This NMRC report, authored by economist Stephen B. Pociask of TeleNomic Research LLC, finds that imposing state and local telecommunications taxes on digital subscriber line (DSL) services would slash federal Universal Service Fund (USF) contributions by $280 million and lead to $4.3 billion in reduced industry revenues available for investment in new union jobs and expanded availability of broadband technologies. Diminished industry revenues would reduce investment in DSL deployment, curtail union job growth, and deny states potential employment, property, and income taxes associated with the economic stimulus of broadband technologies. The NMRC study estimates that the reduction in industry revenues would lead to a one-year loss of 11,900 direct jobs, including 7,600 unionized jobs. There also would be a sizable loss of jobs in other industries, according to Pociask.

April 27, 2004

CNN Inside Politics

Senate debates banning state, local taxes on Internet connections
By Mary Dalrymple / AP Tax Writer

WASHINGTON -- After months of unproductive negotiations, senators resumed battle Monday over a bill banning taxes on Internet service providers.

A temporary ban expired nearly six months ago. Since then, lawmakers pushing a permanent ban have tussled with those who say a broad prohibition could create a new tax loophole for the telecommunications industry.

President Bush called on Congress to permanently ban taxes on Internet services, particularly high-speed broadband connections, during a stop in Minneapolis on Monday.

"In order to make sure it gets spread to all corners of the country, it must be made affordable," Bush said. "We must not tax broadband access."

Congress first barred taxes on Internet connections in 1998. Since then, new technologies allow consumers to leave behind slower dial-up connections for faster DSL, satellite and cable hookups.

While renewing the ban on Internet access taxes, House lawmakers broadened it to cover the new technologies. Some Senate opponents said the rewrite went too far.

"We would create a permanent tax loophole for the high-speed Internet access industry," said Sen. Lamar Alexander, R-Tenn.

The ban's strongest supporters said it aims at making high-speed service more affordable and more accessible.

"This bill is not about tax breaks for telecommunications companies," said Sen. George Allen, R-Va.

Senate Commerce Committee John McCain, R-Ariz., tried to broker a compromise that would ban taxes on Internet connections for four years.

McCain's proposal carves out an exception for telephone services provided through the Internet, known as Voice Over Internet Protocol or VOIP. Opponents fear that state and local governments stand to lose billions in tax revenue as telecommunication companies shift their services to take advantage of Internet technologies.

Senators hesitant to accept the broadened ban did not immediately warm to McCain's proposed middle ground.

Sen. George Voinovich, R-Ohio, said it too quickly phases out taxes in states that currently impose levies on Internet connections. States that started taxing Internet connections before the 1998 ban would have three years to phase them out. States taxing DSL services would have two years to eliminate them.

Other senators said the federal government shouldn't meddle in state and local tax affairs. Sen. Tom Carper, D-Del., said those senators might try to block the legislation on the grounds that it violates Senate rules intended to keep lawmakers from imposing mandates on states without paying for them.

A study presented by the New Millennium Research Council concluded that letting the ban lapse could be costly to consumers. The study, funded by the United States Telecom Association, concluded that consumers could see DSL prices rise 12 percent if states taxed the service at the same rate as telephones.

Potentially complicating the debate, some Democrats eyed the bill as a target for some of the items atop their political agenda, including efforts to raise the minimum wage and extend expiring unemployment insurance benefits.

The Senate voted 74-11 on Monday to push ahead this week and debate the bill.

Voinovich said the week's deliberations may show that the philosophical divide is "too deep to bridge."

"We have unresolved issues," he said.
----
The bill is S. 150.

http://www.cnn.com/2004/ALLPOLITICS/04/27/taxes.internet.ap/ AP story also appeared in the Los Angeles Times, Detroit News, Daytona Beach News Journal, WJLA TV (Washington, DC), New York Newsday, Kansas City Star, Fort Wayne News Sentinel.

