Loss of Tax Funds to E-Commerce Could Pose Difficulties for Public Colleges

Whenever state revenue fails to meet projections, higher education is vulnerable

By PETER SCHMIDT

Unlikely as it may seem, the rapid growth of electronic commerce could spell financial trouble for many public colleges.

The reason: Purchasing over the Internet enables consumers to avoid paying sales taxes,

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which all but a few states rely on to help finance higher education and other services.

Although online shoppers in states with sales taxes are legally required to pay taxes on their purchases, the vast majority don't, and states generally are unable to track such purchases and collect the money owed them. Given that most states rely on sales taxes for well over a third of their revenues, the taxes not collected from those consumers could soon cause serious damage to state budgets for public colleges and other needs.

So far, however, state efforts to collect taxes on online sales have run into formidable obstacles, including some members of Congress. Both the U.S. House of Representatives and the Senate are considering bills that would block states from imposing online-shopping taxes or mounting new efforts to compel vendors in other states to collect and remit taxes on sales. The measures are now pending in committees, but might be taken up for floor votes as early as this summer.

Electronic commerce "is still in its infancy" and "needs to be nurtured by entrepreneurs, not choked off by government," U.S. Rep. John Kasich, an Ohio Republican, said in introducing one of the measures last fall.

"We don't want to create an atmosphere where government at any level becomes comfortable interfering with e-commerce," added Mr. Kasich, the chairman of the House Budget Committee. He called any discussion of taxing electronic commerce "entirely out of line."

If states cannot find an effective way to tax electronic commerce, many may soon find themselves having to adjust revenue projections downward, and making corresponding cuts in state spending.

If such a scenario comes to pass, "you clearly have a threat to public education," says Malcolm Gillis, president of Rice University and chairman of the committee on tax issues for the Association of American Universities, which represents 61 major research institutions.

A recent study by the Center for Business and Economic Research at the University of Tennessee at Knoxville projects that, by 2003, state governments will fail to collect about $10.8-billion annually as a result of unpaid taxes on online sales.

Nearly every state is expected to lose a significant share of potential revenue. The only exceptions are the four without any sales tax: Delaware, Montana, New Hampshire, and Oregon.

"The revenue losses are going to be there whether the economy is strong or sour," notes William F. Fox, the center's director. He says states would feel the impact more in a weak economy, when their budgets already would be strained. But, even in good times, they are susceptible to shortfalls if their sales-tax collections fail to meet projections.

The most vulnerable states are those that, lacking income taxes, rely on sales taxes for at least half of their tax funds. They include two of the nation's largest states, Florida and Texas, both of which are projected to lose more than 4 percent of their total annual tax revenues to electronic commerce by 2003, according to the Tennessee report.

Tennessee, which also relies heavily on sales taxes, will fail to collect about $400-million -- an amount roughly equal to a year's worth of revenue growth from a strong economy, Mr. Fox says.

Many experts on state finance concur with the center's findings, and say that public colleges -- which account for about 6 percent of state spending -- have especially good reason to worry. When presented with budget shortfalls, one of the first areas of state budgets that lawmakers look to trim is spending on higher-education institutions, partly because public colleges have alternative sources of funds, such as tuition.

"Typically, when state revenues are bad, higher education tends to get a disproportionate share of the cuts," notes Scott R. Mackey, the chief economist for the National Conference of State Legislatures.

Until recently, however, public-college leaders have generally been absent from efforts to get Congress to ensure that electronic commerce does not siphon funds from state budgets.

Most opposition to Congressional proposals to ban or limit taxes on Internet sales has come from the state-legislatures' group, the National Governors' Association, other organizations representing state and local officials, and trade associations representing bricks-and-mortar retailers.

"This has been a Washington issue and a statehouse issue, but it has not made its way out onto the campuses," says Travis J. Reindl, a policy analyst at the American Association of State Colleges and Universities.

Some college lobbyists say their silence on the issue stems from pragmatic considerations -- namely, a desire not to alienate fiscally conservative lawmakers or electronic-commerce entrepreneurs who have donated generously to higher-education institutions.

"The picture is pretty complicated because of our need to attract new sources of funds, and because of the fact that the e-commerce community has become one of those sources of funds," says A. Scott Sudduth, director of federal relations for the University of California.

Mr. Reindl's state-college group and three other national organizations -- the American Association of Community Colleges, the Association of American Universities, and the National Association of State Universities and Land-Grant Colleges -- waded into the debate on Capitol Hill in April. In a letter to the chairmen of the House and Senate commerce committees, they urged Congress "not to pursue measures such as a permanent ban on e-commerce taxation," which has been proposed in both chambers.

The letter warned that Congress's approval of such a ban "could destabilize state and local revenue systems, which in turn would have an immediate and adverse impact on public services such as higher education."

More than 170 tax scholars on college campuses signed a similar statement, which they began publicizing that month. In it, they contended that a ban on electronic-commerce taxes would force states to finance budgets through some combination of "massive reductions in expenditures," or substantial increases in other taxes, or an increased reliance on the federal government.

Given the fiscally conservative mood that prevails in most statehouses and Congress, cuts in expenditures appear to be the most likely outcome, experts on state fiscal policy say.

In Florida, for example, "with the Republican administration and Republican legislature, the whole no-new-taxes agenda permeates everything," says David S. Honeyman, director of the University of Florida's Center for the Study of Education Finance.

"We have kind of boxed ourselves in as far as new sources of revenue," Mr. Honeyman says.

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