State budget challenges prompt review of new revenue sources
What: States considering broadening sales tax base to include internet services and digital advertising to increase tax revenues and help with dire budget challenges resulting from the Covid-19 pandemic’s impact on state economies.
Why: States and municipalities across the nation face budget gaps related to the Covid-19 pandemic’s economic impact on cities, counties, and states. Many have called their situations dire and have expressed the need for significant federal funding. On May 15, the US House of Representatives passed the #HeroesAct that would provide as much as $1 trillion directly to states and municipalities. This bill is already facing opposition in the Senate and even if a version of the bill is approved by Congress, and signed by the President, it will likely be weeks or even months before funds reach the states.
To try to offset their potential budget gaps, New York, Maryland, and Nebraska introduced bills that would expand their respective sales tax bases to include digital advertising. The Maryland legislature passed the bill but their Governor recently vetoed it. It is expected that the legislature may override the veto when it convenes for a special session at the end of May. If the bill becomes law, it is expected to raise $100 million. The bills in New York and Nebraska remain stuck in committee.
Some states are revisiting raising significant revenue by broadening their sales tax bases to include internet access (at one point the Congressional Research Service estimated that a sales tax on internet services could raise as much as $6.5 billion across the U.S.). That said, trying to apply sales tax to internet access and digital-only services, like digital advertising, would violate the Internet Tax Freedom Act (ITFA), enacted in 1998 to protect the development of internet technology. States would need to find a way to overcome that.
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