Washington Telecom Newswire

State, Local DSL Taxation Said to Slash USF by $280 Million

The imposition of state and local telecom taxes on DSL services would decrease contributions to the Universal Service Fund (USF) by $280 million over the next 5 years, said a study released today by the New Millennium Research Council (NMRC). "Because universal service programs are already under financial strain, this substantial contribution loss would put these social programs in serious jeopardy," Stephen Pociask, an NMRC scholar who wrote the study, said in a conference call with reporters.

The study, which was sponsored by the USTA, said Internet taxation would also lead to $4.3 billion in reduced industry revenue available for investment in new union jobs and broadband deployment over the next 5 years.

"On the other hand, ending current DSL taxes would only lead to a loss of only $40 million of state and local taxes," it said: "Clearly, this loss pales in comparison to the harm of imposing state and local taxes on DSL services." DSL price increase caused by taxing would encourage consumers to switch to tax-exempt cable-modem services or "disconnect high speed services all together, thereby avoiding taxes and universal service charges," Pociask said.

"Since cable operators do not pay into the Universal Service Fund, an increase in cable-modem demand would not help state and local governments raise taxes, nor would it help fund universal service programs." Assuming that telecom transport portion of DSL services are taxed at an average rate applied to other telecom services, Pociask estimated the cost of transport would increase by 16.9%. That cost would be passed to the ISPs and then to consumers in a form of higher prices, he said. The price increase would be 12.2%, leading to an 18% decrease in demand and $4.3 billion loss in revenue to the industry over the next 5 years, he estimated. The reduction of industry revenue would lead to a one year loss of employment of about 11,900 direct jobs, including 7,600 unionized jobs, he said.

"Simply extending the moratorium, I do not believe would be enough," Pociask said. He said there was "a loophole" in the previous moratorium, which expired Nov. 1, permitting "some taxes" to be applied to DSL services.

"This is because facilities that are used to transport DSL, if they can be classified as telecommunication service... they can be taxed by state and local governments. So, extending the moratorium would not prevent taxes from affecting DSL prices, and meanwhile, cable modem services, [which] remain untaxed, do not contribute to the Universal Service Fund." He said public policy makers were "just giving a competitive advantage" to one form of high-speed service over another.

"Public policy makers need to resist taxing services like DSL... and they need to find other revenue sources that would not cause large market distortions," Pociask said: "They also need to think about maintainig a competitive balance, about spurring IT investment, creating jobs, as well as being mindful of universal service itself. Proposal to tax DSL would be a bad public and economic policy."

AVN Online

High-Speed Net Taxes Could Hurt Consumers, Economy: Study
by Charles Farrar

WASHINGTON - Just days after a top U.S. Senator began moving toward reviving a ban on Internet access taxes, that bid received some potent-sounding ammunition for the defense: a study saying taxes on high-speed Internet connections could injure consumers, cut rather than raise state and local revenues, and injure the economy in general through lost jobs and technological investment.

"State and local taxes imposed on the transport portion of [digital subscriber line services] would flow through to [Internet service providers] and, ultimately, be passed along to consumers in the form of higher prices," said TeleNomic Research president Stephen Pociask in "Taxing High-Speed Service: A Quantification of the Effects on the DSL Industry and Universal Service," issued April 26 through the New Millennium Research Council. "Therefore, taxing high-speed telecommunications facilities is merely a backdoor way to increase prices on broadband consumers."

Three days earlier, Senate Commerce Committee chairman John McCain (R-Arizona) began moves toward re-introducing a proposal to make permanent a federal ban on Internet access taxes whose temporary status expired last November. The ban has been snagged over infighting between federal lawmakers who concur, in general, with such arguments as Pociask's, and those who think state and local governments stand to lose billions in revenues if Internet access isn't taxed the same way traditional telecommunications are taxed.

Pociask, if anything, argues that taxing DSL at the same rates imposed on other telecommunications services would itself turn into a possible $4.3 billion reduction in gross state and local revenues over the following five years and a $10.3 billion revenue loss after taxes.

"This reduction," he wrote, "would mean that DSL employment and investments would be reduced, and so would the current employment, property and income taxes that all businesses currently pay... the reduction in industry revenues would [also] lead to a one-year loss of 11,900 direct jobs, including 7,600 unionized jobs. There will also be a sizeable loss of jobs in other industries."

