(Ed. Note: The “Innovation Fact of the Week” appears as a regular feature in each edition of ITIF’s weekly email newsletter. Sign up today.)
Two Democratic New York politicians, State Senator Andrew Gounardes and Borough President of Brooklyn Eric Adams, recently published an opinion piece in The Wall Street Journal outlining their proposal to create a data sales tax. They present this tax as a solution to New York City’s trends of increasing inequality and government spending, including budget shortfalls driven by the city’s COVID-19 response. To some their proposal may seem reasonable, but digging deeper, the idea is more image than substance; an unworkable idea that would change the Internet for the worse.
While Gounardes and Adams’ proposal lacks details, they offer a four-step plan of how their data sales tax might work: Quantify the amount of New Yorkers’ personal data that companies use for commercial purposes; require companies to register and disclose their transactions of that data; tax those companies, either in the form of a transaction fee or a percentage of their net revenue; and, finally, allocate those funds to state and local governments.
This complaint that consumers are getting a raw deal is not entirely original. Other politicians—including Senators Mark Warner (D-VA) and Josh Hawley (R-MO), former Secretary of State Hillary Clinton, and California Governor Gavin Newsom—have made similar claims that consumers are “paying” for free online services with their data. Proposed solutions to this “problem” have ranged from companies paying consumers for the use of their data to now, a data sales tax.
But these solutions are based on a series of misguided assumptions. “Paying” for a service with data is not the same as paying with money. Data is non-rivalrous, meaning consumers do not have less data after sharing personal information, and they can share that same data with other services as well. And compared to other commodities, data is cheap: The advertising industry pays $0.005 per user profile, and when Wired associate editor Gregory Barber sold his own location data, he made a total of 0.3 cents.
It’s also important to note that, while some companies do sell user data, most companies—including Facebook and Google, the two main targets of proposals like the data sales tax—do not. Instead, they receive money from advertisers who pay to reach a particular audience. The advertisers only know that their ads were shown to people in that audience.
Under Gounardes and Adams’ proposal, companies would have to distinguish between data from New Yorkers and data from everyone else, which isn’t easily done. Is the determination based on where the person’s ISP gateway is? Where the person is at the time? The person’s home address?
Moreover, data is valuable in the aggregate, which is why the price of an individual’s profile is so low. These aggregated datasets aren’t broken up by state or any other geographical area, and to expect all companies that sell or transfer data for commercial purposes to make such a distinction would be unreasonably burdensome.
Imposing costs on businesses that collect user data—via a data sales tax or any other means—would overturn business models that rely on advertising revenue, forcing companies to choose between cutting their services, shutting down entirely, or switching to subscription models. It’s unlikely consumers would be as willing to pay money for the free online services they now “pay” for with their data.
A data sales tax is a bad deal for businesses and a bad deal for consumers. It’s not even a particularly good deal for governments. Again, data is cheap, and most companies don’t make money from selling data directly, but from targeted advertisements. A data sales tax wouldn’t bring in enough money to balance even a tiny portion of New York’s budget or patch the $20 billion hole Gounardes and Adams refer to that resulted from the state’s devastating COVID-19 outbreak.
Finally, why would a tax on data only focus on Internet data? There are many valuable data transactions in the physical world. Why not tax the data New Yorkers provide when they check in to a hotel, book a flight, or make a purchase? This data is worth money too, but the fact that Gounardes and Adams are only focusing on Internet companies just goes to show that a data sales tax is less about balancing New York’s budget and more about taking a swing at Big Tech.
Companies that rely on advertising revenue or other business models involving user data already pay taxes on their profits. Taxing them a second time for the data they collect doesn’t make sense, and it would unbalance the Internet ecosystem and put a price on many of the free services consumers currently enjoy.