Subj: Economic Impact: Perspectives of IPI: Center for Technology Freedom From: Bartlett Cleland Institute for Policy Innovation To: Internet Caucus Advisory Committee [Graphic Tables 2 and 3 have been omitted. Footnotes were not included in the original -- JN] Budget Surpluses As Far As The Eye Can See. Despite what the public might have been led to believe, companies that do business on the Internet carry their own weight. There are no additional legal and constitutional protections extended to them that traditional " bricks-and-mortar" businesses do not already enjoy. Furthermore, neither the federal government nor the states are in need of additional revenue that would justify placing new taxes on the Internet. Productivity growth and the stock market have soared since the introduction of the Internet, and with it capital gains tax revenues, income tax revenues and sales tax revenues all have surged, putting an end to the myth fostered, in part, by the Internet tax moratorium that the Internet is getting special treatment and a tax-free ride. In fact, it is becoming clear that the untaxed Internet has actually been the source of much of the revenue surge flowing into Washington and state capitals. If revenues continue coming into the federal Treasury at their current pace, this year will mark the eighth consecutive year in which the growth of federal revenues has outstripped the growth of gross domestic product. Indeed, from 1994 to 1998, revenues rose at an average rate of 8.3 percent a year, much faster than GDP. Consequently, revenues as a percentage of GDP increased from 18.1 percent in 1994 to 19.9 percent in 1998. Although revenue growth slowed to 6.1 percent in 1999, it still exceeded GDP growth and boosted the ratio of receipts to GDP to a postwar high of 20 percent. The Congressional Budget Office (CBO) projects that even if productivity growth slows from the torrid 6- percent annual rate chalked up in the fourth quarter of 1999 and if average economic growth falls below three percent a year, revenues will remain near 20 percent of GDP for years to come.16 As a result of the economy's Internet-driven performance, the federal government is facing large budget surpluses as far as the eye can see. The CBO projects total surpluses of $3.152 trillion over the next ten years. State governments also enjoy flush fiscal times. Total state revenues from all sources-including taxes on businesses, individual income, sales, and property, and other excise taxes and fees-also have been rising consistently throughout the first few years of the Internet era. State and local revenue growth from 1996 though 1998 averaged 5.6 percent a year. Combined state and local revenues as a share of GDP hit an all time high of 11 percent in 1995 and remain near that high point today at more than 10.7 percent. As a result of this healthy revenue growth, states are in surplus, and that surplus continues to grow. Not only have total state and local revenues risen but state sales tax collections in particular have risen consistently since the advent of the Internet. In 1994, the year Netscape made the Internet browser famous, states collected $123 billion in sales taxes. By 1995 when the fist real e-commerce transactions had been registered, states collected $132.2 billion in sales taxes. As Internet use and e-commerce proliferated, sales tax revenues did not shrink but continued to rise. States collected the following amounts of sales tax revenue: $139.4 billion in 1996, $147.1 billion in 1997, and $155.3 billion in 1998. A recent CATO Institute study showed that state sales tax revenues grew at nearly twice the rate of inflation between 1992 and 1998, 17 and they grew at an even faster pace last year: 7.3 percent in the last quarter of 1999, over the same period in 1998.