The downside to starving America's 'tax beast'

Neil Macdonald on the anti-tax craze that is wreaking havoc with state governments.

Two or three times a day, emails arrive in my inbox offering good wines at almost ridiculous discounts. Thirty, 50, even 60 per cent off.

It's a new American experience, the result of legal changes allowing interstate alcohol shipments — something Canadians will almost certainly never enjoy.

If I click the purchase button in those emails, a box containing three or four bottles arrives at my office a few days later.

Free shipping. And, even better, no tax.

It's not hard to see what will happen next. These aggressive new online companies, with names like Wine Til Sold Out and Cinderella Wines, are going to do to traditional wine merchants what Netflix, the online movie provider, did to Blockbuster.

"Just another great thing about this country," is the general sentiment of acquaintances here who tipped me to these deals. And from the perspective of good old self-interest, it's hard to disagree.

Tea Party activists in Smithtown, N.Y., take their anti-tax message to the streets in April 2010. (Reuters)

Plus, it's perfectly legal. Raise a glass to less government and individual freedom!

The thing is, though, this is nuts. Every dollar's worth of wine that FedEx delivers to my office means 10 cents that doesn't go to the state tax office.

Granted, state governments here don't charge the staggering levies imposed on alcohol by the tax-vacuuming government monopolies in Canada. But it's the same principle.

Somebody has to pay for garbage collection, fire departments, police protection and fixing streets. Somebody has to pay for due process and the courts.

In this country, though, a large and growing population of tax avoiders is helping strangle its own governments.

On the ropes

Right now, internet sales in the U.S. are growing by 10 per cent a year and economic forecasters predict e-commerce will hit $250 billion within three years. That's roughly 20 per cent of Canada's entire economic output.

If the seller doesn't have a corporate presence in your state, meaning no warehouse or retail store, these internet transactions are tax-free. Government gets nothing.

What's more, even when the seller does have a state presence, the pressure to dispense with taxes nowadays is overwhelming.

I was recently trying on a pair of good shoes at Brooks Brothers in Manhattan. Anxious for a sale, the clerk asked whether I reside in New York.

"We'll ship it to you," he said, when I replied no. "You save the tax." Never mind that Brooks Brothers does operate in Maryland, where I live.

It's reaching the point here where actually paying sales tax makes people feel like chumps.

Now, some states are fighting back — Texas has sent a huge bill for years of unremitted sales taxes, and Montana is going after online travel agencies like Expedia and Orbitz, which feel they have the right to avoid state "bed taxes" on hotel rooms.

But state governments today are clearly feeling vulnerable and enfeebled.

The rock and the hard place

Sensing that, online retailers are pushing back. In California, for example, one big online retailer forced tax authorities to back down by threatening to shut its subsidiaries in the state.

At the same time, a citizenry that vigorously pursues its God-given right to avoid taxes is also demanding ever more entitlements and government services.

Meanwhile, the demands for services are on the increase, like here in New Jersey where public sector retirements were up nearly 50 per cent in 2010, partly because of concerns that future benefits would be cut. (Associated Press)

The result? On Wednesday, the U.S. Census Bureau reported that state revenues dropped a full 30 per cent in 2009.

Now, most of that was the result of newly unemployed people paying no income tax on top of cratering returns on state pension-fund investments. But losses to e-commerce contributed, too.

And as revenues have evaporated, millions of newly needy applicants have been lining up for health care, unemployment benefits and workers' compensation.   State governments, staggering around in a daze, have reacted by slashing and cutting wildly.

But that approach isn't working. Illinois is running a deficit amounting to nearly half its total budget. California had to hand out IOUs instead of actual refunds for the 2009 tax year. New Jersey simply refused to pay the $3.1 billion it owed its workers' pension plan in 2010.

It's spreading

Cities are in deep trouble, too. Home values fell off a cliff over the last few years, taking property taxes with them.

Even worse, local authorities have, for many years now, been kicking the financial can down the road by offering their unions generous pension benefits rather than raises. Now that bill is coming due and the money isn't there to pay.

In Alabama, the town of Prichard simply defaulted on its pensions last year, forcing its retired employees to find work again if they wanted to keep eating and paying the rent.

That story made page one when it broke, but defaults may soon seem more commonplace than newsworthy.

"Prichard is the future," San Diego's former city attorney told the New York Times last month. "We're all on the same conveyor belt."

So far, state and local services have been largely sustained by President Barack Obama's much-maligned, economic stimulus package (which also relies on borrowed money).

But that program runs out this year and the newly ascendant congressional Republicans have made it clear they have no intention of renewing it.

They are too busy planning more tax cuts and reductions in service, which is what they say the electorate sent them to Washington to do.

There's a conservative doctrine here known as "starving the beast."

The idea is that government is an ever-expanding, self-perpetuating evil, and only by cutting off its sustenance can it be forced to reshape itself in a smaller, less intrusive form.

But as the famed jurist Oliver Wendell Holmes once said, taxes buy civilization.

Freedom and greed are essential market forces, but there has to be a limit. And in this gloriously free and consummately greedy nation, a reckoning is coming.