We Didn’t See That Coming

Representatives of state and local governments were caught by surprise when the Senate decided to take up legislation that would allow states to collect sales and use taxes on Internet transactions. While the issue has been percolating at the state-local level for decades, Congress has typically shown scant interest in it. Surprise turned to delight when the bill passed the Senate resoundingly. It now heads to the House, where its fate is uncertain. In thinking about why this legislation suddenly has legs, implicit trade-offs come to mind. Specifically, is the federal government compensating states for ongoing cuts in federal aid? Or for federal tax reform that could eliminate tax preferences that benefit state and local governments?