McCain isn't the only high-profile politician taking up the Internet access tax ban issue again. President Bush, stumping in Minnesota the same day the Pociask paper was released, called for Congress to write and pass a permanent Internet access tax ban, a call criticized by a campaign spokeswoman for his likely presidential opponent, Sen. John F. Kerry (D-Massachusetts).

"If you want broadband access throughout the society," the president told a gathering of the American Association of Community Colleges, "Congress must ban taxes on access. Clear out the underbrush of regulation and we'll get the spread of broadband technology and America will be better for it."

But the Kerry campaign rejoined that Bush should have made such an Internet access tax ban part of his previous tax cut packages. "The Bush broadband policies," said spokeswoman Stephanie Cutter to reporters, "don't do anything to provide the new resources that will be needed to deploy broadband in rural and urban areas, and they are not addressing the regulatory barriers that prevent deployment."

Pociask argues that DSL services are "price elastic," meaning that a price increase would produce a larger demand increase and cause total industry revenues to fall. "[P]ublic financing theory shows that taxing an elastic service is inefficient and inappropriate," he wrote. "This is because taxing elastic services, like DSL, would have repressive effects on demand, employment, and investment.... Policymakers should resist taxing elastic services and find revenue sources that would not cause large market distortions and industry losses, such as simply increasing general tax funds."

The Cato Institute, a Washington think tank which favors the free market and low tax policies, applauded the renewed push for a federal Internet access tax ban. "If Congress fails to renew the Internet access tax moratorium," said Cato telecommunications policy director Adam Thierer, "it could open the floodgates of state and local taxation of online services and activities. We should not let state and local government turn this global medium into their latest cash cow."

Bond Buyer

State & Local Finance: Internet Tax Ban Compromise in the Works

By Matthew Vadum

The Bond Buyer, 4 Vol. 348, No. 31871

WASHINGTON -- As the Senate began debate yesterday on a motion that would bring about a vote on legislation to permanently extend the lapsed federal Internet tax moratorium, more details of a compromise proposal emerged.

Under the compromise plan, drafted by Sen. John McCain, R-Ariz., chairman of the Senate Commerce Committee, the ban would be extended for four years. In a speech on the Senate floor yesterday, McCain said the proposed amendment contains two grandfather provisions that allow states and localities that tax certain Internet-related telecommunications to continue to do so. He added that the amendment would also make it clear that Internet-based telephone calls could be taxable.

The first grandfather provision would allow state and local governments that tax basic dial-up services provided by Internet service providers to continue to levy those taxes for three years from Nov. 1, when the moratorium expired, McCain said. This grandfather provision appears to be identical to the clause contained in a bill now being debated by the Senate and sponsored by Sens. George Allen, R-Va., and Ron Wyden, D-Ore., that would allow such taxation to continue until Nov. 1, 2006.

A second grandfather provision would allow states and localities that tax the telecommunications portion of high-speed digital subscriber line service to continue to do so for two years, McCain said.

He also said he plans to offer the amendment in an effort to overcome the current gridlock on the Allen-Wyden bill, which is favored by the Internet service industry but opposed by states and localities, but it is unclear when he will do so.

The Allen-Wyden bill was approved by McCain's committee on July 31 but has been awaiting action by the full Senate ever since. On the House side, a similar bill introduced by Rep. Christopher Cox, R-Calif., that also would prohibit the taxes indefinitely sailed through that chamber in September.

Cox's bill would eliminate the grandfather clause that allows the taxation of dial-up services and prohibit such taxes immediately. The Bush administration supports the Allen-Wyden legislation, but analysts disagree on the impact that the measure would have on state and local government coffers.

The Senate was expected to vote yesterday evening on a motion that would limit debate and bring senators closer to a vote this later this week on the Allen-Wyden measure. Senate Majority Leader Bill Frist, R-Tenn., filed the motion last week to invoke cloture. The bill includes no sunset provision, allowing the moratorium to continue indefinitely.

