EDITORIAL: Congress considers a new Internet tax

OPINION:

Ever since the Internet became a hub for buying and selling in the early ’90s, lawmakers have been itching to deal themselves in on the revenue stream. Today, the House Financial Services Committee will consider a bill that lays the groundwork for a multibillion-dollar online tax. It all starts with legalizing Internet gambling.

Congress enacted a virtual-casino ban in 2006, discarding the principle that had, until then, left the Internet largely free of discriminatory taxes and government regulation. That statute’s draconian enforcement provisions would force financial institutions and credit-card companies to scrutinize every Internet transaction - even those taking place across international boundaries - so that “unlawful” wagers could be blocked.

Treasury Department regulations implementing this law are so complex that they did not take effect until last month. Committee chairman Barney Frank wants to jettison those rules before they are implemented. It’s not that the Massachusetts Democrat is troubled by the imposition of harsh regulatory burdens on banks. Rather, he has his eyes on the $42 billion federal jackpot created by companion legislation introduced by Rep. Jim McDermott. The Washington Democrat’s measure would impose a 6 percent tax on gambling deposits for online casinos to be distributed to states and Indian tribes that opt into the licensing system established by Mr. Frank’s bill.

While debates on this subject often focus on the moral implications of gambling, that has never been the government’s interest. A total of 42 states goad low-income residents into trading their hard-earned cash for illusory dreams of a better life through the lottery, generating $25 billion a year from their deception. Twenty-eight states permit operation of Indian casinos that haul in an additional $27 billion in revenue. A dozen states allow Las Vegas and Atlantic City-style casinos that hand over $5.7 billion in taxes to state bureaucracies each year, according to Congress’ Joint Committee on Taxation.

Government-sanctioned gambling is big business, generating an annual profit of $92 billion. Protecting this cash cow from upstart online competitors was the priority for the industry lobbyists who succeeded in enacting the Internet gambling ban four years ago. Mr. Frank’s proposal represents a far less burdensome and intrusive regime than existing law. Passage of his legalization measure without Mr. McDermott’s companion tax measure would be ideal, but it’s unlikely.

That’s because Congress is the one with a gambling problem. With a $13.2 trillion credit line, federal lawmakers continue to make bad bets, doubling down on spending - just one more stimulus - in the vain hope that it will somehow pay off. Laying the foundation for future Internet-specific taxes will only enable the three-card monte players in Congress to further jeopardize the country’s economic future.