Subj: Digital Divide: Perspectives of Americans For Tax Reform From: Ron Nehring, 858 794 2338 Americans For Tax Reform (ATR) To: Internet Caucus Advisory Committee Section: Digital Divide Tear down the barriers to Internet access: Repeal the federal excise tax on telecommunications Submitted to the Advisory Commission on Electronic Commerce by the e-Freedom Coalition on November 15, 1999. The federal 3% excise tax on telecommunications is an anachronism that should be repealed immediately and in its entirety. The FET was first established in 1898 as a temporary tax to help finance the Spanish-American War, and then continued as a "luxury" tax to help pay for World War I. Today, the FET is third behind alcohol and tobacco as the largest general fund excise tax in the Federal budget, raising nearly $5 billion in FY 1998. When state and local taxes are taken into account, the average tax rate on telecommunications services in the U.S. is over 18 percent. Taxes on telecommunications are, inevitably, taxes on the Internet. Whether through dial-up access or Digital Subscriber Lines (DSL), over cable modems or wireless ones, access to the Internet takes place over the telecommunications network. Indeed, over 50 percent of the traffic on the public switched telephone network is now comprised of data rather than voice. Thus, high telecommunications taxes slow the spread of Internet access and discourage deployment of the broadband networks needed for the next generation of Internet growth. They raise the costs of electronic commerce for every business, big or small, and raise the price of Internet access for every household, rich or poor. Studies by the Joint Committee on Taxation, the Congressional Budget Office and the Treasury Department's Office of Tax Analysis have all concluded that the FET is the most regressive of all federal taxes. A recent study by The Progress & Freedom Foundation estimates that at least 165,000 U.S. households are priced out of the market for fast Internet access due to high telecom taxes, with the impact falling disproportionately on low-income and rural households. The FET also discriminates against the very sector of the U.S. economy that is driving economic growth. While the information technology sector of the economy accounts for less than 10 percent of Gross Domestic Product, it has produced over 40 percent of GDP growth in recent years. Jobs created by the IT sector are among the highest paying jobs in the U.S. economy, with average annual wages in excess of $52,000, as compared with an economy-wide average of less than $37,000. Prohibit the discriminatory taxation of interstate telecommunications As discussed above, excessive taxes on telecommunications ultimately restricts access to the Internet, either through higher costs to users or under- investment telecommunications infrastructure. Available and affordable Internet access requires a nondiscriminatory tax burden on telecommunications service providers. Discriminatory property taxation usually takes two forms. First, as part of the concept of unit valuation, many states tax the intangible assets of public utilities while not taxing the same assets held by other businesses. These intangible assets, which include assets as diverse as federal operating licenses to an assembled work force, are often the most valuable portion of the utility's business. Second, states often apply a higher tax rate to the tangible personal property held by utility companies than that held by other business taxpayers generally. A recent study by the Committee On State Taxation (COST) illustrates this fact. The study found 15 states tax telecommunications' tangible personal property at a higher rate than other business property, and 14 states levy an ad valorem tax on telecommunications intangible property at a higher rate than other business intangibles. The impact of discriminatory property taxation victimizes customers in several ways. Costs are exported to non-resident customers, driving up nationally-set long distance rates. As discriminatory taxes are eventually passed to the consumer, they constitute a regressive tax aimed at the nation's less fortunate citizens, who tend to spend a higher portion of their incomes on utilities than wealthier Americans. Even if a strong case against a discriminatory property tax could be made, current federal law severely curtails such challenges being heard in federal court unless an extremely high showing is made that the taxpayer has no "plain, speedy and efficient remedy" available. As a result, these taxpayers must file an appeal in the state court system and perhaps multiple local administrative agencies often composed of the same people who assess the property, thus making it more difficult to gain a fair hearing. Without federal protections, telecommunications companies are forced to pay the discriminatory taxes before seeking judicial review. The net result of all of these factors is a danger that telecommunications companies will make inadequate investment in the infrastructure backbone that is essential to the development of the Internet. Discriminatory taxation of telecommunications property reduces return on such property and investment in the Internet backbone is diminished as a result. Improved customer access to the Internet, the World Wide Web and electronic commerce will only come through lower costs associated with increased competition and adequate investment. Discriminatory property taxation of telecommunications companies stands squarely in the way. A legislative proposal to extend federal protections against discriminatory property tax treatment to telecommunications carriers engaged in interstate commerce is sorely needed to protect investment in the Internet backbone, and to protect consumers from the higher costs that result from such practices. This proposal affords telecommunications companies the same tax treatment as their competitors for property tax purposes. Tax discrimination will be eliminated and increased investment encouraged. Ultimately, this policy will result in expansion of the