For Release: August 16th, 1995
For more information, call:
Nathan Newman (510) 643-8293
newman@garnet.berkeley.edu

Prop 13 Meets the Internet:

How State And Local Government Finances Are Becoming Road Kill On The Information Superhighway

Berkeley, CA: UC Berkeley's Center for Community Economic Research (CCER), known for its innovative Internet work, released a report today detailing how rising Internet-based commerce is threatening the stability of state and local government finances nationwide.

Getting beyond the hype of media mergers and "cyberporn", the report, entitled Prop 13 Meets the Internet: How State and Local Finances are Becoming Road Kill on the Information Superhighway, documents how "cyberspace" is undermining regional taxation and development decisions by local and state governments.

The report argues that, with state and local governments already losing $3.3 billion each year to untaxed interstate sales, new standards for Internet-based sales promise a devastating loss in local government revenue. "With companies like Netscape, Intuit, and Mastercard agreeing on new standards for financial payment over the World Wide Web," argues report author and CCER co-director Nathan Newman, "it is only a matter of time before the stream of on-line commerce becoming a roaring river."

The report highlights the irony that Silicon Valley, home to many key Internet companies, is one of the areas where local governments are most vulnerable to revenue losses because of its dependence on sales taxes as a government revenue source. "The thing that scares us is that cities are run on local sales tax," notes Cupertino Mayor Wally Dean in the report; "If stuff is sold on the Internet, there's no sales tax. It's a house of cards for government finances."

The report details the potential tax losses to state governments across the country. In order to highlight the danger to local government, the report lists the "Top Ten Vulnerable California Counties And Cities." Sacramento and Santa Clara counties t op the list of counties vulnerable to total loss of sales taxes. The towns of Colma, Bellflower and Cupertino lead the list of cities which receive the highest percentage of tax revenue from sales taxes.

In a desperate scramble for local revenue and jobs, cities and states have ended up offering tax subsidies that further undermine overall revenue for local governments. "As counties like Los Angeles and Orange County teeter on the brink of bankruptcy, " notes Newman, "policy makers need to rethink the current fad for decentralization of government responsibilities. In an age of national and international commerce, it is now impossible for local governments to design fair and efficient systems of taxat ion that serve rational economic development."

To respond to the challenges of rising electronic commerce, the Center for Community Economic Research suggests three broad policy recommendations:

This report is part of long-term research by the Center for Community Economic Research on the social, economic and political effects of the Information Superhig hway. CCER is also actively engaged in helping governments, community organizations and educational institutions use Internet technology to enhance civic life. CCER's work has been cited in national periodicals ranging from USA Today to Business Week to the Washington Post. CCER's most recent project, a National Budget Simulator to allow "Internet Senators" to interactively cut the federal deficit on the World Wide Web, has had tens of thousands of visitors since it was announced in June 1995.

CCER has been a consultant to the Association of Bay Area Governments in assisting cities and government agencies in Northern California to get on-line. Its Economic Democracy Information Network (EDIN) project has supported and trained a whole range of community organizations in getting on-line and bringing their voices to the Information Superhighway. PC Computing declared the EDIN server (located at http://garnet.berkeley.edu:3333/) one of the 29 "Highlights of the Internet" in their September 1994 issue.