Ted Cruz’s Plan for Internet Freedom? A Permanent Internet Tax Ban

Sen. Ted Cruz is lobbying hard to prevent government regulation of the Internet, but one measure the Texas Republican supports is expected to create a sizeable budget hole for his state.

Cruz, a likely presidential candidate in 2016, spent ample time last week promoting a permanent extension to an expiring ban on federal, state, and local taxation of Internet access that is currently being considered in Congress. The measure, which passed the House earlier this year, is popular in both parties and considered a lame-duck "must pass," as the ban is set to lift on Dec. 11.

But a lesser-known consequence of the bill is that it would also end Internet access taxes currently in place in seven states—Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Wisconsin, and, yes, Texas.

These states are the only ones that can charge residents for Internet access thanks to a grandfather clause in the original Internet-tax moratorium—first passed by Congress in 1998—that carved out an exemption for states that had already begun to cash in.

If the permanent ban is enacted, those states are due to lose an estimated $500 million in annual revenue, according to a report from the left-leaning Center on Budget and Policy Priorities. About $358 million of that would come from Texas.

Texas's overall projected sales tax revenue for the 2014-15 fiscal year was nearly $55 billion, according to Gov. Rick Perry's budget, but eliminating its Internet tax is more than a drop in the bucket, said Michael Mazerov, a policy analyst at CBPP who authored the report.

"Even in a state the size of Texas, that's a significant amount of revenue," he said.

Compounding matters is Texas's lack of an income tax, meaning the state relies more heavily on its 6.25 percent sales tax. Other than South Dakota, Texas is the only state among those slated to lose their Internet-access tax revenue that doesn't have some form of income tax.

Cruz almost never mentions Texas specifically when he raises the issue, eschewing mention of how the bill would present a challenge for the state budget and specifically reduce the taxes paid by Internet-accessing Texans. His office declined repeated requests for comment on the matter, but he has spoken extensively on the topic this month.

"And what I hope we do in January, with a new [Republican] majority in the Senate, is pass a permanent ban on Internet access taxes," Cruz said during a speech in Austin last week outlining his four "principles to protect Internet freedom," a catalog that includes opposition to net-neutrality regulations and support for reforming government surveillance. "That would be a pro-freedom agenda. That would be a pro-Internet agenda. That would be a pro-economic opportunity and empowerment agenda."

But even with a GOP majority, passing the permanent ban would require complicated political navigation. The ban is supported by online-freedom groups and antitax coalitions, which have rallied an unusual collection of Republicans and Democrats behind it.

Few in Congress want to see the ban expire, and it passed the House this summer on a voice vote without much debate. But some Democrats, including Rep. John Conyers of Michigan, have suggested adopting another temporary ban extension as a more judicious approach, saying that the Internet is no longer a nascent technology in need of tax protections. (Such a temporary ban would also likely maintain the grandfathered exemption for Internet taxes in Texas and the six other states.)

And there's a bipartisan group of senators who want to link the Internet-access tax ban with a separate bill that would give states more authority to tax online purchases from websites like Amazon and eBay. That measure, which Cruz vocally opposes, is more controversial than extending the temporary ban: The bill—known as the Marketplace Fairness Act—passed the Senate last year, but House Speaker John Boehner indicated earlier this month he would not bring it up for consideration.