[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
STATE TAXATION OF INTERSTATE TELECOMMUNICATIONS SERVICES
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HEARING
BEFORE THE
SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
JUNE 13, 2006
__________
Serial No. 109-120
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
_____
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28-199 PDF WASHINGTON : 2006
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COMMITTEE ON THE JUDICIARY
F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina HOWARD L. BERMAN, California
LAMAR SMITH, Texas RICK BOUCHER, Virginia
ELTON GALLEGLY, California JERROLD NADLER, New York
BOB GOODLATTE, Virginia ROBERT C. SCOTT, Virginia
STEVE CHABOT, Ohio MELVIN L. WATT, North Carolina
DANIEL E. LUNGREN, California ZOE LOFGREN, California
WILLIAM L. JENKINS, Tennessee SHEILA JACKSON LEE, Texas
CHRIS CANNON, Utah MAXINE WATERS, California
SPENCER BACHUS, Alabama MARTIN T. MEEHAN, Massachusetts
BOB INGLIS, South Carolina WILLIAM D. DELAHUNT, Massachusetts
JOHN N. HOSTETTLER, Indiana ROBERT WEXLER, Florida
MARK GREEN, Wisconsin ANTHONY D. WEINER, New York
RIC KELLER, Florida ADAM B. SCHIFF, California
DARRELL ISSA, California LINDA T. SANCHEZ, California
JEFF FLAKE, Arizona CHRIS VAN HOLLEN, Maryland
MIKE PENCE, Indiana DEBBIE WASSERMAN SCHULTZ, Florida
J. RANDY FORBES, Virginia
STEVE KING, Iowa
TOM FEENEY, Florida
TRENT FRANKS, Arizona
LOUIE GOHMERT, Texas
Philip G. Kiko, Chief of Staff-General Counsel
Perry H. Apelbaum, Minority Chief Counsel
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Subcommittee on Commercial and Administrative Law
CHRIS CANNON, Utah Chairman
HOWARD COBLE, North Carolina MELVIN L. WATT, North Carolina
TRENT FRANKS, Arizona WILLIAM D. DELAHUNT, Massachusetts
STEVE CHABOT, Ohio CHRIS VAN HOLLEN, Maryland
MARK GREEN, Wisconsin JERROLD NADLER, New York
J. RANDY FORBES, Virginia DEBBIE WASSERMAN SCHULTZ, Florida
LOUIE GOHMERT, Texas
Raymond V. Smietanka, Chief Counsel
Susan A. Jensen, Counsel
Brenda Hankins, Counsel
Mike Lenn, Full Committee Counsel
Stephanie Moore, Minority Counsel
C O N T E N T S
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JUNE 13, 2006
OPENING STATEMENT
Page
The Honorable Chris Cannon, a Representative in Congress from the
State of Utah, and Chairman, Subcommittee on Commercial and
Administrative Law............................................. 1
The Honorable Melvin L. Watt, a Representative in Congress from
the State of North Carolina, and Ranking Member, Subcommittee
on Commercial and Administrative Law........................... 3
WITNESSES
Mr. Steven Rauschenberger, Assistant Republican Leader, Illinois
Senate, and President, National Conference of State
Legislatures, Springfield, IL
Oral Testimony................................................. 6
Prepared Statement............................................. 8
Mr. Stephen P. B. Kranz, Tax Counsel, Council on State Taxation
(COST)
Oral Testimony................................................. 24
Prepared Statement............................................. 26
Mr. David Quam, Director, Office of State and Federal Relations,
National Governors Association, Washington, DC
Oral Testimony................................................. 32
Prepared Statement............................................. 34
Mr. Scott Mackey, Economist and Partner, Kimbell Sherman Ellis
LLP, Montpelier, VT
Oral Testimony................................................. 37
Prepared Statement............................................. 40
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Prepared Statement of the Honorable Chris Cannon, a
Representative in Congress from the State of Utah, and
Chairman, Subcommittee on Commercial and Administrative Law.... 2
STATE TAXATION OF INTERSTATE TELECOMMUNICATIONS SERVICES
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TUESDAY, JUNE 13, 2006
House of Representatives,
Subcommittee on Commercial
and Administrative Law,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 3:07 p.m., in
Room 2141, Rayburn House Office Building, the Honorable Chris
Cannon (Chairman of the Subcommittee) presiding.