In order to pass, the cloture motion would have to receive 60 votes under Senate rules. Opponents of Allen-Wyden contend that making the moratorium permanent would deprive state and local governments of billions of dollars in future tax revenue, which in turn would undermine their financial stability and ability to pay debt service on bonds.

Meanwhile, the New Millennium Research Council, a project of Washington-based public relations firm Issue Dynamics Inc., released a study yesterday claiming that the imposition of state and local telecommunications taxes on DSL service would both hurt the Internet service industry and reduce tax revenues flowing to the Universal Service Fund, which subsidizes telecommunications services for low-income customers.
www.bondbuyer.com

APRIL 26, 2004

USA TODAY

Senate takes up bill for Net-access tax ban
By Andy Sullivan, Reuters

WASHINGTON —The U.S. Senate Monday voted to begin discussion on a bill that would prevent states from taxing Internet access, but opponents said they would try to scale it back dramatically before it becomes law.

The Senate voted 74 to 11 to begin debate on the bill, which would make permanent a ban on access taxes that expired in November 2003. Staffers expect a final vote by the end of the week.

"This Senate will be known as the Senate that favored new taxes on the Internet" if it does not reinstate the ban, said bill sponsor Sen. George Allen, a Virginia Republican. Congress since 1998 has prevented states and local governments from taxing the monthly access fees that Internet providers like America Online charge their customers. The House of Representatives last year voted to make the moratorium permanent and expand it to include high-speed "broadband" service.

But the Senate has deadlocked on the issue after some lawmakers said it would require states to raise taxes in other areas to make up for the lost revenue. "What we're going to do today is begin a series of votes about passing the buck," said Tennessee Republican senator Lamar Alexander. "We can call this the 'Raising Local Property Tax Act of 2004."'

State and local governments say the bill's broad wording could cost them as much as $9 billion a year by 2006 as telephone service, music sales and other activities migrate to the Internet. The Congressional Budget Office puts losses at $80 million to $120 million per year. No states have imposed new access fees since the moratorium expired last year. Campaigning in Minneapolis, President Bush said a ban on access taxes would encourage more Americans to sign up for broadband, which typically costs $10 to $30 more per month than dial-up access.

"If you want broadband access throughout the society, Congress must ban taxes on access," Bush said.

Broadband access taxes could lead to a reduction in demand as price-sensitive consumers would opt to stick with cheaper, slower dial-up service, according to a report released Monday. State Internet-access taxes could cost the telecommunications industry $4.3 billion in lost sales over a five-year period, said Stephen Pociask, president of the TeleNomic Research consulting firm.

That, in turn, would mean $280 million less for a federal program that funds Internet service for schools and libraries, he said.

Contributing: Jeremy Pelofsky in Minneapolis

http://www.usatoday.com/tech/news/techpolicy/2004-04-26-senate-taxban-bill_x.htm. This Reuters story also appeared in Forbes online.

Communications Daily and Washington Internet Daily

Taxes Could Cut USF $280 Million -- Study

The imposition of state and local telecom taxes on DSL services would decrease contributions to the Universal Service Fund (USF) by $280 million in the next 5 years, said a study released Mon. by the New Millennium Research Council (NMRC). "Because universal service programs... are financed by a levy on all interstate telecommunications revenues... a reduction in DSL revenues caused by imposing new taxes would produce a reduction in universal service contributions," the study said. "Because universal service programs are already under financial strain, this substantial contribution loss would put these social programs in serious jeopardy," economist Stephen Pociask, an NMRC scholar who wrote the study, said in a conference call.

The study, sponsored by the USTA, said Internet taxation would also lead to $4.3 billion in reduced industry revenue available for investment in new union jobs and broadband deployment over the next 5 years. "On the other hand, ending current DSL taxes would only lead to a loss of only $40 million of state and local taxes," it said: "Clearly, this loss pales in comparison to the harm of imposing state and local taxes on DSL services."

The DSL price increase caused by taxation would encourage consumers to switch to tax-exempt cable modem services or "disconnect high speed services all together, thereby avoiding taxes and universal service charges," Pociask said: "Since cable operators do not pay into the Universal Service Fund, an increase in cable-modem demand would not help state and local governments raise taxes, nor would it help fund universal service programs."

