NEW YORK (MainStreet) — The vast majority of states are projected to have budget deficits for the 2012 fiscal year, forcing some to consider fixes ranging from hiking income taxes to rethinking pension and health care plans for public employees. But one new study argues states could significantly reduce their deficit just by imposing an online sales tax.
If every state in the country taxed online sales, it would raise $10 billion nationwide and cut the average state’s budget deficit by 17%, according to a report from Extrabux, a price comparison website. And for some states, the gains would be even greater.
Iowa, which is projected to have a budget deficit of $186 million next year, could bring in about $113 million by imposing an online sales tax, cutting its deficit by 61%. Likewise, Indiana could bring in $230 million from online sales and reduce its deficit by 85%.
“It’s important to recognize that taxing online sales at the national level wouldn’t just fix a small percentage of the budget deficit – 17% is a very big number,” said Jeff Nobbs, co-founder of Extrabux. “It may not be the best thing for websites like ours to have all online sales taxed, but it’s the fairest thing to do and it would make a big difference.”
Indeed, several states have begun to tack on sales tax for online purchases in the past few years, including North Carolina, Rhode Island and most recently Illinois, with the goal of raising revenue and making it easier for bricks-and-mortar businesses to compete with e-commerce sites.
But even in these states, there is generally a big gray area for online sales taxes because many of the biggest online retailers like Amazon are located out of state and can’t be taxed directly. Instead, states resort to taxing e-commerce companies who partner with affiliate commerce sites in the state to promote their products. Unfortunately, this usually just leads to big retailers like Amazon breaking their ties with these smaller affiliate companies to avoid the tax, only to focus their efforts on other states. Meanwhile, much of the sales tax revenue continues to go uncollected.
For this reason, Nobbs argues that tweaking the sales tax policy can’t be done on a state by state basis, and must instead be imposed at the national level. And given Washington’s current emphasis on finding cures for the state and federal budget problems, the numbers in the Extrabux report could prove enticing to some legislators.