Local Laws Are 'Laboratories' for Taxing Big Tech

Earlier this year, Nobel Prize-winning economist Paul Romer spoke about the benefits of taxing platforms like Facebook and Google to help suppress Big Tech’s dominance and spur competition.

Romer said that you can get there by levying a “pigovian tax” on digital ads. In general terms, a pigovian tax is one that’s levied against any market activity that generates “negative externalities” — or bad consequences across society. 

In Romer’s interpretation, such a tax could be progressive when applied to the revenues of online platforms; the marginal tax rate would increase relative to a given firm’s market dominance. Companies that are becoming more dominant would be taxed at a rate that discourages further control (and the “negative externalities” that result from it). Meanwhile, smaller competitors would pay a far lower rate, fostering their ability to provide an alternative to consumers.

Romer holds up taxation legislation in Maryland as a worthy approach that might inspire other legislatures in the United States and abroad. The state is on the cusp of implementing legislation that would impose a 2.5–10-percent tax on in-state digital advertising.

“It makes perfect sense for them to try and claw back for the citizens of Maryland revenue which has been sucked out of their state and is going to San Francisco, New York, Seattle, and a few other places,” Romer said during a Stigler Center keynote address.

In a 2019 Op-Ed for The New York Times, Romer writes that taxing Big Tech may be a preferable strategy to pursuing antitrust law or regulation. Though U.S. antitrust law addresses certain problems like price gouging, he writes, it’s not an effective remedy for other platform harms — such as “undermining the institutions of democracy.”

Laboratories for democracy

There’s a facet of the Maryland tax that Romer doesn’t mention: the funneling of resulting revenues to support a specific remedy. For example, money from Maryland’s proposed tax — estimated to reach $250 million in the first year — will go to the state’s public schools.

While Romer’s version of a pigovian tax might help curb Big Tech’s runaway growth, it’s unclear how that would address many of the anti-democratic harms caused by the targeted-advertising model that forms the economic backbone of online companies big and small.

Maryland lawmakers rightly see better-funded education as a possible fix to the “negative externalities” of Big Tech’s algorithmic amplification — which fuels the spread of disinformation and hate, and incites anti-democratic violence.

Others, including Free Press, believe a pigovian tax should be levied on algorithmic ad revenues with the resulting money supporting the robust production of news content — with an emphasis on local journalism, noncommercial outlets and other news for underserved communities.

As much as anywhere, the platforms’ negative impacts are felt in journalism: As Facebook and Google have come to dominate the new-media economy, the independent, local journalism that people need to debunk online conspiracies and participate in democracy continues to disappear from communities.

Romer says state legislatures and city councils — and not the executive or judicial branches of the federal government — are the “least bad” ways to do this; they are akin to “laboratories of democracy.”

“If we can allow local taxation we can see some innovation,” Romer adds, “and we can learn from their experience as we approach a kind of national consensus.”

What Maryland is doing should prove a good model for other states to follow and adapt. Congress should pay attention, too.

Free Press Action encourages any lawmakers who take up legislation to tax Big Tech to also consider how the resulting monies should be spent locally. If the impetus for taxes is to make dominant platforms more accountable to the public, the resulting tax money should address the crisis in journalism these companies have worsened.