Assuming that telecom transport portions of DSL services are taxed at an average rate imposed on other telecom services, Pociask estimated the cost of transport would increase by 16.9%. That cost would be passed on to the ISPs and then to consumers as higher prices, he said. The price increase would be 12.2%, leading to an 18% decrease in demand and $4.3 billion loss in revenue to the industry over the next 5 years, he estimated.

The reduction of industry revenue would lead to a one year loss of 11,900 direct jobs, including 7,600 unionized jobs, he said: "There will also be a sizable loss of jobs in other industries."

"Simply extending the moratorium, I do not believe would be enough," Pociask said. He said there was "a loophole" in the previous moratorium, which expired Nov. 1, permitting "some taxes" to be applied to DSL services: "This is because facilities that are used to transport DSL, if they can be classified as telecommunication service... they can be taxed by state and local governments. So, extending the moratorium would not prevent taxes from affecting DSL prices, and meanwhile, cable modem services, [which] remain untaxed, do not contribute to the Universal Service Fund." He said public policy makers were "just giving a competitive advantage" to one form of high-speed service over another.

"Public policy makers need to resist taxing services like DSL... and they need to find other revenue sources that would not cause large market distortions," Pociask said: "They also need to think about maintaining a competitive balance, about spurring IT investment, creating jobs, as well as being mindful of universal service itself. [The] proposal to tax DSL would be a bad public and economic policy." -- Patrick Ross, Susan Polyakova

TelecomWeb.com

Study: State, Local Taxation of DSL Internet Access Would Harm USF, National Economy

The imposition of state and local telecommunications taxes on digital subscriber line (DSL) services would slash federal Universal Service Fund (USF) contributions by $280 million and lead to $4.3 billion in reduced industry revenues available for investment in new union jobs and expanded availability of broadband technologies, according to a new study from the New Millennium Research Council (NMRC). The U.S. Senate is poised to debate this week the issue of state and local taxation of Internet access (see related story below).

The NMRC study, "Taxing High-Speed Services: A Quantification of the Effects on the DSL Industry and Universal Service," was written by economist Stephen Pociask, a seated NMRC scholar. Pociask is president of TeleNomic Research, a consulting firm specializing in public policy analysis for information technology industries.

"DSL service is price-sensitive and an increase in taxes would produce an increase in price, leading to a significant reduction in demand and a decrease in total industry revenues," Pociask claims. He explained that consumers would migrate to tax-exempt cable-modem service, or abandon high-speed access altogether. "Since cable operators do not pay into the Universal Service Fund, an increase in cable-modem demand would not help state and local governments raise taxes nor would it help fund universal service programs."

USF contributions are paid on all interstate telecommunications services and are used to support telecom service for low income customers, underwrite network development in high-cost areas, and fund Internet services for schools, libraries, and rural healthcare providers. Pociask warned: "Because universal service programs are already under financial strain, this substantial contribution loss would put these social programs in serious jeopardy."

Diminished industry revenues would reduce investment in DSL deployment, curtail union job growth, and deny states potential employment, property, and income taxes associated with the economic stimulus of broadband technologies. The NMRC study estimates that the reduction in industry revenues would lead to a one-year loss of 11,900 direct jobs, including 7,600 unionized jobs. There also would be a sizable loss of jobs in other industries, according to Pociask.
http://www.telecomweb.com/news/1083086055.htm

TelecomWeb.com (2)

Meanwhile, Senators Ready to Debate Taxation of 'Net Access

The U.S. Senate is expected to take up this week the question of state and local taxes on Internet access. One bill, S. 150, calls for a permanent ban on taxation of Internet access and services and broadens the definition to include DSL and wireless platforms in addition to cable-modem service. Another, S. 2084, would only extend a now-expired moratorium on state and local taxation of cable-modem service by two years, but leave consumers using DSL or wireless platforms paying state and local taxes.