Mr. Cannon. Good afternoon, ladies and gentlemen. This
hearing of the Subcommittee on Commercial and Administrative
Law will now come to order. I apologize for being a few minutes
late. We just had a vote.
Every month, we'll receive at least one bill from a
telecommunications company and some receive more. I know I do.
These bills are for our home phone, cell phone, cable, DSL,
cable Internet, and other services. Whenever I look at my bill,
one thing I keep thinking is how much do I have to pay in taxes
just to be able to communicate with others.
In our increasing mobile society, communications services
hold us together. These services allow us to keep in touch with
our families while we are away from home. They allow us to
communicate with our kids when they leave home. I personally e-
mail or text message my son. It turns out to be the most
convenient way to get more than three words out of him. And not
often and they sometimes are ``u'' instead of ``y-o-u,'' but
this is what life is about. With the touch of a button, we can
contact them to find out how they are, find out how they are
doing and then they ask us for more money. I was thinking we
might be able to establish a filter for that.
The innovations and expansion of communications have helped
us become a more productive society and fueled our ability to
lead the global economy. We should be finding ways to encourage
innovation, not block it with excessive and discriminatory
taxes. Higher taxes ensure that we will see less of the taxed
service. Taxing telecommunications services stymies
technological process by creating disincentives to purchase
these services.
Communication taxes have been applied piecemeal by local
State and Federal Government over a long period of time, and
many of these taxes were created while we still had essentially
one company running communications in America. We now have
competition from wireless, cable and others, but we still have
not moved away from a complex tax system, even though we have a
dynamic competitive industry.
Taxes on communications services are a jumble. The tax
rates on communications are about at the point where these
taxes are approaching the level of ``sin'' taxes. We want to
encourage people to use communications, and we want all people
to be able, not move the cost beyond what the poor amongst us
can afford. The taxes fees and surcharges on a phone bill
include: Relay center surcharges public right-of-way fees,
gross receipts taxes, 911 fees, universal service funds, cost
recovery surcharges, State sales tax, local sales tax and
additional local taxes.
It is easy to understand what some of these taxes fund such
as the 911 fees, but other fees are not comprehensible such as
the cost recovery surcharge found on the Virginia Verizon bill.
In 2004, the regressive rate of State and local taxation on
telecommunications services was 14.17 percent. States and
localities have acknowledged there is a problem and that we
need to reform. Today, we'll discuss this problem and what can
be done to limit excessive taxation on telecommunications
services and providers. This is just the beginning of the
discussion. I expect future hearings on this issue, and I look
forward to the testimony of the panel.
Now without objection, the Chair will be authorized to
recess the Committee at any point. Hearing none, so ordered.
I further ask unanimous consent that Members have 5
legislative days to submit written statements and statements by
interested parties for inclusion in today's record. Without
objection, so ordered.
[The prepared statement of Mr. Cannon follows:]
Prepared Statement of the Honorable Chris Cannon, a Representative in
Congress from the State of Utah, and Chairman, Subcommittee on
Commercial and Administrative Law
Good afternoon ladies and gentlemen; this hearing of the
Subcommittee on Commercial and Administrative Law will now come to
order.
Every month we all receive at least one bill from a
telecommunications company, and some receive more, I know I do. These
bills are for our home phone, cell phone, cable, DSL, cable internet,
and other services. Whenever I look at my bill, the one thing I keep
thinking is: How much do I have to pay in taxes, just to be able to
communicate with others?
In our increasingly mobile society, communications services hold us
together. These services allow us to keep in touch with our families
while we are away from home. They allow us to communicate with our kids
when they leave home. With the touch of a button, we can contact them
to find out how they are, find out what they are doing and for them to
ask us for more money. Maybe we could establish a filter for this use!
The innovations and expansion of communications have helped us
become a more productive society and fueled our country's ability to
lead the global economy. We should be finding ways to encourage
innovation, not block it with excessive and discriminatory taxes.
Higher taxes ensure that we will see less of the taxed service. Taxing
telecommunications services stymies technological progress by creating
disincentives to purchase these services.
Communication taxes have been applied piecemeal by local, state,
and federal government over a long period of time. Many of these taxes
were created when we still had essentially one company running
telecommunications in America. We now have competition from wireless,
cable and others, but we still have not moved away from a complex tax
system even though we have a dynamic and competitive industry.
