State faces revenue drop as federal Internet tax ban passes House

Starting November 1, 2006, Wisconsin will no longer be allowed to tax Internet usage, in a move that would open up savings for users but could put a hole in the state budget.

The federal measure to eliminate the tax was authored by Representative James Sensenbrenner, R-Wis., who said home users could save around a dollar a month.

It was inserted into the Internet Tax Nondiscrimination Act, a “tech-neutral” plan that exempts all Internet access from taxes. Legislators expect President Bush to sign the bill, passed on November 19 by the House of Representatives, into law.

“Enacting this legislation is a big win for the majority of American Internet users,” Sensenbrenner said in a statement. “Without any action by this Congress, Internet commerce would be subject to state and local taxes in thousands of jurisdictions. ... As one of only a handful of states that taxes Internet access, Wisconsin’s growth and ability to remain competitive in the technology sector is seriously hampered.”

Wisconsin is able to levy its 5 percent tax because it started before 1998, when the Internet Tax Freedom Act brought a moratorium on state charges. Wisconsin was exempt from the act under a “grandfather” clause. Sensenbrenner said that he sees this clause as contrary to the aid the act was supposed to give to Internet users, adding another “onerous tax” to the burdens of low-income Wisconsin residents. He attempted to have the tax revoked immediately in September 2003, but Senator Herb Kohl, D-Wis., and others fought to keep the taxes active for a few more years.

While passing the tax ban is a victory for Sensenbrenner, it removes a source of funding from the state budget. According to Eva Robelia, communications officer for the Wisconsin Department of Revenue, the estimated loss of tax revenue to the state is about $25.8 million for the first year. Robelia said that while the long-term effects of the tax loss have yet to be determined, the state’s upcoming $1.6 billion shortfall needs as much funding as it can gather.

“Any loss in revenue would be problematic for the state,” Robelia said.

Melanie Fonder, spokesperson for Wisconsin Governor Jim Doyle, said that it is too soon to tell what the effect of the tax will be on the state revenue, but the governor’s office will be keeping a close eye on the legislation to see how the process will move forward. Doyle has supported the continued taxation as a way to bring more money to the state.

“It’s too soon to say ... [but] we’re going into another tight fiscal period, and we’re very concerned about anything that has an impact,” Fonder said.

Sensenbrenner feels that the losses in the budget will be made up by personal gains on the part of Internet users, and will open business interaction in the state by moving away from Wisconsin’s reputation as a high-tax environment.

“Beginning November 1, 2006, people in Wisconsin will save at least a dollar, if not more, each month,” Sensenbrenner said. “These savings will allow more low-income individuals to access the Internet and relieve a tax burden on Wisconsin’s economic growth.”

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Les Chappell is a staff writer for WTN and can be contacted at les@wistechnology.com.