Congress passed a temporary moratorium in 1998, with language restricted to cable-modem service because DSL was just developing at the time. Last fall, the House of Representatives passed a bill making the tax ban permanent and including the newer technology platforms. Because the Senate could not reach a vote before the end of session, the moratorium expired.

A study from the New Millennium Research Council (NMRC) explores two scenarios -- one with a DSL tax rate of 10.9 percent (the difference between average taxes of 16.9 percent for telecommunications services and the average general business tax of 6 percent); the other with a tax rate of 16.9 percent for cases where a tax exemption has existed previously.

In both cases, the study’s author, Stephen Pociask, anticipates a reduction in high-speed DSL growth over five years due to suppressed demand caused by tax-fueled price increases as well as eventual market saturation. In the first scenario, DSL revenue loss over five years would be $2.5 billion with a USF shortfall of $161 million. In the second scenario, DSL revenue loss over five years would be $4.3 billion and USF support is depleted by $280 million.

By contrast, the Congressional Budget Office estimates that the cost today of making the moratorium permanent across all platforms and ending current state and local taxation of DSL service would be only $40 million. Pociask noted: "If state and local taxes are prohibited, the risk to state and local budgets is very small compared to what they currently spend." Paciask highlights several additional adverse effects of Internet taxation, including:

• Stunting the widespread deployment of broadband services and thereby slowing the pace of technological change;
• Driving consumers off of high-speed networks, with serious effects on the health of the overall economy (information technology investments to date have been instrumental in stimulating economic growth and productivity); and increasing highway congestion, gasoline consumption and air pollution through the loss of e-commerce and a reduction in the growth of work-at-home businesses.

Xchange Magazine

'President Bush: Don't Tax Broadband Access'

President Bush today reaffirmed a goal to bring high-speed Internet access to every part of the country by 2007 and reiterated broadband technology should not be taxed.

"Broadband technology must be affordable. In order to make sure it gets spread to all corners of the country, it must be affordable. We must not tax broadband access," Bush said today during a speech before the American Association of Community Colleges Annual Convention in Minneapolis, Minn. "If you want broadband access throughout the society, Congress must ban taxes on access."

During a speech last month in Albuquerque, N.M., the president said the country must have universal affordable access to broadband technology by 2007, adding the government does not need to tax access to broadband service.

The U.S. Senate is currently in discussions on whether to impose state and local taxes on Internet access. One bill would permanently ban taxation of Internet access and services and expands the definition to include DSL and wireless platforms as well as cable modem service, according to the New Millennium Research Council. Another bill would extend a now-expired moratorium on state and local taxation of cable modem service by two years, the NMRC says, but consumers using DSL or wireless platforms would have to pay state and local taxes.

During his speech today, the president also supported the FCC’s decision to deregulate the broadband market, said the government should make more wireless spectrum available for free public use, endorsed increased access to federal land for fiber-optic cables and transmission towers and advocated new technical standards to make possible new broadband technologies such as high-speed Internet access over power lines.

The president supported FCC Chairman Michael Powell’s decision last year to eliminate regulations on new broadband networks. The rules free the biggest local phone companies from having to lease newly constructed networks to competitors.

"Secondly, a proper role for the government is to clear regulatory hurdles so those who are going to make investments do so," Bush said. "Broadband is going to spread because it's going to make sense for private sector companies to spread it so long as the regulatory burden is reduced -- in other words, so long as policy at the government level encourages people to invest, not discourages investment."

The president said the number of broadband customers has tripled since 2000, yet the U.S. ranks tenth among industrialized countries in the availability of high-speed Internet service. "That's not good enough for America. Tenth is 10 spots too low as far as I'm concerned," he said.

During his speech, the president did not cite controversial phone rules that created a rift between fellow Republicans FCC Chairman Powell and FCC Commissioner Kevin Martin. A federal appeals court has overturned the phone rules, but the government may ask the Supreme Court to review the regulations.
http://www.x-changemag.com/hotnews/44h26133645.html

Telephony Online; Insight

Internet taxes would cost jobs, hurt economy, USTA-backed report says
By Donny Jackson

Imposing state and local telecommunications on DSL services would slow consumer adoption of the technology and hurt the economy, according to a New Millennium Research Council report funded by the United States Telecom Association.

