===================================================================== Center for Community Economic Development University of Wisconsin-Extension Community Economics Newsletter No. 294 April 2001 ===================================================================== A Newsletter from the Center for Community Economic Development; Community,Natural Resource and Economic Development Programs, and University of Wisconsin-Extension, Cooperative Extension Service ===================================================================== Internet Commerce: Challenges for the Rural Public Sector /1 by John Leatherman /2 The public sector in rural areas faces a number of challenges associated with electronic commerce. Many of these challenges stem from institutional trends quite apart from advances in telecommunications technologies, specifically, to trends associated with the devolution of public service responsibilities. The decentralization of responsibility from broader levels of government has created a situation where local well-being is increasingly left to the private market and local communities. Communities are largely on their own to formulate strategies to respond to the broader forces that may create or constrain opportunities. In this environment, it becomes essential that local public officials and other community leaders understand the importance of emerging economic trends relating to advanced information technologies (IT). Concerns Related to Local Public Finance Among the chief concerns of local officials is public finance. Probably nowhere is the aversion to local property taxes greater than in rural areas where large numbers of low-income elderly and land-rich/income-poor farmers reside. In rural areas where local governments may have access to the retail sales tax, the tax base is often weak at best. Lower rural per capita income, coupled with the propensity for people to travel to regional trade centers, make the sales tax base extremely vulnerable. Many state and local governments have expressed concern over the 1998 federal moratorium on new taxes related to Internet commerce that currently extends until 2006. The “Internet Tax Freedom Act” has been justified as providing protection for the yet-embryonic cyberspace-based economic engine federal and some state policy makers are eager to encourage. Similarly, much has been made about the supposed indirect benefits associated with the creation of many new high-paying jobs and revenue-generating economic activities. Along the same line, it has been said the Internet will strengthen industries to the extent productivity enhancements make them more competitive, thereby protecting and potentially expanding states’ and localities’ tax. Finally, the moratorium provides time to devise a system that avoids unfair double- and triple-taxation of Internet-Based transactions. Advocates for states and local governments, however, see the moratorium as eroding an important revenue source. A wide range of estimates have been generated regarding the revenues at stake, ranging from inconsequential to catastrophic losses. For local governments in rural areas, the immediate concern is twofold. The fear is that the Internet-Based commerce will join catalogue sales as another means whereby retail sales “leak” from the local economy. Fewer local sales means less retail sales tax. Equally troubling is the effect that additional competition will have on the viability of local merchants. If uncompetitive local merchants close shops on Main Street that will put the commercial property tax base at risk as well. In addition, states that are not competitive in capturing a share of new IT-based economic opportunities may see lagging personal and business tax revenue growth, the source of many intergovernmental aids. Currently, Internet commerce does not seem to have a significant competitive effect on traditional retail sellers, but this could change over time and sector-specific differences are likely. Further, the difficulty and costs of requiring firms to collect state and local taxes are probably not as high as many industry advocates fear. Importantly, the moratorium on tax collection does have a regressive effect given the higher propensity of wealthier individuals who use the Internet for purchases, but the effect is decreasing as less affluent people are also purchasing computers and going online. Maintaining Critical Community Services Among the ubiquitous economic trends that may be observed in rural areas is the consolidation and increasing scale of economic activity. This can be noted in the consolidation of retail sales activity in large retail discounters located in regional trade centers. Other critical rural community services are facing similar pressures. School districts in rural places have long faced consolidation pressures to the considerable consternation of many communities. More recently, health care systems faced a similar restructuring. Many local governments in rural areas heavily subsidize local hospitals, homes for the aged, and other health-related services in a desperate attempt to maintain a quality, albeit inefficient, health care system. To the extent that emerging communications technologies can partially offset the necessity of scale economies, rural communities may have greater chance of maintaining service systems critical to viability. Such would seem the case in areas of education (distance learning), health care (telemedicine), and business (video conferencing, non-local market access, and business-to-business transactions). Shifting emphasis from local governments subsidizing inefficient service delivery systems to supporting more economically sustainable ones through technology investments might be a positive adaptive strategy. Local Government Service Provision Local governments in rural areas are critical local institutions. Many local government officials not only fail to appreciate the importance of broader trends related to IT, but also don’t recognize the potential the technology has to strengthen the institution of local government itself. Local government can improve access to information by making public records available online and keeping information about meetings or public issues current. Similarly, local officials can often respond to public inquiries and complaints faster and more effectively via e-mail than by telephone or in person. They can also use Internet technology to enhance citizen involvement through Internet-Based public polling, referenda, and voting. It is possible to create forums for public issues on local government Web sites. Among the potentially beneficial uses of the Internet is to conduct the business of government online. There are many types of transactions and filings that can be done using the Internet, ranging from paying a parking ticket to distributing copies of local ordinances. Providing access to records or services online can represent a substantial cost savings for local government workers serving customers at the front desk, and for local business persons, such as Realtors and builders, who spend considerable time at local government offices. 1/ Based on “Internet-Based Commerce: Implications for Rural Communities.” Reviews of Economic Development Literature and Practice: No. 5. U.S. Economic Development Administration. The full report is available on the EDA Web site at: 2/ Assistant Professor in the Department of Agricultural Economics and Director of the Office of Local Government, Kansas State University-Extension. Ron Shaffer Community Development Economist Issued in furtherance of Cooperative Extension work, Acts of May 8, and June 30, 1914, in cooperation with the U.S. Department of Agriculture. Carl O‘Connor, Cooperative Extension, University of Wisconsin-Extension. University of Wisconsin-Extension, U.S. Department of Agriculture and Wisconsin counties cooperating. UW-Extension provides equal opportunities in employment and programming, including Title IX and ADA.