A coalition of the nation's governors, state legislators, county officials and mayors implored a high-level federal panel meeting here today not to recommend to Congress that goods purchased over the Internet be exempt from sales taxes, warning that state and local governments eventually may have to raise property and income taxes to make up for lost revenue as electronic commerce becomes more popular.

The panel of business and government leaders, created by Congress earlier last year to study the thorny issue of how and whether online purchases should be subjected to sales taxes, is considering a proposal advanced by the group's chairman, Virginia Gov. James S. Gilmore III (R), to make online shopping free of sales taxes.

Gilmore and anti-tax activists argue that imposing sales taxes on Internet purchases will burden online retailers and dissuade consumers from engaging in electronic transactions.

The state and local officials--who also cautioned that the tax-free proposal would hurt traditional "bricks-and-mortar" merchants--instead urged the panel to back a proposal that would encourage online merchants to voluntarily collect sales taxes, with the assistance of a third-party clearinghouse, in exchange for an immunity from certain tax audits.

"If you say no to sales taxes, you are saying yes to higher income and property taxes," said Randy Johnson, chairman of the Hennepin County, Minn., Board of Commissioners. "Government can't run on a empty tank."

South Dakota Gov. William Janklow (R) told the panel that exempting online purchases from sales taxes would create "a loophole, an unfair loophole, for a certain set of people."

"We can't adopt a tax policy that assists in wiping out small-town Main Streets," Janklow said. "Government shouldn't do things that deliberately wreck rural America."

The debate quickly turned feisty, with Gilmore and his supporters on the Advisory Commission on Electronic Commerce sparring with state and local officials who had come to testify.

Arguing that states and cities don't have a financial need to tax online commerce, Gilmore asked Janklow: "Aren't sales tax revenues going up?"

"That's not the issue," Janklow responded, noting that tax revenue for most states and cities is near a record high because of the booming economy. He argued that those jurisdictions could find themselves in a financial pinch when the economy slows if they are unable to collect sales taxes on Internet purchases.

"Do you have any empirical evidence of that?" Gilmore shot back, to which Janklow said he did not. Later, Janklow attacked Gilmore's anti-tax position as "extreme."

Under a 1992 Supreme Court decision, retailers do not have to collect sales taxes when they ship goods into states where they do not have a substantial "physical presence," such as a retail store or a warehouse. In the 46 states that have a sales tax, however, consumers are supposed to pay a "use tax"--equivalent to their local sales tax--on goods bought out of state. Few people actually do so, making most out-of-state purchases effectively tax-free.

Business representatives on the panel voiced general support for the proposal introduced by the coalition of state and local officials, which includes the National Governors' Association, the National Association of Counties, the National Conference of State Legislatures and the U.S. Conference of Mayors.

"It's important to have a level playing field here," said Ted Waitt, the chairman of personal computer manufacturer Gateway Inc., who called the coalition's proposal "good on a lot of fronts."

The panel also heard from executives representing businesses and industry groups, including Wal-Mart Stores Inc., Value America Inc., Federated Department Stores Inc. and the International Council of Shopping Centers. Many of the executives said they were in favor of applying sales taxes to online purchases as long as the system would not be onerous for retailers.

"E-commerce is growing so fast it doesn't need preferential tax treatment," said Peter Lowy, the co-president of shopping-center owner Westfield America Inc.

A group of 49 economists also weighed in, telling the commission in a letter today that online transactions should not be immune from sales taxes. "There is no principled reason for a permanent exemption for electronic commerce," the economists wrote. "Electronic commerce should be taxed neither more nor less heavily that other commerce."

The 19-member panel is supposed to deliver its conclusions to Congress by April 1. Although the proposal advanced by the coalition of state and local officials appears to have the backing of many of the business executives as well as many of the state and local government representatives on the commission, it is unclear whether it can garner the 13 votes needed to prevail.

A clear majority of commission members did, however, voice support today for two less controversial recommendations: prohibiting any taxes on Internet access fees and repealing an excise tax on telecommunications originally enacted to fund the Spanish-American War. But late today, the panel decided to defer a formal vote on those two issues until March, when the group holds its final meeting.

When it formed the commission last year, Congress imposed a three-year moratorium on access-fee taxes and any new levies that could specifically target online commerce.