Calling them "ruthless profiteers", Ben Wallace said the firms face a multi-million pound tax raid if they continued to refuse to take down extremist content as well as failing to block posts that include guides to bomb making.
Wallace told the Sunday Times Britain is "more vulnerable than at any point in the last 100 years".
Facebook-owned WhatsApp, which has refused to give security services access to encrypted messages – some of which have been used to co-ordinate terrorist attacks – has turned "the internet into an anarchic violent space”, Wallace said, adding:
We should stop pretending that because they sit on beanbags in T-shirts they are not ruthless profiteers.
"Because of encryption and because of radicalisation, the cost of that is heaped on law enforcement agencies… I have to have more human surveillance. It’s costing hundreds of millions of pounds."
A tax raid could be similar to the windfall tax levied by Tony Blair's Labour government in 1997 on privatised utility giants or Margaret Thatcher's raid on the banking sector in 1981, the Sunday Times reported.
Wallace said: "If they [internet firms] continue to be less than co-operative, we should look at things like tax as a way of incentivising them or compensating for their inaction.
Because content is not taken down as quickly as they could do, we’re having to de-radicalise people who have been radicalised. That’s costing millions. They [the firms] can’t get away with that and we should look at all options, including tax.
New Year's Eve
Despite warning there are more than "considerably more" than 3,000 UK terror suspects are considered a serious risk to the public, Wallace urged Britons to "go out and enjoy themselves" during New Year's celebrations.
"When you’re going out, if you check where the exits are, you are massively increasing your chance of survival if there’s an attack.
"Tell people where you are going and give them your contact details," he said.
In the wake of a spate of terror attacks in the UK during 2017, Wallace said authorities had "invested in a specialist ambulance and fire response so when an event happens they can go right into the hot zone instead of sitting on the outside of cordons".