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States leapfrog federal government in restraining tech

States across the U.S., unwilling to wait for the slower gears of the federal government to turn, are moving aggressively to regulate the tech industry.

Why it matters: States famously serve as "laboratories of democracy," testing out innovative laws that other states or the federal government can adopt. But their experiments can sometimes be half-baked or have unintended consequences, and their regulations can run afoul of the courts.

Driving the news: Maryland's House of Delegates is expected Thursday to override Gov. Larry Hogan's veto of a tax of up 10% on digital advertising. The state Senate is expected to do the same Friday. Democrats control both statehouses, while Hogan is a Republican.

  • The measure, which would be first of its kind in the country and resembles similar taxes passed in the European Union, would tax revenue that large tech companies generate from showing online ads to Maryland residents. Money raised from the tax would help bridge budget gaps, largely going to public schools.
  • The tech industry and business community widely oppose the tax, which they contend would be impossible to implement and would violate the Constitution by impeding interstate commerce.

The big picture: The Maryland measure is only the latest in a growing list of state proposals at various stages of development that could have enormous financial and operational impacts on the tech industry.

  • States have a range of motivations: to raise revenue from a wealthy target, to protect citizens in areas where federal legislation has stalled out, or simply to whack Big Tech.
  • The states are acting at a moment when, despite lots of talk in Washington about changing the ground rules for tech, federal lawmakers are preoccupied with impeachment and COVID-19 relief.

What's happening: In Virginia, a digital privacy bill that's supported by some tech trade groups and companies like IBM is set to pass and be signed into law. It would make Virginia the second state to pass a major data privacy bill, after California's 2018 law.

  • In North Dakota, GOP lawmakers just introduced a privacy law that would fine any company that sells someone's data without that person's express consent.
  • Republicans in Nebraska and Florida have floated bills that would fine social media companies for kicking people off their platforms. Critics say such proposals would violate social networks' First Amendment rights.
  • In dozens of other states, lawmakers are considering bills around topics including cybersecurity, digital advertising, privacy, facial recognition, broadband expansion, contact tracing and artificial intelligence.

What they're saying: "States can propose very serious legislative threats without hearings or notice, and move in a couple of days," Dan Jaffe, vice president of government relations at the Association of National Advertisers, told Axios.

  • "We're fighting on multiple fronts. If a number of these bills pass, it will be dramatically more difficult to do business on the internet and mobile."

Our thought bubble: Growing partisan polarization at the state level guarantees the introduction and potential passage of more party-line tech bills that wouldn't stand a chance of moving forward in the more narrowly divided federal government.

  • It's likely, for instance, that we'll see more proposals out of red states aimed at punishing tech for perceived censorship of conservatives, while blue states may follow Maryland's lead on digital taxes, among other tech priorities.

Issues with greater bipartisan overlap, such as privacy, may see broader buy-in.

  • Already, Washington , Utah, Oklahoma and New York are considering data privacy bills of their own. The industry wants a single federal law to comply with instead, but that goal remains elusive.

What's next: Companies and trade groups will bring lawsuits against any new state law they dislike if it offers any opportunity for constitutional challenge.

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