Internet and improved access for all Americans. Scrap Internet tolls: No above-cost fees for the installation of telecommunications cable along rights-of-way. State and local governments are using strained interpretations of the 1996 Telecommunications Act to impose "Internet tolls" in the form of new "franchise taxes" of up to 5% on business and consumer telecommunications use. With an average 18.2% transaction tax burden already being paid by consumers, these new taxes and related special "fees" could easily make telecommunications the most highly taxed product or service in the United States. Consumers need these services to access the Internet, making such new taxes a true impediment to widespread access to the Internet. The Advisory Commission on Electronic Commerce should urge Congress to take remedial action immediately to clarify the Telecommunications Act of 1996 and to ensure state and local government tax policy is not a major contributor to the digital divide evident today. Section 253(c) of the Telecommunications Act of 1996 states that: "[n]othing in this section affects the authority of a State or local government to manage the public rights-of-way or to require fair and reasonable compensation from telecommunications providers, on a competitively neutral and nondiscriminatory basis, for use of public rights-of-way on a nondiscriminatory basis, if the compensation required is publicly disclosed by such government." Unfortunately, state and local governments are routinely interpreting this language as granting them authority to impose a whole new regime of taxation on telecommunications providers and ultimately, consumers. Clearly, as found in a number of recent federal district court cases,2 Congress intended this term "compensation" to bear a direct relationship to the actual costs incurred by state and local jurisdictions in managing telecommunications facilities located in the public rights-of-way. Clarification by Congress of what is meant by "fair and reasonable compensation" is critical lest providers will continue to incur years of costly litigation as state and local governments repeatedly attempt to impose new taxes never intended by Congress in adopting Section 253(c). Specifically, Section 253(c) should be amended to make clear that state and local governments should be reimbursed only for their actual and direct incremental expenses incurred in managing the telecommunications providers' presence in the public rights-of-way. Clearly, telecommunications providers and their customers should be responsible for those expenses state and local governments incur in managing the placement of facilities in the public rights- of-way. And, just as clearly, Congress never intended state and local government to create a new tax regime that creates barriers to entry, discourages the development of facilities-based competitors and makes it much more expensive for both businesses and consumers to enjoy the benefits of advanced telecommunications services and access to the Internet. Accordingly, this new and detrimental form of taxation must be halted - this type of costly taxation can only have the effect of slowing the growth of high-speed access to the Internet. Local governments have also misinterpreted Section 253(c)'s language regarding "authority . . . to manage the public rights-of-way" as providing them with authority to introduce a third tier of regulatory oversight. These attempts at local level regulatory oversight of telecommunications services always result in the telecommunications provider bearing significant and unnecessary costs. Local governments have repeatedly attempted to impose regulatory/management requirements on telecommunications providers that translate into increased costs of doing business in the local jurisdictions. Of course, these increased costs are passed along to business and consumer users of telecommunications in the form of increased rates - a hidden tax. These new local regulatory/management requirements, e.g. mapping requirements, facilities planning reports, provision of in-kind services, undergrounding of facilities, do not constitute "manag[ing]. . . the public rights-of-way" as envisioned by Section 253(c). Instead, as with new "franchise" taxes, these new local regulatory/management requirements have the effect of creating additional barriers to entry, discouraging the development of facilities-based competitors and making telecommunications services more expensive for consumers. Congress should clarify Section 253(c) to bar this third tier of regulation. Section 253(c) of the Telecommunications Act was never intended to be the vehicle for erecting tolls on the information superhighway. The Commission should urge Congress to clarify the law to ensure that this abuse of telecommunications consumers is ended. Simplify state and local telecommunications taxes, filing and auditing procedures. State and local telecommunications taxes are too high, too complicated, and too numerous. Consumers are burdened by multiple and often regressive taxes on telecommunications while providers must cope with complex filing and auditing procedures and in turn pass compliance costs along to consumers. The Commission should consider several ideas to reduce and simplify state and local taxes on telecommunications. States and localities that choose to tax telecommunications should impose only a single tax (one for state, one for localities), with one low rate and base applying across the state using uniform definitions representing the components of taxable and exempt transactions and customers. Providers should be required to file only a single return to the state, representing funds collected for state and local taxes, after which the state should distribute funds back to localities. To further reduce compliance costs, only one audit per state should be permitted for any taxable period. Additional means of simplifying state and local telecommunications taxes should be considered, but only when such simplification will not ultimately increase the net tax burden, or rates, for consumers.