One of the more interesting outcomes of the explosion of the Internet on our culture is the wave of anxiety it has produced at City Halls and in Sacramento. And it's not because the powerful new interactive media isn't already being used in hundreds of ways by state and local government to connect and its constituents - or otherwise benefiting our technology-strong economy. It is because the Web's success threatens to siphon off the lifeblood of the public agency revenue stream: sales tax. The threat is being taking very seriously. For openers, the National League of Cities vigorously opposed the Clinton-backed Internet Tax Freedom Act. Of course the League failed, and the ITFA was signed into law October 21, 1998 with heavy support from Internet Service Providers and e-retailers. President Clinton said that taxing the 'Net would be unfair, and would "weigh it down and stunt the development of the most promising new economic opportunity in decades." Among other provisions, the Act instates a three-year moratorium on state and local (but not federal) taxes on Internet access charges. And maybe more important for state and local government, the law cements into place the practice of prohibiting collection of sales tax by electronic vendors with no "outlets" in an out-of-state customer's home state. There certainly is ample evidence that e-commerce, with its potential to rearrange the taxing table, merits close scrutiny. After all, most of the wildly optimistic Internet use projections seem to be bearing out. And e-retailing is expanding as part of that trend. A January report by the Pew Research Center for People claims that 41% of Americans had gone on-line by the end of 1998. Compared with just 14% in 1995. An estimated 32% of Internet users bought something on-line in 1998, and these figures are before the Christmas-season surge. That's 34 million Americans - a fourfold increase from four years ago. So far, there is little hard evidence of any direct effect on municipal revenue streams. And according to the Chicago Tribune, internet sales still only account for 1% of retail sales. However, with the growth of e-commerce, it stands to reason that the more a state or municipality relies on sales tax for its revenues, the tighter a looming revenue pinch will feel. According to Forrester Research, Inc., e-retail will increase tenfold over the next five years. And currently, situs-based retail sales taxes make up nearly 30% of California's revenue stream. to Davis-based government revenue specialist Michael Coleman says that even though they make up only 9.6% of municipal revenues, sales tax has become the number one source of California cities' discretionary revenues. Even a modest drop in these proportions may yield dramatic effects. Mayor Harry Smith of Greenwood, Mississippi, reported to the National League of Cities that a 5% drop in sales tax revenues in his community would directly result in a loss of five police officers - 10% of his city's police force. Booksellers may be the first Main Street-styled retailers to take an e-commerce hit. Palo Alto-based Printers Inc. recently shuttered, reporting that they couldn't survive the 10% drop in year-to-year sales experienced over the 1998 Christmas season. The trend may grow as the overall population joins the on-line community in numbers mirroring Palo Alto's Silicon Valley home. But though e-commerce has become the latest problem for local government financiers, it's important to remember that the problem precedes Internet culture. The tax structure remains based on a taxing model designed for an insulated economic system: a geographically fixed economy where goods rather than services are produced, and where people live and work in the same community. The outmoded structure is politically hobbled by the very popularity of the Internet as a promising new medium and the corresponding unpopularity of taxes - despite the flagging public service levels faced by most communities. Traditional catalog sales have resulted in the same loss of local sales tax revenues. Observers from all perspectives agree that fundamental inequities in the tax structure push the whole question of e-retail taxation towards a discussion of overall tax reform. In California, the urgency of tax reform is underscored by dramatic in-state inequities amongst cities. Here, cities geographically blessed with favorable locations for regional malls, auto-malls and outlet centers have always been at a major revenue advantage to less favored locales - often only a few miles away. So are we facing yet another unforeseen consequence of the Internet? A comprehensive reform of state and local taxing structure that levels the playing field for all parties? Maybe. But not until Year 2004 will we be able to revisit the e-retail tax question. In that year, an ITFA-created Advisory Commission on Electronic Commerce will be required to propose new taxing recommendations. By then, harder data may be available. And policy makers just may figure out how to sell an equitable taxing program to a skeptical public. In the meantime, maybe city finance directors should invest municipal reserves into equities. Stephen Svete, AICP, is a principal in the Ventura-based consulting firm of Rincon Consultants Inc.