Taxes on communications services are a jumble. The tax rates on
communications are about at the point where these taxes approach the
level of ``sin'' taxes. We want to encourage the use of communications
by ALL people, not move the cost beyond what the poor amongst us can
afford.
The taxes, fees and surcharges, on a phone bill include: relay
center surcharges, public right-of-way fees, gross receipts taxes, 911
fees, universal service funds, cost recovery surcharges, state sales
tax, local sales tax and additional local taxes. It is easy to
understand what some of these taxes fund, such as the 911 fees. But
other fees are not comprehensible such as the cost recovery surcharge
found on a Virginia Verizon bill.
In 2004 the regressive rate of state and local taxation on
telecommunications services was 14.17 percent. States and localities
have acknowledged there is a problem and that we need reform. Today, we
will discuss this problem and what has been done to limit excessive
taxation on telecommunications services and providers.
This is just the beginning of the discussion. I expect future
hearings on this issue, and I look forward to the testimony of the
panel.
Without objection, the Chair will be authorized to recess the
committee at any point. Hearing none, so ordered.
I further ask unanimous consent that Members have 5 legislative
days to submit written statements and statements by interested parties
for inclusion in today's record. Without objection, so orderd.
I now yield to Mr. Watt, the Ranking Member of the Subcommittee,
for an opening statement.
Are there any Members wishing to make opening remarks?
Mr. Cannon. I'd now like to recognize Mr. Watt, the Ranking
Member of the Subcommittee, for an opening statement.
Mr. Watt. Thank you, Mr. Chairman. Today's hearing and
mark-up consider tax policies of significant importance to the
effect that industries and also to the States and local
governments that levy taxes and rely on revenues from those
taxes. At the hearing on H.R. 1396, which we understand are
marking up today one of the witnesses testified ``it is
axiomatic that if had Congress intervenes in State and local
taxation in a manner that establishes a favored group of
taxpayers, then other taxpayers who feel that they are in the
same position will come forward seeking the same favorite
treatment.''
Against the backdrop of any Federal legislation seeking to
curtail or limit the States' taxing authority, are structural
issues of federalism and constitutional considerations
including due process, commerce clause, and equal protection.
There are also very basic bread and butter issues: Funding of
schools, revitalizing post hurricane devastated areas and
paving streets. Things of that kind.
That said, I think that it is important that we take a
serious look at the current state of State and Federal and
local tax structures and the way they affect the
telecommunications industry and the consumer. I believe the
change is necessary in this area. I am also respectful of State
sovereignty and hope that this and subsequent hearings will
enlighten us on what role Congress can constructively make in
assuring that the principles of tax efficiency, competitive
neutrality and tax equity on which all stakeholders seem to
agree are reflected in concrete policies and practices.
One of my particular concerns about the discriminatory
application of State and local taxes on the telecommunications
industry is the disproportion of burdens such taxes may have on
low fixed and middle income families and communities of color.
As Chair of the Congressional Black Caucus, I have endeavored
to support legislative initiatives that close the disparities
that exist in various facets of American life.
Telecommunications is no different. Indeed, in light of the
pervasiveness and rapidity of technological advances, I believe
that ensuring policies that promote growth, competition and
access are fundamental to citizens of all economic background.
Understand that we will hear from additional stakeholders
at subsequent hearings. For example, a U.S. conference of
mayors and other local entities not represented here today may
have another variations on these issues and certainly a
different perspective. And because I have always wanted to hear
all the perspectives, I will certainly be supporting additional
hearings so that everybody can express themselves.
Thank you again, Mr. Chairman, for convening the hearing. I
look forward to additional hearings on this issue and thank the
witnesses in advance for their testimony, and I yield back the
balance of my time.
Mr. Cannon. Thank you. I always appreciate your thoughtful
comments. I want to apologize for the background communications
while you are speaking. Just for the convenience of witnesses,
we have a camera that is associated with whoever thinks he's
going to be the first witness, and I am not sure who that is.
Is that you, Mr. Rauschenberger? Okay. Great.
Then, actually, for odd reasons we are going to introduce
Mr. Mackey first and then we'll move across the dais. We'll
start with you as the first witness.
