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Tax the Net!

By David Friedman
Senior Fellow

Planet IT
September 20, 2000

Few economic fantasies are as beguiling as the notion that the Internet consumes far less of our social infrastructure -- roads, energy, police, court time and so forth -- than brick-and-mortar stores and shops. "[An] e-commerce transaction," the Cato Institute recently argued, "does not require police protection, fire service, garbage collection and so on." Such claims support Congress' decision to exempt e-tailers from state sales taxes and fuel environmentalists' eagerness to tout the Web as the key to a greener future.

None of these contentions, however, survives even cursory examination. Contrary to the Cato Institute's libertarian mythology, e-commerce relies heavily on public services. Most states, for instance, have had to set up Internet fraud and anti-hacker task forces. Police and fire agencies protect both packages and the consumers who receive them. And even trivial Internet sales generate piles of cardboard waste.

Nor are online sales necessarily earth-friendly. Last December, the Center for Energy and Climate Solutions, a global-warming advocacy group, breathlessly reported that by replacing "atoms with bits" the Internet was reducing American energy and material consumption. E-commerce, the group assured us, lets consumers buy all the products they want without driving their cars or stimulating new retail development.

The truth is, there's scant evidence that online sales really do displace trips to real-world stores. Many Internet deals occur only after consumers check out products in local shops. In fact, energy analyst Mark Mills has shown that during the digital 1990s, U.S. consumption of transportation fuel actually rocketed by 12 percent, and air traffic grew by a remarkable 34 percent. "The Internet," Web pioneer Vinton Cerf once observed, "has the funny effect of increasing the amount of travel."

Competition, moreover, is forcing most online companies to use overnight air transport, by far the most wasteful use of oil and gas products. To spur sales, for example, Amazon.com announced that it was prepared to deliver 250,000 copies of the latest Harry Potter novel the day after the book's release. A whopping 100 FedEx flights and 9,000 delivery employees were required to make good on that promise.

And what about the energy costs required just for taking orders over the Web? E-commerce advocates often assume that the Internet, easily the most elaborate electrified system ever built, was somehow constructed and powered up for free. But electrons comprise the very lifeblood of the Web, and making sure they are in plentiful supply and go where they are supposed to is an enormously expensive proposition.

Traffic delays throughout the country attest to the massive installation of hundreds of thousands of miles of new cabling, server relays and hubs that supports Internet growth. Since 1997 alone, we have plugged more than $1 trillion worth of electric machinery into this ever-expanding network.

Analysts such as Mills estimate that far from conserving energy, the Internet accounts for some 8 to 15 percent of total U.S. electricity consumption -- up from nothing at the start of the decade. Over the past five years, U.S. electricity demand increased by more than the total generating capacity of Central and South America combined. Half of this new requirement was met by coal -- one of the dirtiest energy sources -- and nuclear power supplied another 20 percent. The U.S. economy currently spends four times more for electric power than for oil, a complete reversal from just three decades ago.

Internet delivery requirements are spurring massive new development and infrastructure growth. For example, ShopLink.com, an East Coast online grocery store, requires a fleet of 25 trucks, each of which makes 40 deliveries per day, just to meet e-grocery demand within a 50-mile radius. Multiply that by thousands of similar businesses, then add national and worldwide shipping requirements, and the result is an explosive need for new airports, factories, warehouses, vehicles and fuel.

Internet "fulfillment" development is everywhere apparent in areas like Ontario, Calif., suburban New Jersey and Portland, Ore., which sport cheap land and labor on the fringes of densely populated areas. Dubbed "aero-tropolises" by one scholar, they contribute to urban sprawl and stimulate precisely the demand for new schools, housing, development, and social infrastructure e-tailers disdain.

This is the real harm inflicted by the myth of virtual commerce: The Internet transforms but does not avoid the social costs of our economy. We currently fund commercial infrastructure by levying sales taxes that, however imperfectly, allocate public expenses to the consumers they benefit. E-commerce may change how we should think about these issues, but it cannot magically avoid them. They deserve a far more serious hearing than Internet advocates have allowed so far.

Copyright: 2000 Planet IT

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