If the Internet Sales Tax Fails, Expect Higher Gas Prices

Legislation allowing states to collect sales taxes on purchases made over the Internet—approved by the Senate in a 69-27 vote Monday evening—faces an uncertain future in the House.

What would happen if the push for Internet sales taxes falls apart? In at least a couple of states—Maryland and Virginia—it could mean higher gasoline prices.

One reason the Senate’s Marketplace Fairness Act came up now is that states are hungry for new revenue. Balanced-budget rules and the slow economic recovery have combined to produce a $55 billion budget shortfall affecting all states this year.

That hunt for revenue makes online shoppers an appealing target; estimates are that collecting sales taxes on Internet purchases could put an additional $23 billion a year in state coffers.

Some states are so anxious for the anticipated revenues they’ve already committed the money to various projects. Virginia recently approved a landmark transportation bill that assumes $258 million in tax receipts from online sales—about 65 percent of which would go toward infrastructure and abolishing the state gasoline tax.

Maryland is also dependent on congressional action, though to a lesser extent. The state plans to apply online-sales revenue toward offsetting an increase in its own gas taxes. Plans call for phasing in a hike of 20 cents per gallon between now and 2016, but about 7 cents of that could be offset by Internet sales taxes.

If the Marketplace Fairness Act doesn’t make it through the House, both Annapolis and Richmond will be left with revenue shortfalls in programs already approved in state budgets. I Maryland, drivers would be hit with the full 20 cent hike in gasoline taxes.

“They’re going to get the money they want for transportation,” said Stephen Lee Davis of Transportation for America, “whether it’s coming through the Internet-sales tax or not.”

The consequences for Virginia will be a little more extreme. Instead of abolishing its gas tax as planned, the state will reverse course and raise it—probably the last outcome motorists want.

In the long run, this might be a good thing. Because gas taxes haven’t kept up with inflation in most places, they’re no longer the moneymakers for states they used to be. Raising gas taxes would correct for that downward trend.

And while they don’t affect fuel costs to the same extent that crude oil prices do, gas taxes are between six and 14 times more effective at cutting fuel consumption than new fuel-economy standards, MIT researchers have found. That’s because, unlike advances in fuel efficiency that take place over years, gas taxes produce immediate changes in behavior—such as switching to public transit or ditching the car entirely, both of which could have offsetting social benefits.