Scott Mackey is an economist and partner at Kimbell Sherman
Ellis. He's worked with the States and major wireless
telecommunications companies in their efforts to conform to the
Mobile Telecommunications Sourcing Act. Mr. Mackey has been the
chief economist for the National Council State Legislatures and
represented NCSL on the Steering Committee on the NTA
Telecommunications and Electronic Commerce Tax Project.
Mr. Mackey earned his undergraduate degree in economics
from Middlebury College and his MBA from the University of
Colorado. Mr. Mackey, thank you for your appearance here today.
We look forward to your testimony.
Our next witness is David Quam, the Director of the Office
of the State and Federal Relations for the National Governors
Association. He works closely with the governors of Washington
D.C. Representatives and the NGA's standing committees.
Prior to joining the NGA, Mr. Quam was the Director of
International Affairs and General Counsel for the International
Anti-Counterfeiting Coalition, Inc. He was also Majority
Counsel for the U.S. Senate Subcommittee on the Constitution,
Federalism and Property Rights for the Committee on the
Judiciary.
And Mr. Quam received his undergraduate degree from Duke
University and his J.D. from Vanderbilt University, and we
appreciate you coming to testify today.
Our next witness is Stephen Kranz, Tax Counsel for the
Council on State Taxation. He's responsible for following and
responding to State tax developments around the country for
COST. Mr. Kranz is a regular contributor to COST's publications
and COST's State Study and Report on Telecommunications
Taxation. He's also a frequent speaker on State and local tax
topics around the country.
Prior to joining COST, Mr. Kranz established the Office of
the Chief Counsel while working at the District of Columbia's
Office of Tax and Revenue. He spent 6 years as a trial attorney
in the Honors Program of the United States Department of
Justice, Tax Division and he is the current chair of the
District of Columbia Bar's State and Local Tax Committee. And
Mr. Kranz, welcome. We appreciate your time.
Our final witness is, or in this case, the first witness
today is Senator Steven Rauschenberger. Senator Rauschenberger
was elected to the Illinois Senate in 1992. He is now the
assistant Republican leader and specializes in eliminating
State and local discriminatory tax schemes, as well as
immigration, Medicaid, and welfare reform.
Would you like to come to Utah? Take some of the arrows for
the next few days?
He is President of the National Counsel of State
Legislatures through August of this year and previously served
as co-chair of NCSL's Executive Committee Taskforce on State
and Local Taxation of Telecommunications and Electronic
Commerce.
During his time in office, Senator Rauschenberger has been
an advocate in the interests of taxpayers.
Senator Rauschenberger, we thank you for coming here to
Washington to discuss these issues with us today. It is nice to
see you today and appreciate your involvement in the topic,
which is very important. I extend to each of you my warm
regards and appreciation for your willingness to participate in
today's hearing. In light of the fact that your written
statements will be included in the hearing record, I request
that you limit your oral remarks to about 5 minutes.
We have a lighting system that starts with a green light
that goes for 4 minutes, then it turns yellow and at 5 minutes
it turns red. It is my habit to tap my pencil just to get a
little bit of attention at that point. Sometimes we have a lot
of people in these hearings, maybe people who are still
wandering back from votes. When that's the case, we try to keep
it more tightly at 5 minutes because everybody needs a chance
to ask questions, but this is not a fixed thing, unless people
ask questions that I don't like then I get tougher with the
gavel. That's not true, we have never had a problem with that,
I don't think.
On the other hand, we would like to explore a bit in
discussion and with questions, and so to finish up your
thoughts, we'll move on. And after you've presented your
remarks I will, based upon the time of arrival of Members of
the Committee will be offered the opportunity to ask questions.
Now, pursuant to the Chairman of the Judiciary Committee, I
need to ask you to stand and raise your right hand and take the
oath.
[Witnesses sworn.]
Mr. Cannon. The record should reflect that all of the
witnesses answered in the affirmative.
You may be seated.
And then we are going to start with you, Mr.
Rauschenberger; is that not correct? You are recognized for 5
minutes.
STATEMENT OF STEVEN RAUSCHENBERGER, ASSISTANT REPUBLICAN
LEADER, ILLINOIS SENATE, AND PRESIDENT, NATIONAL CONFERENCE OF
STATE LEGISLATURES, SPRINGFIELD, IL
Mr. Rauschenberger. Good afternoon, Chairman Cannon, and
Ranking Member Watt and Members of the Subcommittee on
Commercial and Administrative Law. I truly appreciate the
opportunity to be here to testify before you today and I am
very appreciative of the fact that you are taking up what I
think is a very important issue to my children, to my
constituents, and ultimately, to the United States.
