2015 ITFA Talking Points

Internet Tax Freedom Act: Why a Limited Moratorium is Necessary and Appropriate

  • Any federal law preempting state and local taxing authority must have a sunset date, but especially one like the Internet Tax Freedom Act (ITFA), which over time will exempt an entire sector of the economy from state and local taxation. 
  • The Internet is no longer a nascent industry needing special preemptive federal tax protection to grow and prosper. To the contrary, as more services transition from telecommunications and cable to broadband, the scope of what the ITFA covers will greatly expand, even if the ITFA’s current language remains unchanged.  Over time, the ITFA will essentially exempt an entire, and enormously fast-growing and prosperous sector of the economy – the telecommunications and cable industries – from state and local taxation.  As a result, the ITFA will become a special state and local tax exemption for some of the largest, most entrenched, and most prosperous companies in the nation and the world:  AT&T, Verizon, Comcast and the like.  
  • Permanently shielding a large, unregulated, entrenched and prosperous industry from state and local taxation means that other, less prosperous individuals and industries will have to pick up the tax shortfall. 
  • At the individual consumer level, poorer, largely rural consumers of plain old telephone services will have to pay higher taxes, while wealthy, largely urban and suburban, consumers escape taxes by moving entirely to broadband.
  • At the business level, other industries like retailers, manufacturers and other general businesses, as well as   utilities like electric, water and gas services, will have to pay higher taxes, while the enormously profitable broadband/telecommunications industry gets off tax-free.
  • To protect the tax bases and fiscal strength of state and local governments, Congress should support a limited/short-term extension of the ITFA, by which time the full scope of the transition from telecommunications to broadband will be complete, and the true costs of the ITFA preemption can be more reliably and meaningfully assessed. 
  • Experience has proven that it is very difficult to get Congress to revisit an issue unless legislation includes a sunset provision. The best example is the enactment of the 4R Act, which has been the subject of considerable litigation because it is very poorly drafted.  Yet Congress has never held an oversight hearing on the law to discuss whether it’s been implemented successfully and whether changes might be necessary.
  • The presence of a sunset date in the current ITFA has acted as an effective restraint against aggressive litigation by the telecommunications industry attempting to use the law in ways that clearly were not intended. If industry knows that there is a possibility that state and local officials are going to have an opportunity to alert members of Congress that ITFA has been used in ways that were not intended, and that Congress is required to revisit the issue, litigation will be significantly restrained.
  • Eliminating a sunset provision, and making the moratorium permanent, would likely lead to more litigation to determine the application of the extremely broad and very ambiguous language found in the ITFA, particularly related to the definition of discriminatory taxation.  The costs of expensive litigation against states and localities are always borne by the taxpayers.
  • If Congress approves a permanent moratorium, virtually every single bad aspect of the ITFA, including costly litigation and tax shifting onto less well-off consumers and industry will come true, and Congress will be without the means or the will to reexamine these negative effects on states and localities and their constituents.