over email or Twitter.

But as CBPP points out, the Internet Tax Freedom Act would bar taxation of the one purchase consumers must make as a gateway to all these other services:  a monthly Internet access subscription. Maryland recently realized the benefits of a modernized sales tax that better reflects today’s economy when Amazon announced plans to pen a warehouse in Baltimore, making Amazon purchases taxable in Maryland. The state Comptroller’s office estimated that Maryland loses out on $200 million in tax revenue each year from online purchases 

Maryland has a hard enough time making the right choices when it comes to raising revenue in an equitable way without Congress making it even more difficult. Congress should either lift or at most temporarily extend the ban on taxes of Internet providers and give states like Maryland the change to fund needed services and investments in a manner consistent with the changing nature of the economy.