I am State Senator Steve Rauschenberger from Illinois. I am
President this year of the National Conference of State
Legislatures. With me today in the audience is State Senator
Leticia Van de Putte of Texas and NCSL's President-elect.
Senator Van de Putte and I have made telecommunications tax
reform one of NCSL's major priorities and I am pleased that she
could join me here today to see the testimony and see how I did
in my first testimony before the Judiciary Committee.
New technology convergence and competition in
telecommunications makes it critical to simplify and reform
State and local taxes to ensure a level playing field and to
enhance economic development and avoid discrimination among
telecommunications providers.
For almost 100 years until 1984, telephone service was a
highly regulated industry in which consumers did not have a
choice of provider. Phone companies were subject to tax under
statutes applicable to public utilities, and such taxes in the
form of gross receipts, franchise and other industry. Specific
taxes were passed on to customers as part of the regulatory
rate setting scheme. Many monopoly phone companies had no
reason to, and normally did not, oppose these taxes. In the
1990's, many States began efforts to deregulate local markets
and to open these markets to competition to improve consumer
choice and, hopefully, lower prices. In the Telecommunications
Act of 1996, Congress further opened local markets. In most
States, the deregulation of the industry was not accompanied by
corresponding elimination, simplification, or restructuring of
the old monopolistic tax system that's based on silos and
technology. Innovation and convergence of existing technologies
are radically expanding what telecommunication services are;
blurring the distinction between telephone and Internet
services; between cable wireless and satellite communications;
between long distance and local service; and, between telephone
and other forms of communications.
Many of these new technologies are capable of delivering
telecommunications or telecommunications-like services. As a
result, similar services can be delivered by networks that are
taxed very differently and for a growing number of new
technologies, these services are free from State and local
taxation. This uneven governmental treatment at the State and
local level, while not intentional, has led to competitive
barriers, discouraged market investment and infrastructure
development that is crucial to the future and impacted the
rollout of advance telecommunications service throughout the
United States.
Imposing these higher tax burdens on telecommunications
services provided by some telecommunication providers while
imposing lower or even no tax burdens on similar services sold
by nontraditional providers, places governments in the position
of picking winners and losers in the market place.
Under the legacies of the former monopolistic structure,
State and local tax burdens on telecommunications companies and
their customers are significantly above those imposed in other
types of industries and service. The Council on State Taxation,
COST, found that the average rate of State and local taxes for
telecommunications services was around 14.1 percent, compared
with only an average of about 6 percent for general business
taxes.
No reasonable policy maker can continue to justify this
discriminatory tax regime on communication services. At a time
when we talk about how important it is to have everyone
ubiquitously connected to the network and to have access to
high speed communications, for us to allow a--a discriminatory
tax regime is not realistic.
You need to know that NCSL has been working for almost a
decade on reforming State telecommunication taxes. The three
principles that I want to highlight that we believe and have
pressed hard for are tax efficiency by State and local
governments; we've pushed hard for competitive neutrality in
State and local public policy; and, for tax fairness between
technologies.
Telecommunications tax reform is much easier said than
done. States face a tremendous barrier in overcoming inertia,
in persuading local governments in municipalities to accept the
risks of a new tax regime which may lower rates but broaden
their tax base. But if we are going to have the kind of
advanced deployment of telecommunication services in networks
that we all believe are the future for the United States, we
are going to have to take those kind of risks.
I think the fact that this Subcommittee is taking this
issue up, helps provide impetus and encourages State and local
decision makers to stay focused on the task. The threat over
time that there may be deadlines from the Federal Government
serves as a stimulus which will help bring State and local
government decision makers together.
You know, I've worked thoughtfully and watched the
telecommunications industry cooperate with my task force for
nearly a decade as we tried to build consensus and we have had
some progress. I am going to get into it in questions where
States had acted on their own.
But I don't think we have another decade to thoughtfully
wait for enlightened State public policy makers to find their
way on their own. So the very fact that you're convening this,
that you are discussing this, you are making people aware that
the Congress is concerned about equity and taxation, are making
sure we send the right kind of messages. I'll be happy to
answer any questions you have.