NMRC economist Stephen Posciask authored the report, which contends that DSL is a price-sensitive service and should not be taxed, just as cable-modem offerings the primary competitor for DSL providers are not.

Although the network provider is subject to the tax, any notion that Internet service providers and end users are not affected is mistaken, according to Posciask.

"Nothing could be further from the truth," Posciask said during a conference call this morning. "Thats merely a back-door way of increasing prices on broadband consumers."

Currently, about half of the states allow DSL to be taxed. Posciask said he did not have any "empirical evidence" comparing DSL adoption rates in states that tax DSL vs. those that do not tax DSL to support his theory that taxation negatively affects consumers willingness to pay for broadband service.

Tomorrow, the Senate is expected to debate a bill sponsored by Sen. George Allen (R-Va.) that would permanently ban taxation of Internet access.

A rival bill offered by Sen. Lamar Alexander (R-Tenn.) and Thomas Carper (D-Del.), which did not emerge from committee, would have grandfathered current DSL taxes while requiring Congress to revisit the Internet taxation policy again in two years.

Posciask said the report did not study the impact the Alexander-Carper bill would have on the industry. Instead, the reports claim of 11,900 jobs lost and a $4 billion negative impact to the industry over a five-year period is based on all states being allowed to assess new DSL taxesa scenario currently not being considered in Congress.
http://telephonyonline.com/ar/telecom_internet_taxes_cost/index.htm

Telecommunications Reports Daily

SENATE ALLOWS DEBATE TO PROCEED ON PERMANENT BAN ON INTERNET TAXES

The Senate late today cleared on a procedural vote a motion allowing the Senate to proceed with an eventual vote, most likely this week, on a controversial bill that would permanently ban taxes on Internet services.

The vote invoking "cloture" - limiting debate to 30 hours - came as the Senate kicked off what is expected to be a vigorous, contentious debate this week pitting Democrats against Democrats and Republicans against fellow Republicans.

In an important development, Sen. John McCain (R., Ariz.), chairman of the Commerce, Science, and Transportation Committee, said he would introduce an amendment offering a long-awaited compromise. The compromise would put in place a four-year extension and explicitly exclude voice-over Internet protocol services from the ban, provided they essentially imitate traditional phone service.

Under the McCain proposal, which he discussed on the floor of the Senate shortly before the procedural vote, the amendment would also clarify that the moratorium does not apply to "nontransactional" taxes, such as taxes on net income, net worth, or property value. It would grandfather for three additional years the states that were taxing Internet access in October 1998, when the first moratorium went into effect. It would grandfather for two years, from Nov. 1, 2003, states that began to tax Internet access after the initial ban.

"This compromise will not make everyone 100% happy," Sen. McCain said. "There are several aspects that will accommodate state and local governments, but the legislation also contains components that are favored by industry and ultimately benefit consumers." He added, "Any practical person who reads the amendment objectively will have to agree what we're offering constitutes a reasonable middle ground in the debate between those who want to make the Internet tax moratorium permanent and broad and those who want to make the moratorium brief and narrow."

Sen. McCain had supported a permanent moratorium (S 150) introduced by Sens. George Allen (R., Va.) and Ron Wyden (D., Ore.). Supporters of that legislation are expected to rally behind the McCain compromise.

Meanwhile, the proposal is expected to be opposed by supporters of a limited two-year moratorium, led by Sens. Lamar Alexander (R., Tenn.) and Thomas R. Carper (D., Del.).

Both sides squared off as debate got started on the Internet tax proposal this afternoon. A few hours earlier, President Bush in a speech in Minnesota had called attention to the issue, pledging once again his support for a permanent ban (see related story).

Sen Allen accused opponents of the legislation of distorting the record.

"This legislation is not about tax breaks for telecommunications companies," he said. "It's not about mayors and governors. It's certainly not about the 1994 Republican revolution. It has absolutely nothing to do with traditional telephone calls migrating to the Internet."

