Amazon Tax backfires

 

As is now the expected norm in California, the State Legislature and Governor do not want to leave money on the table.  And a budget shortfall of $28 billion is giving them plenty of incentives to stick taxes into every corner of the state economy that they can.

Democratic lawmakers passed ABX1 28, the “Amazon Tax”, which was signed by Jerry Brown on June 29th in an effort to raise $200 million from online retailers who sell products through Amazon.com.

But as is the case with “revenue generation” in Sacramento, it never takes into consideration that businesses, people, capital, and incentives are fluid.  Businesses can leave.  Employment can and will rise and fall as a direct result of spending decisions decreed by Sacramento.  The weather is great, but nobody is forced to stay in California and fight for decreasing job opportunities.  In fact, lawmakers should know this, as they met in Texas to find out why California companies relocate there mere months ago.

Amazon.com has a network of retailers who use the well-recognized company to sell products.  For example, if you were a small business owner who wanted to sell apparel online, you could set up an account with Amazon.com to allow online users to find your apparel and purchase it online.  The payment is facilitated by Amazon.com, you earn a profit, and the buyer is shipped the good.  This is great for California.  With such a high cost of living, it affords entrepreneurial citizens and taxpayers the ability to earn an above national average standard of living in California and while having access to literally a world of consumers.

Under ABX1 28, Amazon.com and other online retailers like Overstock.com (who has even spent money to have their name on the Overstock.com Coliseum in Oakland) have to collect the 7.25% from anyone purchasing a good from California because Amazon.com’s affiliates are located in California (not Amazon.com, located in Seattle).  So in an effort to not pay taxes, Amazon.com has severed it’s ties with over 10,000 smaller business in the state to be free of the economically disastrous laws of California.

Lawmakers state that they want an even playing field for both online retailers and brick-and-mortar retailers like Wal-Mart.  Of course, as Charles Dudley Warner said, politics makes strange bedfellows.  The only way Sacramento would defend Wal-Mart is to justify a supposedly $200 million revenue stream to the capitol.  It’s an excuse that is intended to sound fair.

And here’s where outcomes become less than stellar.  With Amazon.com severing ties, the state will collect significantly less than anticipated because the online transactions that drive sales revenue will not take place.  The products from those retailers will not be available to the online world of consumers.  Individual firms will lay off staff, which, on top of less than anticipated online sales tax revenue, equates to less state income taxes collected.  And with continual job destruction in a state with an unemployment rate of 11.7% (as of May 2011), further income uncertainty will lead to less discretionary spending and, thus, less sales revenue, on brick-and-mortar retailers in the state.  And property values, both commercial and residential, fall as a result of falling aggregate incomes.  Consider this on top of California ranking as the worst state to do business and the 47th most expensive state to do business.

Every municipal, state, and federal government needs to realize that job creation is the root of economic problems.  Creating jobs leads to increased revenues to the state.  While balancing budgets are a noble and right goal, squandering future economic opportunity to pay for a budget shortfall today and keep public employee unions happy only kicks the ball down the road when economic growth looks grim.

Amazon.com and online retailers can fight the law in court, stating that having affiliates does not constitute a physical presence of the company and fight the interpretation of a “long-arm statute” by the State Board of Equalization.  But in an effort to hedge against a legal system run by the same California political class, Amazon.com is now collecting signatures to qualify a measure on the February 7th ballot to overturn the law.

When issues like these are no longer considered politics as usual, California will be making progress.