Thank you.
[The prepared statement of Mr. Rauschenberger follows:]
Prepared Statement of Senator Steven Rauchenberger
Mr. Cannon. Thank you, Mr. Rauschenberger. It's always a
pleasure to hear from you.
Mr. Kranz.
STATEMENT OF STEPHEN P.B. KRANZ, TAX COUNSEL, COUNCIL ON STATE
TAXATION (COST)
Mr. Kranz. Thank you, Mr. Chairman, for the invitation to
participate in today's hearing.
As you said during the introductory remarks, my name is
Steve Kranz. I am Tax Counsel with the Council on State
Taxation, also known as COST. COST is a trade association that
represents about 600 of the Nation's largest taxpayers,
including companies from every industry segment and
particularly those companies in the telecom and cable and
technology arena which have been asked, and, in fact, forced by
State and local laws to collect the taxes that we are
discussing today.
COST's mission is to preserve and promote equitable and
nondiscriminatory taxation, and as the 2004 State study and
report on telecommunications taxation, which COST prepared,
points out telecommunications and communications taxation is
anything but. In fact, it is inequitable and discriminatory.
We have forced a square peg of a monopoly form of tax
administration, left over from the days of telecom regulation,
into the round hole of free market telecom service providers.
The result is a system that's broken and in desperate need of
repair.
COST has studied and commented on the tax structure facing
telecommunications providers since 1999, has put on a number of
those studies and can describe the landscape in really 2 words:
Oppressively burdensome. We have a system of telecom taxation
that violates every tenet of good tax policy, creates an
untenable burden for telecom providers and more importantly for
their customers. We ask telecom companies to collect tax from
their customers under a set of rules that are so complicated no
one can do the job correctly. We ask companies to collect tax
from their customer at rates that make one think the product
they're selling should be kept behind the counter of a
convenience store and only sold to customers who are over the
age of 18.
While a small number of States have made progress, as State
Senator Rauschenberger has indicated, by improving their
particular tax systems, the overall burden, as you see by
looking at the 1999, the current study, has not significantly
changed. In fact, the overall tax rate that is imposed by State
and local governments continues to increase.
Telecom customers are taxed at a rate more than double the
rate on goods sold by a normal or general business. Second, the
accounting burden that's imposed by State and local tax
authorities is astounding. Companies are required to file
almost 50,000 tax returns a year if they do business
nationwide.
Looking in further detail at the results of the telecom
study. In 2004, as I said, the rate that was imposed on telecom
services was double that was imposed on goods sold at a K-Mart.
The average rate on telecom was over 14 percent, while the
average rate on sales of goods was about 6 percent. This
difference is something you can see in many of the States
across this country. Eighteen States have rates on
telecommunications in excess of 15 percent. Nine of those
States tax telecom services at rates exceeding 20 percent.
Turning to the accounting burden that is created by this
system. I mentioned 50,000 tax returns a day. That's a big
number. And if you break it down, it is over 190--I am sorry--
50,000 and tax returns per year broken down is over 190 tax
returns per business day, almost one every 2\1/2\ minutes. I
don't know how much time it takes you to do your tax return or
whether you do it, but it takes a long time to prepare tax
returns and these companies are required to spend phenomenal
resources filing those returns on a daily basis.
On a State-by-State level, when you look at the study, 18
States require companies to file more than a thousand tax
returns per year. Of those, 6 States require more than 3,000
tax returns per year. Looking at your phone bill, as you said
Mr. Chairman, you can see the complexity on its face. In
Maryland, for example, there are 7 separate line items,
different taxes that are imposed. In Washington State, there
are 10 separate line items of tax imposed, and in New York,
there are 12. Each of these line items requires a company to
calculate, collect and remit tax information and dollars from
consumers on a monthly basis.
In conclusion, while the phone bill gives you a snapshot,
the 50-State study gives you a thorough picture of the
complexity of the issue that exists out there. The difference
in rates that is imposed on telecom companies and the
administrative and accounting burden that results from the
various impositions.
Mr. Chairman, and Members of the Subcommittee, thank you
again for giving me the opportunity to testify. I hope that you
provide--that you find the information and the COST study
useful as you consider this difficult problem. And I'd be happy
to respond to any questions that you'd have.
