Tax unfairness is a job killer

Nearly 15 million Americans of widely varied skill levels are employed in the retail sector of the U.S. economy, a number second only to the healthcare sector among private employers. As such, we should expect the retail sector to play a vital role in the job market’s recovery. However, while retail sales grew 25 percent between 2004 and 2012, total sector employment over the period was virtually unchanged. One of the major reasons behind this job stagnation can be traced to the rapid rise of e-commerce. As sales move online, however, retail jobs disappear because online retailing requires less labor per unit of sales than do “brick-and-mortar” stores. To put this job loss into perspective, consider that Wal-Mart employs about five persons per $1 million in sales, while that number is only 1.4 per $1 million for Amazon.com.

Obviously, online retailing benefits from many technological advantages over brick-and-mortar sales. Since labor is a cost of production, technology often reduces the need for labor, and in many cases the purpose of technology is to do so. When driven by efficiency concerns, economists generally view labor-saving technology with favor. Yet, even if we fully embrace efficiency, a public policy which promotes labor-saving technology beyond what market incentives provide is problematic, because the ultimate result of such a policy is the government picking winners and losers. For this reason, these types of formal or informal subsidies are, as former Republican National Committee Chairman and Mississippi Gov. Haley Barbour bluntly observed, “something most conservatives traditionally abhor.”

Or do they?

In 1992, the Supreme Court in Quill v. North Dakota held that absent a clear authorization from Congress, out-of-state vendors who have no physical presence in a state are not obligated to collect and pay state sales taxes. As the direct result of this tax loophole, the federal government today is engaged in the active promotion of job-reducing policies in the retail sector by the discriminatory tax treatment of e-commerce sales. Indeed, state and local sales taxes average about 9.5 percent across the nation, so avoiding sales taxes provides a substantial price advantage for online retailers, expanding online relative to local sales. As online retailing grows relative to brick-and-mortar sales, so also grows the use of low-labor production technologies used by online sellers. Federal law, therefore, is picking winners and losers, and the losers are American workers.

Fortunately, a solution is available.

{mosads}According to the Supreme Court in Quill, Congress has the authority to close this disparate tax treatment between brick-and-mortar and online commerce via legislation. Taking up the court’s invitation, the United States Senate passed the Marketplace Fairness Act to close this tax loophole with strong bipartisan support. Yet, the Republican-controlled House has yet to even take up the measure.

While many leading conservative voices such as Wisconsin Gov. Scott Walker (R), Ohio Gov. John Kasich (R) and syndicated columnist Charles Krauthammer have all voiced support for the Marketplace Fairness Act, there remains a surprising number of powerful conservatives such as Sen. Ted Cruz (R-Texas) and Speaker John Boehner (R-Ohio) who continue to oppose the bill because they falsely view the legislation as a tax increase. Once the issue is properly understood, however, this view of the Marketplace Fairness Act is misguided.

Let’s be clear here: Having online vendors remit sales taxes is not a new tax, and this should be obvious to all without an ulterior agenda. Sales taxes, whether collected by the seller or not, are already owed, but few buyers bother to report and remit the sales tax to the state government. As such, the absence of a sales tax on a transaction is actually tax evasion rather than a tax exemption. For this reason, the Marketplace Fairness Act stands in stark contrast to current efforts to impose significant new taxes on the Internet such as a failure by Congress to extend (and hopefully make permanent) the Internet Tax Moratorium or the Federal Communications Commission’s threatened reclassification of broadband Internet access as a Title II common carrier service, which would open up the Internet to a 16.1 percent universal service fee.

Like it or not, technology is changing the world, and it always has. Advances in information technology are quickly transforming the retail sector, with e-commerce taking an increasing share of sales and driving out local brick-and-mortar outlets. The success of e-commerce may be caused, in part, by superior efficiency and consumer preferences for online shopping, thereby giving economists nothing to complain about. To the extent e-commerce’s growth is driven by tax preferences, however, the economic welfare implications are not nearly so clear, especially when the tax treatment leads to a reduction in labor demand. The U.S. job market remains poor, especially for lower-skilled labor, and tax policies that diminish job opportunities should be subject to careful scrutiny by policymakers. Accordingly, legislative solutions to close this tax loophole, such as the Marketplace Fairness Act, should be given serious consideration.

Ford is the chief economist of the Phoenix Center for Advanced Legal & Economic Public Policy Studies, a nonprofit 501(c)(3) research organization that studies broad public policy issues related to governance, social and economic conditions, with a particular emphasis on the law and economics of the digital age.