Republicans in Ohio last week took an important step toward broad tax reform when the state House of Representatives approved an across-the-board reduction in the personal income tax. That tax cut, however, is contingent upon Congress passing legislation that will allow Ohio and other states to have online-only retailers remit state sales tax just like any other business does. The U.S. Senate is now poised to grant states this power via the aptly named Marketplace Fairness Act. This legislation levels the economic playing field by putting small businesses on the same footing as online-only outfits. Conservatives should embrace this needed reform.
Under the current system, state governments collect sales tax from stores located in the jurisdictions if an outlet conducts an in-person sale or makes a transaction online with a state resident. When an individual makes an online purchase from a retailer outside their state, that person is supposed to report the purchase and pay the sales tax—commonly called a “use tax”—to his or her home state. As one might imagine, taxpayers rarely adhere to the requirements of use taxes.
The nationwide increase in online shopping has thus led to a sharp decline in sales tax compliance for state governments. States, which are legally forced to balance their budgets, have made up their revenue shortfalls through a mix of spending cuts, increasing marginal income tax rates and hiking other taxes or fees. The lack of a mechanism to have remote sellers collect and remit sales tax ultimately hurts small local business owners while increasing the overall tax burden on individuals and families who now pay for the higher taxes in other areas. This policy essentially amounts to a federal subsidy for online-only retailers and it threatens the creation of jobs for many local businesses.
The Marketplace Fairness Act is Congress’ answer to a 1992 Supreme Court ruling that said states needed federal approval to have remote retailers remit sales tax the same way local retailers do. This legislation allows states to correct the tax imbalance and divide the burden they impose on their residents more sensibly. With the recovery of lost sales tax revenues, states will be able to reduce marginal income tax rates and other levies as they balance their budgets. Naysayers argue that this will not be done, but they are already being proven wrong.
States with conservative leadership like Ohio are eager to take advantage of this change. Legislators in Columbus have already approved language that will automatically reduce the state income tax rate based on projected new sales tax collections if the Marketplace Fairness Act is adopted federally. Ohio families will then have more money in their pocket and local businesses will be able to compete more evenly with out-of-state competitors. This is a fiscal recipe, based on sound conservative principles, which can be replicated around the country.
Arthur Laffer, the famed chief economist for President Reagan, endorsed the federal legislation in a recent Wall Street Journal column and noted that the principle of levying the lowest possible tax rate on the broadest possible tax base is the way to improve the incentives to work, save and produce—all of which are necessary to reinvigorating the American economy.
It is a conservative principle that taxes should be flat, fair and equally applied. The Marketplace Fairness Act gets our nation closer to that ideal by eliminating what has become a de facto federal subsidy for online retailers while flattening the tax code and encouraging pro-growth policies in the states. The Senate, with GOP support, will approve the bill shortly. Conservatives should rally to the cause of this important legislation and urge that the Republican House follows suit.
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