Mr. Cannon. Thank you, Mr. Kranz.
[The prepared statement of Mr. Kranz follows:]
Prepared Statement of Stephen P. B. Kranz
Mr. Cannon. We want to acknowledge the presence of Mr.
Coble from North Carolina and the gentlelady from Florida, Ms.
Wasserman Shultz, who have joined us for the hearing.
And Mr. Quam, you are recognized for 5 minutes.
STATEMENT OF DAVID QUAM, DIRECTOR, OFFICE OF STATE AND FEDERAL
RELATIONS, NATIONAL GOVERNORS ASSOCIATION, WASHINGTON, DC
Mr. Quam. Thank you, Chairman Cannon, Ranking Member Watt,
Members of the Committee. My name is David Quam. I am the
Director of Federal Relations for the National Governors'
Association and greatly appreciate the opportunity to testify
here today.
Telecommunications tax reform has been a major issue for
the governors over the past year. As I am sure we'll discuss,
the NGA was essential in trying to pull together industry and
State and local officials together last year to have a
discussion about what could be done regarding the status of
State and local taxes on telecommunications, and really, it's a
communications issue. Not just telecommunications, but all the
different communications mediums which are now competing
against one another.
I'll talk a little bit about those reforms, but first,
there are four main points that I'd like to get across to the
Committee today. First and foremost is that issues and
responsibility for State and local taxations should be left to
State and local officials. Ultimately, this is about State and
local revenues, and State and local taxes and governors and
State legislatures are very concerned with both those revenues
and control of those tax systems.
Second, an acknowledgement that changes do need to be made.
Communications technology has evolved far beyond the existing
State tax systems and a failure to act on behalf of States will
only create increasing disparities among competitors and
threaten long term revenues for State and local governments.
Third, States are working to reform their taxes. Perhaps
not at the speed that some in industry would like, but States
are working very actively to try to modernize their tax
systems, reduce administrative burden, and, in some cases,
reduce rates.
Finally, that Congress can best support State tax
modernization by ultimately avoiding Federal action that will
restrict the ability of States to craft meaningful reforms.
Again, this gets back to the principle of federalism because
we're talking about State and local taxes. Reforms and
solutions really need to come from State and local governments.
The discussions that NGA hosted were quite comprehensive,
and, I should say, quite difficult.
NGA and members of the big seven organizations, including
NCSL, the National League of Cities, the Conference of Mayors,
the Association of Counties, and others, joined together with
representatives from the telecommunications industry, from the
Internet industry, and cable and satellite television. All of
the major players who are currently involved in
communications--in the communications industry to try to
discuss what could be done. First, what are the problems
associated with State and local taxation. Second what are the
principles for reforms for the different groups and, third,
could consensus be developed to create some sort of solution
that could be enacted by State and local governments.
A couple of key points became clear during those
discussions. First, of course, that the current system of
taxation is complex and does not completely reflect today's
market for communications services. Several State taxation
systems continue to tax communications based on the technology
used to provide them rather than the service. It is these silos
that often create disparities between new competitors in the
market place.
Second, industry regards certain, if not most, State and
local tax practices and requirements as barriers to their
ability to compete in an ever-increasing competitive market
place. This is best summed up by one of the participants who
said, ``in my estimation the real problem here is that there
are 49 too many States.'' I think that's summed up where
industry was coming from with regard to State and local
taxation.
Another industry observation from a non-telecom: ``Nobody
wants to be a telecommunication company.'' If you look at the
tax burden and some of the regulatory burdens, anybody out side
of that rubric would like to remain out there.
Third, every one wants to preserve their own competitive
advantage. If a statute allows you a business model that gives
you a competitive advantage over another member, you are going
to want to preserve the status quo. These are all obstacles for
reform. From the State standpoint, local and State officials
are committed to competition and encouraging innovation. There
is no governor that wouldn't want more broadband access in
their State. However, State sovereignty also has to mean
something, and at its core, that is the ability to structure
State and local revenue systems, regulate businesses and
protect and promote the public interest.
And finally, for State and local governments, revenues do
matter. Any reform that simply shifts cost to States away from
States is going the create more problems than it ultimately
solves. And so anything that is just a simple tax cut without
more comprehensive reforms, creates difficulties.
