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The New Economy
Geography of the New Economy

PPI | Policy Report | March 13, 2002
The Best States for E-Commerce
By Robert D. Atkinson and Thomas G. Wilhelm

Editor's Note: The full text of this report is available in Adobe PDF format, only. (35 pages; 550KB; Download estimate: several seconds with a fast Internet connection, 2 minutes with a dial-up modem.) Requires Adobe Acrobat Reader.

Introduction & Overview

State governments can make a big difference in how easy it is for their citizens to fully take advantage of the Internet to buy things, engage in legally binding transactions, and interact with government. This report measures how state laws, regulations, and administrative actions support or hinder Internet use by Americans. We hope our findings encourage states to examine carefully their laws, particularly those designed to protect incumbent bricks-and-mortar companies against e-commerce competitors, with an eye toward giving their citizens more choices and options as Internet users.

Like past major waves of technological innovation, today's information technology revolution is changing the landscape of virtually all economic activities. A driving force for productivity and wage growth in the New Economy will be the pervasive use of digital technologies to increase efficiency and productivity, particularly in the heretofore low-technology service sector. This "digitization" in the 21st century promises to bring the kinds of economic benefits that mechanization brought in the 20th. Fostering the growth of the digital economy must be one of the foundations of New Economy policy.

While in many areas, national and even international policy will affect the growth of the Internet, state government policies can have a significant positive or negative impact on the growth of the Internet in their states. Through their regulations on individuals, industry sectors, or professions, states regulate the ease, and in some cases, the ability of Internet users to buy certain goods and services online. States control tax rates on Internet access. Through their own actions to digitize state government, they control how much and how easy it is for Internet users to conduct online transactions with their government. And finally, they determine if state residents can engage in legally binding online transactions by whether the state recognizes the legal validity of digital signatures. As a result of this widespread influence of states on Internet use, the ability, ease, and cost of being online and conducting online transactions differs significantly depending on where you live. Some states levy high taxes on Internet access, some prohibit or make it difficult for consumers to buy particular goods and services online, and some have provided limited opportunities for citizens to interact with government online. In contrast, other states go out of their way to be e-consumer friendly.

Some may argue that with the so-called dot-com bust the Internet revolution was a flash in the pan and that states don't need to worry about crafting policies that promote Internet use. We could not disagree more; the information technology and Internet revolution is only getting started. The online market continues to grow at a robust pace, with more and more of it done by traditional bricks-and-mortar companies. The Census Bureau reports that e-commerce retail sales were 13 percent higher in the fourth quarter of 2001 than the prior year, with e-commerce retail sales growing 2.5 times faster than all retail sales. E-commerce sales are expected to reach $3.2 trillion by 2004. Advancing the Internet revolution is more than ever a key public policy goal.

As a result, in order to assess what are the easiest and most difficult states for Internet users, this report examines the 50 states and the District of Columbia, identifying the extent to which they impose industry-specific protectionist laws, tax Internet access, enable Internet users to transact electronically with state government, and recognize the legal validity of digital signatures. Each category directly affects the environment Internet users encounter in their states, and each category is something that is under direct control of state government. Industry-specific protectionist laws and regulations limit selection and increase prices for online consumers. For example, we looked at whether consumers could buy wine, cars, insurance, contact lenses, and number of other goods and services online. The more they could, the higher the state's score. Taxes on Internet access make reaching the Web more expensive, and may, by raising cost of access, even keep a modest number of lower income individuals from getting online. E-government makes it easier for citizens to interact with government and obtain government services. States where the state government enables citizens to do a significant share of their governmental transactions online give people more online choices than states that do less. Digital signature laws make it possible for Internet users to "sign" documents electronically, expanding the range of transactions they can engage in. By combining these factors, we calculated a score for each state based on its friendliness toward Internet users.

Based on all these factors, Oregon emerges as the state most friendly to Internet users. The next three states are Utah, Indiana, and Louisiana-all scoring above 14. As the nation's best state for Internet users, Oregon does not require consumers to pay access taxes on Internet usage. Oregonian Internet users have the opportunity to purchase wine, mortgages, and prescription drugs with few restrictions. And the state is above average in providing opportunities for its residents to interact with their government online. This report does not intend to imply that Oregon, or any other high-scoring state, does not have room for improvement, but does suggest that relative to other states, consumers in these states have more choices, and in many cases pay lower costs to engage in e-commerce.

South Carolina and New Mexico score the lowest of the 50 states. For example, South Carolina prohibits online wine sales. State laws there prohibit direct-to-customer interstate wine shipments via common carriers. The state also restricts online contact lens sales and has no laws giving citizens tools to address the issue of unsolicited commercial email.

While individual states differ in their Internet friendliness, so do regions of the nation. The Pacific region (Alaska, Hawaii, Washington, Oregon, and California) and West South Central states (Texas, Oklahoma, Arkansas, and Lousiana) are most friendly to e-consumers. The lowest ranking region is the South Atlantic (West Virginia, Maryland, District of Columbia, Virginia, North Carolina, South Carolina, Georgia, and Florida).

It should be understood that this rating system is very different than that used in the Progressive Policy Institute's (PPI) State New Economy Index. That report assessed how the structure of state economies was in line with the realities of the New Economy. This report assesses how state policies affect the choices and opportunities Internet users in states have. Perhaps this is why there are only weak overall patterns to the scores. For example, somewhat surprisingly, states that score higher on PPI's State New Economy Index receive only a slightly higher score than states that have been slower to make the transition to the New Economy. While there are some states that scored near the top on the State New Economy Index and on this report card, some do not. For example, California, New York, Texas, and Arizona, score relatively low for Internet friendliness. These are places that may be friendly to companies developing advanced technologies, but are not very friendly to the consumers going online. In contrast, some states like Iowa, Louisiana, and Indiana scored near the bottom on the Index, but have avoided passing many laws that make it difficult for their citizens to take advantage of these technologies.

Download this report (PDF)....

Robert D. Atkinson is vice president of PPI and director of its Technology & New Economy Project. Thomas G. Wilhelm is a PPI research associate.

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Related Links The State New Economy Index

Press Release: 'States Vary Widely in Barriers to Consumer Internet Use'

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