“Electronically-delivered amusements” and “nonpossessory computer leases” sound innocuously legalistic, but in Chicago they are anything but.
Chicago, like many municipalities and states is cash-strapped and looking for new sources of revenue. It decided that Internet taxes, given its population density and network centrality, would help it generate revenue in a state and city that already have some of the highest traditional taxes in the nation.
Many Chicagoans already cross the county line to buy gasoline, liquor, and cigarettes. Unfortunately, residents have no easy escape from these new Internet taxes on streaming services and cloud computing. Providers such as Netflix are already planning to pass on the tax cost to consumers via service charges. Businesses, including the host of new Internet businesses supported by Chicago’s fledgling ecosystem of finance, higher education, and incubators, will also be hit. It’s one thing to collect the eggs from a golden goose but quite another to begin trying to collect before it matures.
Chicago is by no means the only government in this predicament. Cities and states around the country are wrestling with the hangover from the economic collapse. However, up until now, governments have been loath to impose Internet taxes. Congress has repeatedly demonstrated uncharacteristic wisdom in avoiding imposing online taxes and even declaring a moratorium—for good reason.
The Web that we think of as the Internet has been with us now over twenty years. During that span of time we have seen immense change. New online services, mobile service, and now the Internet of Things, wherein devices will be interconnected. One of the major advantages of the Internet is its capacity to reduce friction through disintermediation. That’s wonkspeak for cutting out the middleman. Reducing friction makes things cheaper and quicker. Users like fast and less expensive.
Taxes, however, threaten these by diminishing these characteristics of online interaction by imposing costs and adding a layer of complexity. State intervention through taxation, while not acting as a true middleman, adds another layer of accounting to business models that until now have rarely considered anything more than the occasional sales tax. For Internet startups, this is burdensome and a fine way to inhibit or stop success dead in its tracks.
Policymakers might have thought that the great untaxed Internet and its users might be ready to bear a greater tax burden. They are mistaken. While large companies have the capacity and profitability to absorb the added costs, Internet startups do not. Part of Congress’s rationale for not taxing the Internet was to support the expansion and development of a technology largely created in the United States.
Chicago needs to take the hint. Already, some firms are questioning the legal authority of Chicago on this matter and seeking redress with the courts and the federal government. Congress and the FCC have been at odds of late over many issues, network neutrality chief among them. Yet there is still broad consensus in Washington that taxing the Internet is bad policy.
The new taxes in Chicago should be abolished. Local government can clearly see that its initiatives to cultivate a local Internet ecosystem are clearly harmed by its tax policy. Failing that, Congress should work to extend the largely tax-free status of the Internet. Its inaction has made taxes like Chicago’s possible and it is time for it to act to preserve the vibrancy of Internet startup culture.
