WILL THE INTERNET CIRCUMVENT THE TAX MAN? Is the New Global Economy Leaving State-Local Tax Structures Behind? THOMAS BONNETT NATIONAL LEAGUE OF CITIES, WASHINGTON, D.C., 1998 Reviewed by James D. Nowlan

Illustration by Mike Cramer

Want the inside dope for saving money on popular consumer purchases? Buy your fall sweaters from L.L. Bean, not Land's End. And order your books by Internet from amazon.com, not barnesandnoble.com.

Why? Because Bean and amazon don't charge you sales tax, but their competitors do. Why? Because Bean and amazon lack "nexus," or physical presence in Illinois, while the other two direct marketers have stores within our state. The U.S. Supreme Court ruled years ago that state governments cannot force a seller to pay a state's sales tax unless the company has nexus with that state. Congress could mandate tax collections from all sellers but has thus far chosen not to do so.

Welcome to the arcane world of state and local taxation in a global, digital economy, which is the topic of this small book by Thomas Bonnett, a former Vermont state legislator, now a policy analyst.

At present, Illinois loses $50 million to $100 million annually in sales tax revenue from out-of-state mail order sales. And that loss could triple in just a few years, based on estimates that Internet traffic is doubling every 100 days, and that retail sales on the Net will hit $115 billion within the next five to eight years.

This seems patently unfair to hungry state tax collectors, for obvious reasons. More important, your local retailers are put at a price disadvantage, as he and she collect and remit the Illinois sales tax of 6.25 percent, plus varying amounts for localities — and pay stiff taxes on property. But neither state government nor local retailers should expect relief soon. This year more than 20 bills circulate in Congress that would impose three- to five-year moratoriums on taxation of the Internet, and apparently of sales of products purchased in cyberspace. One of them is expected to pass.

The Internet is a phenomenon that few if any of us understand. Why kill the goose that may lay many golden eggs with oppressive, multitudinous federal, state and local taxes? Besides, local businesses are apparently divided on the issue, in part because many of them are creating their own web site showrooms and get shivers thinking about remitting sales taxes at varying rates to 50 different states.

In 80 packed but readable pages, Bonnett explores the implications of this technological, economic and social change for government tax policy.

But rapid change in electronic commerce is only one of his concerns.

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Bonnett notes several trends in state and local taxation: a shift from the property tax and to the income tax; more reliance on the local option sales tax (which Illinois allows); and reductions in business taxes.

On this last point, Bonnett believes competition for economic development among the states has pushed business taxes down. Indeed, in the recent session of the legislature, Illinois business was successful in winning tax concessions for Illinois-based corporations with the argument that it would stimulate investment in new workers and plants.

Bonnett devotes a chapter as well to intergenerational tax inequities in many states, certainly including Illinois. For example, Illinois has had the same low $1,000 individual exemption from the income tax that we instituted 30 years ago when I voted for it as a lawmaker. It was generous then, but is stingy now. At the same time, Illinois exempts all pension income from the state income tax. Thus, a poor working mother with children pays the 3 percent tax while wealthy retirees on multiple pensions escape the tax altogether.

That's out of whack, and to the lawmakers' credit, they just increased the individual exemption to $2,000 over three years. Many would call this modest, however, as the exemption would need to be more than $4,000 to have the same value for a low-income family that $1,000 represented in 1970.

Bonnett should give this state's lawmakers plenty to think about in the years ahead. His analysis is a distant early warning for all policymakers. 

James Nowlan was president of the Taxpayers' Federation of Illinois in the early 1990s. A former Illinois legislator and state agency head, he is director of the Journalism Fellows Program at the University of Illinois Institute of Government and Public Affairs.

36 ¦ July/August 1998 Illinois Issues