PROP 13 MEETS THE INTERNET


How State And Local Government Finances Are Becoming Road Kill On The Information Superhighway


For Release: August 16th, 1995
For more information, call:
  CENTER FOR COMMUNITY ECONOMIC RESEARCH
  Nathan Newman (510) 643-8293   newman@garnet.berkeley.edu
  Full report located at:
       http://garnet.berkeley.edu:3333/budget/tax-internet.html

BERKELEY, CA: UC Berkeley's Center for Community Economic Research (CCER), known for its innovative Internet work, released a report today detailing how rising Internet-based commerce is threatening the stability of state and local government finances nationwide.

Getting beyond the hype of media mergers and "cyberporn", the report, entitled PROP 13 MEETS THE INTERNET: HOW STATE AND LOCAL FINANCES ARE BECOMING ROAD KILL ON THE INFORMATION SUPERHIGHWAY, documents how "cyberspace" is undermining regional taxation and development decisions by local and state governments.

The report argues that, with state and local governments already losing $3.3 billion each year to untaxed interstate sales, new standards for Internet-based sales promise a devastating loss in local government revenue. "With companies like Netscape, Intuit, and Mastercard agreeing on new standards for financial payment over the World Wide Web," argues report author and CCER co-director Nathan Newman, "it is only a matter of time before the stream of on-line commerce becoming a roaring river."

The report highlights the irony that Silicon Valley, home to many key Internet companies, is one of the areas where local governments are most vulnerable to revenue losses because of its dependence on sales taxes as a government revenue source. "The thing that scares us is that cities are run on local sales tax," notes Cupertino Mayor Wally Dean in the report; "If stuff is sold on the Internet, there's no sales tax. It's a house of cards for government finances."

The report details the potential tax losses to state governments across the country. In order to highlight the danger to local government, the report lists the "Top Ten Vulnerable California Counties And Cities." Sacramento and Santa Clara counties top the list of counties vulnerable to total loss of sales taxes. The towns of Colma, Bellflower and Cupertino lead the list of cities which receive the highest percentage of tax revenue from sales taxes.

In a desperate scramble for local revenue and jobs, cities and states have ended up offering tax subsidies that further undermine overall revenue for local governments. "As counties like Los Angeles and Orange County teeter on the brink of bankruptcy," notes Newman, "policy makers need to rethink the current fad for decentralization of government responsibilities. In an age of national and international commerce, it is now impossible for local governments to design fair and efficient systems of taxation that serve rational economic development."

To respond to the challenges of rising electronic commerce, the Center for Community Economic Research suggests three broad policy recommendations:

This report is part of long-term research by the Center for Community Economic Research on the social, economic and political effects of the Information Superhighway. CCER is also actively engaged in helping governments, community organizations and educational institutions use Internet technology to enhance civic life. CCER's work has been cited in national periodicals ranging from USA Today to Business Week to the Washington Post. CCER's most recent project, a National Budget Simulator to allow "Internet Senators" to interactively cut the federal deficit on the World Wide Web, has had tens of thousands of visitors since it was announced in June 1995.

CCER has been a consultant to the Association of Bay Area Governments in assisting cities and government agencies in Northern California to get on-line. Its Economic Democracy Information Network (EDIN) project has supported and trained a whole range of community organizations in getting on-line and bringing their voices to the Information Superhighway. PC COMPUTING declared the EDIN server (located at http://garnet.berkeley.edu:3333/) one of the 29 "Highlights of the Internet" in their September 1994 issue.

See attached Executive Summary


EXECUTIVE SUMMARY


State and local government finances are being undone by rapid changes in global commerce and technology, particularly the rise of the Internet. The key revenue base of state and local governments--sales taxes--is being undermined through the rise of untaxed commerce on the Information Superhighway.

THE EMERGING CRISIS:

ROOTS OF THE CRISIS:

Beginning in the early 1980s, the federal government began to cut funding to the states, forcing states and local governments to pay for more and more services out of local budgets with sales taxes often the revenue of choice. These two trends--more out-of-state sales and a greater dependence by local governments on sales taxes--are now on a collision course.

THE BURDENS ON LOCAL GOVERNMENT FROM THE SALES TAX:

RECOMMENDATIONS:

To respond to the challenges of rising electronic commerce, the Center for Community Economic Research makes three broad policy recommendations:

The threatened loss of local sales taxes due to mail-order and on-line commerce should be treated as an opportunity to look more closely at the burdens we put on local and state governments. We should question whether such burdens make sense in a world where multinational corporations often outpower whole states in total assets and can pit such local governments against each other in competition for jobs and local revenue.