“Therefore—as with any pro-growth tax reform—the sales tax base in the states should be broadened by treating Internet retailers similarly to in-state retailers, and the marginal income-tax rate should be reduced such that the total static revenue collected by the state government is held constant.”

Today’s Wall Street Journal carries an op-ed by Arthur B. Laffer which lays out how e-fairness is part of pro-growth tax policy, underscoring the split among conservatives on this issue. He argues that states can cut income taxes if Internet retailers collect and remit the sales tax on purchases that are legally due.  The Marketplace Fairness Act, which passed a test vote in the U.S. Senate a few weeks ago with bipartisan majority of 75 Senators, would make this possible.  Legislators in Ohio already have a plan in place to cut state income taxes if the bill is passed and signed by the President.

Tax Internet Sales, Stimulate Growth

States can cut their income-tax rates if Web vendors collect the sales taxes that are legally due.

By Arthur B. Laffer
The Wall Street Journal

Reinvigorating the economy should be priority No. 1 for federal and state leaders. After enjoying an average growth rate above 3.5% per year between 1960 and 1999, Americans have had to make do with less than one-half that pace since 2000.

The consequences are already dramatic and will become even more so over time. Overall we are 20% poorer today than we would be had the pre-2000 growth rate persisted. All other things being equal, less national income also means federal and state fiscal problems are more intractable.

At the state level, there are reforms that can alleviate the problems associated with declining sales-tax bases and, at the same time, allow the states to move closer to a pro-growth tax system. One such reform would be to have Internet sellers collect the sales taxes that are owed by in-state consumers when they purchase goods over the Web.

So-called e-fairness legislation addresses the inequitable treatment of retailers based on whether they are located in-state (either a traditional brick-and-mortar store or an Internet retailer with a physical presence in the state) or out of state (again as a brick-and-mortar establishment or on the Internet).

In-state retailers collect sales taxes at the time of purchase. When residents purchase from retailers out of state (including over the Internet) they are supposed to report these purchases and pay the sales taxes owed—which are typically referred to as a “use tax.” As you can imagine, few people do.

The result is to narrow a state’s sales-tax base. It also leads to several inefficiencies that, on net, diminish potential job and economic growth.

Exempting Internet purchases from the sales tax naturally encourages consumers to buy goods over the Web; worse, the exemption incentivizes consumers to use in-state retailers as a showroom before they do so. This increases in-state retailers’ overall costs and reduces their overall productivity.

The exemption of Internet and out-of-state retailers from collecting state sales taxes reduced state revenues by $23.3 billion in 2012 alone, according to an estimate by the National Conference of State Legislatures. The absence of these revenues has not served to put a lid on state-government spending. Instead, it has led to higher marginal rates in the 43 states that levy income taxes.

Therefore—as with any pro-growth tax reform—the sales tax base in the states should be broadened by treating Internet retailers similarly to in-state retailers, and the marginal income-tax rate should be reduced such that the total static revenue collected by the state government is held constant.

One difficulty in imposing an Internet sales tax is the existence of dozens, if not hundreds, of sales-tax jurisdictions in many states, often with the tax rates and tax classification of the same goods varying by jurisdiction. It is overly burdensome to task companies with remitting sales taxes to more than 9,500 such tax jurisdictions. Instead, each state should set up a single sales-tax system, making compliance as easy as possible for today’s modern sellers.

Addressing e-fairness from a pro-growth perspective creates several benefits for the economy. A gross inequity is addressed—all retailers would be treated equally under state law. It also provides states with the opportunity to make their tax systems more efficient and better aligned toward economic growth, as well as improve the productivity of local retailers.

The principle of levying the lowest possible tax rate on the broadest possible tax base is the way to improve the incentives to work, save and produce—which are necessary to reinvigorate the American economy and cope with the nation’s fiscal problems. Properly addressing the problem of e-fairness on the state level is a small, but important, step toward achieving this goal.

Mr. Laffer is the chairman of Laffer Associates.