Sen. Allen added, "Our legislation has everything to do with consumers and the impact of taxation on real people and our American economy. All of the pro-tax arguments and misleading accusations presented by the opposition are unrelated distractions aimed at confusing senators and stalling consideration of this very important measure."

Sen. Wyden warned that some state and local governments have come to view the Internet as "the last cash cow in the pasture" ripe for new taxes. He warned that senators will be flooded with reports from state and local governments warning of a potential funding disaster if the moratorium is made permanent.

"Again and again over the last seven years as this debate has gone forward, the Senate has been given these projections about calamitous losses to our states and localities if the Internet tax freedom bill is passed," he said. "In instance after instance revenue has gone up rather than revenue going down."

He said his concern remains making certain that consumers "who now hear the message `you've got mail,' don't get a message `you've got special taxes.' That's what this issue has always been all about."

Sen. Alexander said he was pleased Majority Leader Bill Frist (R., Tenn.) had agreed to a full debate on the issue but the two sides continue to "simply have a difference of opinion" on the issue. He said S150 remains a bad bill.

By passing the legislation "we would create permanent confusion about how to regulate and tax the fastest growing new technology in America, high-speed Internet access," Sen. Alexander said. "We would create a permanent tax loophole for the high-speed Internet access industry and the telecommunications industry."

Sen. George V. Voinovich (R., Ohio), like Sen. Alexander a former governor, said that supporters of S 150 have characterized opponents as favoring taxes on the Internet and on email.

"I stand here today in opposition to taxes on Internet access," he said. "But that's not what today's debate is about. Rather the debate on S 150 is about federalism, unfunded mandates, and protecting the states' ability to collect revenue at a time when state and local governments are struggling to make ends meet."

The U.S. Chamber of Commerce put out an issue alert calling on the Senate to support the McCain compromise.

"The growth of the Internet has revolutionized the way we transact business, and has fundamentally changed how individuals communicate and manage their daily lives," the Chamber said. "To continue to foster this growth, it is imperative that all governments - federal, state, and local - not impede this progress by imposing multiple or complex taxes that unfairly target Internet transactions. Therefore, the Senate must act quickly to restore the moratorium."

The New Millennium Research Council said in a study released this morning that if DSL services were subject to taxes it would hurt Universal Service Fund support and lead to a $4.3 billion loss in gross industry revenues over five years, which would cost 11,900 U. S. jobs in just one year.
Howard Buskirk, hbuskirk@tr.com
www.tr.com

Benton Communications

TAXING HIGH SPEED SERVICES: A QUANTIFICATION OF THE EFFECTS ON THE DSL INDUSTRY AND UNIVERSAL SERVICE

Curiously, on the day the Senate began deliberation on Internet taxation, a new research report on the issue was released. The imposition of state and local telecommunications taxes on digital subscriber line (DSL) services would slash federal Universal Service Fund (USF) contributions by $280 million and lead to $4.3 billion in reduced industry revenues available for investment in new union jobs and expanded availability of broadband technologies, according to a new study released today by the New Millennium Research Council (NMRC). The NMRC study, "Taxing High-Speed Services: A Quantification of the Effects on the DSL Industry and Universal Service," was written by economist Stephen Pociask. Mr. Pociask is president of TeleNomic Research, a consulting firm specializing in public policy analysis for information technology industries.

Pociask said: "DSL service is price-sensitive and an increase in taxes would produce an increase in price, leading to a significant reduction in demand and a decrease in total industry revenues." He explained that consumers would migrate to tax-exempt cable-modem service, or abandon high-speed access altogether. "Since cable operators do not pay into the Universal Service Fund, an increase in cable-modem demand would not help state and local governments raise taxes nor would it help fund universal service programs." USF contributions are paid on all interstate telecommunications services and are used to support telecom service for low income customers, underwrite network development in high-cost areas, and fund Internet services for schools, libraries, and rural healthcare providers. Pociask warned: "Because universal service programs are already under financial strain, this substantial contribution loss would put these social programs in serious jeopardy."
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