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Taxing Issue

Republicans hijack the e-commerce debate.

Government-appointed bipartisan commissions have played an important role in recent American politics. The social security commission in the early '80s and the commission on closing military bases in the early '90s both helped resolve thorny issues that legislators, beholden to special interests, couldn't settle on their own. The Advisory Commission on Electronic Commerce is supposed to serve the same purpose for the public policy crisis created by the shift of commerce away from local merchants and onto the Internet.

By 2003, states and cities could lose as much as $15 billion in sales tax revenues because of a shift from old-fashioned retail shopping to catalog and Internet sales, according to the Center on Budget and Policy Priorities. That's the equivalent of $50,000-a-year salaries for 300,000 teachers. What's more, the shift to Internet sales would place the burden of already regressive sales taxes even more disproportionately on low-income Americans, who are least likely to buy products over the Internet or from catalogs. Most public officials—particularly those at the state and local level—believe such sales must be taxed. But some conservative Republicans, particularly those in the House and Senate leadership, don't want to be associated with any tax increase, even a manifestly reasonable one that merely eliminates a disparity among categories of businesses. And many Internet and mail-order merchants resist losing their advantage over local retailers.

Unable to agree on a solution, Congress passed the Internet Freedom Act in 1998, creating a three-year moratorium on Internet taxes and establishing a 19-member commission charged with developing a plan by April 2000. The members of the commission, both industry representatives and public officials, were appointed by the Republican and Democratic congressional leadership and by the Clinton administration. If the commission conforms to the traditional role of such commissions—forging compromises—it will propose a way to tax Internet purchases that won't unnecessarily check the growth of online commerce. Indeed, the commission does contain a potential majority of business leaders and public officials trying to devise such a plan. But a determined minority of conservative anti-taxers and business lobbyists, who oppose this majority, are turning the Internet commission into an ideological circus.

THE MAJORITY SURFACED at the commission's first meeting, which took place in Williamsburg, Virginia, last June. Among the public officials, it includes Mike Leavitt, the Republican governor of Utah; Ron Kirk, the Democratic mayor of Dallas; and the three administration appointees. On the business side, it includes Charles Schwab CEO David Pottruck; John Sidgmore, vice chairman of MCI WorldCom; Ted Waitt, CEO of Gateway; and AT&T CEO C. Michael Armstrong. The business leaders are willing to accept the imposition of sales taxes if the states and cities would simplify and standardize the current tax system. (Vendors must now deal with some 7,000 different sales tax jurisdictions.)

But the opposition to any tax compromise also surfaced. The opposition consists of commissioners appointed by Senate Majority Leader Trent Lott and then-Speaker of the House Newt Gingrich, and it includes Virginia Governor James Gilmore, chairman of the commission; Grover Norquist, president of Americans for Tax Reform and a lobbyist for Microsoft; Dean Andal, a California Republican official who also runs a real estate and banking business; and Stan Sokul of the Direct Marketing Association, which lobbies for catalog and e-commerce businesses.

Gilmore quickly made his own sentiments apparent by appointing the wife of a lobbyist for the Electronic Industries Alliance as the commission's executive director and installing the commission at the lobbying firm's offices. (When Leavitt complained of a conflict of interest, Norquist accused him of sexism.) After the Williamsburg meeting, Gilmore assured BusinessWeek that the Internet would make the sales tax itself obsolete: "The emergence of a whole new form of commerce may bring the frailty of the sales tax to the surface." Gilmore also acceded to requests from Norquist and his anti-tax allies that obscure right-wing apparatchiks be allowed to speak at the second meeting.

At that session, which was held in New York on September 14 and 15, House Majority Leader Dick Armey and House Majority Whip Tom DeLay circulated a letter declaring their opposition to "new taxes on the Internet" and accusing the commission of focusing on "how to tax the Internet rather than whether to tax the Internet." But the first session, in a packed conference room at the Millennium Hotel, did not take up taxes on Internet purchases. It was devoted to the testimony of three speakers who favored rescinding a three percent national tax on telecommunications. The speakers included Raymond Keating of the Small Business Survival Committee, a group that Norquist helped to establish, as well as Jeffrey Eisenach of the Progress & Freedom Foundation, an organization started by Gingrich. Norquist then introduced a resolution attacking the tax, which he labeled the "Gore tax," even though it existed in various forms for many decades before the current vice president became a supporter.

Most of the commissioners were not pleased to be spending their time listening to people they had never heard of debate questions that were not part of the commission's legislative mandate. ("The notion that state and local governments need additional revenues is absurd. I've spent months working on my next book. Trust me!" Keating exclaimed.) Even AT&T's Armstrong, who favors eliminating the telecommunications tax, complained. During one intermission, an official from a major accounting firm lamented privately that the "right-wing fringe" was dominating the meeting. It reminded me of one of these 1960s antiwar meetings in which some tiny Trotskyist or Maoist sect manipulated a moderate majority into voting on whether or not to support world revolution.

ON THE SECOND DAY, after the commission had finally heard relevant testimony about the Internet and taxes, Leavitt tried to consolidate the silent majority. He set out criteria for a plan that included tax simplification and the equal treatment of all sellers, and he proposed that a group within the National Governor's Association be asked to come up with a proposal that the committee could consider during its next meeting, in December. Pottruck, Armstrong, and Time Warner President Richard Parsons backed the essence of Leavitt's plan, and it looked as if it might be adopted.

But then Gilmore, Norquist, and the anti-tax faction entered the fray. Norquist argued that the public and the House Republican leadership opposed taxes on Internet purchases. Gilmore declared that he opposed the criteria. Norquist called on the commissioners to vote first on whether the plan had to result in no new net taxes. Norquist's proposal, if accepted, would have defeated the purpose of any compromise. Sokul complained that Leavitt and the governors had a "protectionist interest" in the result.

Gilmore then announced that he had to cut the debate short so that he could return to Virginia to prepare for Hurricane Floyd. Wielding his power as chairman, he declared that the entire matter should be sent to a new drafting committee. The Leavitt-Pottruck forces, caught off guard, consented, and Gilmore appointed a drafting committee that included himself, Sokul and Andal. Leavitt's proposal had been shelved.

Gateway's Joe Heubach expressed his frustration with the meeting and with Gilmore's role. "There is a deal to be made," he said. "A silent majority favors it, but Gilmore is a one-term governor who wants to run for the Senate and doesn't want to be seen favoring a tax." A spokeswoman for Gilmore insists his position was based on principle: "The governor has made no bones that he is philosophically opposed to taxes and tax increases." But, she added, "obviously, there are politics going on."

It's still possible the commission could come up with a constructive compromise, but to do so the silent majority must first develop a strategy for overcoming Gilmore and Norquist. A good beginning might be simply to replace Gilmore, who was elected chairman by the commissioners themselves, with Leavitt, who, despite being a conservative Republican from one of the most conservative states, has found himself cast as a flaming liberal by Norquist and Gilmore.

As for Norquist, some of the CEOs might consider calling his employers in Redmond, Washington. As a Microsoft lobbyist, he occupies one of the commission's industry slots. Yet introducing resolutions pillorying the vice president or gaining prime time for Keating can't be too high on Microsoft's agenda. Perhaps Bill Gates would be interested to learn that his lobbying budget is financing the agenda of the House Republican leadership.

This article originally ran in the October 11, 1999 issue of the magazine.