Gov. Cellucci

Internet tax testimony

Wednesday, February 2, 2000

Thank you Chairman Domenici and members of the Committee for this opportunity to speak before you this morning on an issue of the utmost importance to the economic future of our nation _ an Internet free from burdensome taxes.

Innovation has defined the American identity for more than two hundred years _ especially during the 1900s. In the American Century, homegrown dreamers used their imagination and perspiration to generate history_changing inventions, from the telephone, to the automobile, to the supercomputer, to, most recently, the Internet.

The boisterous new information_based economy that we are enjoying today is the natural evolution of that tradition. The Internet economy is here to stay. The flurry of commercials from .[dot] com companies during last Sunday's Superbowl illustrates the high tech impact on our economy. It is incumbent on political leaders to set economic policy that will facilitate its continued growth.

But despite the important boost technology has given our economy, nearly everyone would agree that we are only scratching the surface of the full potential of e_commerce. That future potential is being put in peril by misguided efforts to tax on_line purchases, which would choke off a burgeoning industry before we experience its full economic benefit.

We are proud of our new economy in Massachusetts, just ten years removed from a national recession that hit Massachusetts harder than nearly any other state. The Massachusetts economy of the new century bears no resemblance to that of the late 1980s, when a few large corporations dominated our business landscape. Today, many of our companies have fewer than a handful of employees, a sign of a more stable economy, but also one that can adapt quickly to a changing market. Much of this growth is a direct result of the explosion of e_commerce and from Internet start_ups. In fact, we have picked up a new state nickname, the .[dot] commonwealth, which  underscores our high tech focus.

We are very pleased to have helped create 450,000 new jobs in Massachusetts over the past five years, but it wasn't state government that directly hired all those people. What we have done is to create an employer_friendly atmosphere that has encouraged businesses to stay, relocate and expand in Massachusetts, including 38 tax cuts. Chopping taxes and helping reduce other business costs have been particularly important for our high tech industry, which employs about 700,000 people statewide.

Embracing change is important to the progress of any nation, state or community. The Berkshire County former mill city of North Adams, rebounding from massive layoffs in the 1980s, is now being referred to as Silicon Village _ a destination for e_entrepreneurs seeking a more rural lifestyle. Last month, I held my State of the State address in the northeastern Massachusetts City of Lowell, a high tech melting pot that is the envy of any mid_size city in the nation. Without the high tech driven economy, these cities and many others like them would be the economic ghost towns that they were in the early 1990s, when a generation of young people believed that they were doomed to fall short of their parents' success. I will do anything in my power to prevent that sense of despair from prevailing again.

But this is not just an issue for Massachusetts. In order for our nation to continue this record economic growth, we must not build a  toll on the Information Superhighway. Imposing stifling taxation on this powerful new tool of commerce jeopardizes the future of high technology and the jobs it creates for our citizens. There is a belief among some elected officials that if it moves, tax it. But often times, when you tax it, it won't move.

In addition, imposing an Internet tax would leave the United States vulnerable to foreign competitors that do not tax on_line sales. Last October, I met with Canadian leaders to impress upon them the  importance of a worldwide ban on Internet taxes, but that is unlikely to ever fully come to pass. Unlike traditional brick and mortar businesses, e_commerce ventures are extremely portable, and could easily move their headquarters offshore to an island like  Bermuda where they would be immune from any sales tax from this country.

This is not just a real threat to the economy of Massachusetts, but for the nation as a whole. An Internet tax_fueled exodus of high tech employers would damage a growing industry that, according to Forrester Research, is expected to surpass $180 billion in sales by 2003 _ more than nine times the sales generated in 1999. More important, it could shut off the flow of new Internet_related jobs,  which, according to a University of Texas study has created 2.3 million new employment opportunities. I don't know of any governor who would forgo that level of job growth for his or her state, in return for a small _ and unneeded _ amount of revenue.

Opponents of a tax_free Internet also point to missing out on revenue from not slapping a sales tax on e_commerce. Based on 1998 factors, estimates of the taxes from on_line sales fall between $170 and $450 million nationally. While that is not a big number to  governments with multi_billion dollar budgets, it means a lot to the consumer who generally must pay a shipping and handling charge on Web purchases, and may find the added cost of a sales tax too  much to bear. And it means a lot to e_commerce companies that are trying to get off the ground and can't afford to lose business.

But the final number is irrelevant. This is perhaps the best economic boom in our nation's history, and to attempt to derail  this progress for short money today threatens to put an abrupt end  to our prosperity. This revenue is better left in the private markets than sitting in already overflowing government coffers.

In fact, by the end of the next fiscal year, Massachusetts will have more than $4.2 billion stored away in reserve accounts, while just eight short years ago, these accounts were running a deficit.  Last month, I filed my Fiscal Year 2001 budget, which factors in an  income tax cut while recommending spending increases in health care, education, local aid, and housing _ all priorities for my  state. This is true not just in Massachusetts, but on a national  basis. From Maine to Florida, Oregon to Maryland, government is  already keeping too much of the people's money _ it is time to say enough is enough.

There is also no empirical evidence that e_commerce has a detrimental effect on traditional retailers. Proponents of taxing  e_commerce argue that traditional "Main Street" merchants are losing customers to the tax_free Internet shopping. The fact that sales tax collections in  Massachusetts were up more than eight percent in the second half of 1999 _ the same time period that e_  commerce became part of the American vocabulary _ go a long way toward proving that the growth of on_line sales has not slowed the  success of traditional retailers.

I understand that later you will be hearing about a new tax scheme from the National Governors' Association. With all due respect to  my friends and colleagues from the NGA, the so_called Zero Burden  Tax Simplification Proposal is unworkable, and would harm the national economy with little, if any reward in return. While the plan's primary purpose is to allow for the taxation of the  Internet, it would have other harmful effects as well.

Even the proposal's supporters must admit that for this to work, every state and company would need to sign_up. Since the plan is voluntary, there is no way to guarantee full participation. And  without full_participation, we would have a much more disjointed and arbitrary system than exists today. In fact, it would place the states and businesses that entered the plan voluntarily at a competitive disadvantage. The plan even seems to complicate  standard cash purchases by not making clear whether a third party  would be required for that type of transaction.

The NGA plan would also create a giant network of private taxation bureaucracies that would rival even the Internal Revenue Service in terms of scope, and its potential intrusion into the private dealings businesses and consumers _ an issue that Lt. Governor Jane Swift and I are making a priority of our Administration.

The formation of this oversight bureaucracy would mean that another entity would have access to consumers' personal information. There is always the worry that this detailed information on the spending  habits of millions of American consumers would be vulnerable to  computer hackers or sold to profiling companies, just as some states have done with motorist information through their motor  vehicle departments.

In Massachusetts, the Cellucci_Swift Administration has its own version of a tax simplification plan. It is a ballot initiative  drive for the November general election that will roll back the  state income tax to five percent _ a promise made more than a decade ago that the state Legislature has refused to keep. This tax cut will help simplify the lives of thousands of Massachusetts  families by allowing them to keep up to $600 per year of their hard earned money.

I would like to take this opportunity to call on Congress not just to extend the moratorium on Internet taxation to cover sales tax,  but to enact a permanent ban on all Internet_related taxes. The  Internet is a new technology that is open to anyone, anywhere. An  Internet venture can spring up from the soil of the smallest hamlet in the Nation's Heartland as easily as it could in Silicon Valley, Austin, Texas or Cambridge, Massachusetts. For that reason, its  continued growth is crucial to our future prosperity and reign as  the world's technological leader. We can only achieve this goal by keeping the Internet a tax_free zone.

Thank you, Mr. Chairman.