As I said before, States are working to reform their
systems. The COST study, which we've heard about, cites
simplification reform in Florida, Illinois, Ohio, Tennessee,
and Utah as having decreased the number of tax returns that a
telecommunications provider must file by over 18,000.
More recent reforms in Missouri and Virginia have gone even
further. Virginia is a particularly interesting example--having
just passed, it will take effect this year. The back story on
Virginia's new tax, one that combined several different
communications industries to broaden the base and lower the
rate, is that it involved all levels of government negotiations
between the governors office, State and local government, and
different industry groups.
Finally, States have also supported wide ranging
telecommunications tax reforms as part of the streamlined sales
and use tax agreement. This is the State-based voluntary
agreement. Under that agreement, States are required to adopt
uniformed definitions in administrative rules in return for
collecting taxes from revoked vendors that volunteered to
participate in the agreement. The governing board recently
adopted new definitions that will require States participating
to adopt those definitions into their State laws for purposes
of sales tax. So there is considerable reform going on at the
State level.
When State and local government went into the discussions
that we held with industry. And I should say that ultimately
they did not prove fruitful because of some of the conflicts we
had between revenue neutrality and competitive neutrality.
There were several different principles that were important
to State and local government. First and foremost, reform
should be technology neutral focusing on the service rather
than the technology used to provide the service. Second, reform
should be revenue neutral, hence one of the problems during our
discussions. That's debated over 20 billion annually
telecommunications taxes not only support general revenues, but
are often allocated at the local level to pay for specific
purposes ranging from education to improving public safety
systems.
The potential to significantly reduce State and local tax
revenues is one of the primary difficulties with simply
subscribing to a request that telecommunications industry be
treated just like a general business. As the COST study
asserts, and assuming the numbers are correct, and Steve, I'll
give you the benefit of the doubt--the telecom tax rate stands
at 14.17 percent compared to only 6.12 percent for general
business. Mandating a reduction on telecommunications rates to
those of general business with the effort required of 51
percent increase.
Third, the Federal Government should not pre-empt State and
local taxing authority. Fourth, the role of State and local
government in serving public interest obligations must be
maintained in any sort of reforms. And fifth, reform can not
happen over night.
The complexity of State and local tax systems does not lend
itself to an immediate or one-size-fits-all solution. Reform
should incorporate the interest of all affected parties and
allow for sufficient transition time to fully implement
comprehensive reform.
I'll be happy to take any questions from the Committee.
[The prepared statement of Mr. Quam follows:]
Prepared Statement of David Quam
Chairman Cannon, Ranking Member Watt, distinguished members of the
committee, my name is David Quam and I am the Director of Federal
Relations for the National Governors Association (NGA). I appreciate
the opportunity to appear before you today on behalf of NGA to discuss
issues related to the taxation of communications services at the state
and local level.
overview
Last year NGA embarked on an ambitious effort to develop consensus
between representatives of the communications industry and state and
local officials regarding the future of state and local taxation of
communications services. For over eight months participants
representing the wireline and wireless telecommunications sectors,
cable and satellite television and state and local governments met to
examine the issues raised by the current systems of taxation, formulate
principles for reform, and if possible, craft a consensus for promoting
changes that could benefit industry, government and consumers.
Through those discussions several points became clear:
The current system of taxation is complex and does
not completely reflect today's market for communications
services.
Industry views certain state and local tax practices
and requirements as barriers to their ability to compete in an
increasingly competitive marketplace.
State and local government officials are committed to
encouraging innovation and deployment of communications
services while also protecting the public interest and
providing for the needs of their citizens.
The last two points proved the most difficult to reconcile. From
the industry perspective, the days of monopoly service have given way
to a competitive and evolving marketplace. Traditional state and local
tax laws, which are generally based on the technology used to deliver
communications services, distort the marketplace by disproportionately
favoring one industry over another. The solution proposed by the
telecommunication industry was to end specific telecommunications taxes
and treat telecommunications service providers like a ``general
business.''
In contrast, state and local officials recognized the need to
modernize existing tax laws, but stressed that reform also must reflect
government's responsibility to protect the public interest and remain
cognizant of the need for state and local governments to balance their
budgets and structure their revenue systems.
In the end, these competing interests prevented consensus, but they
also made it clear that the complexity of state and local tax systems
requires that long-term comprehensive solutions evolve from states--not
the federal government. The ability of states to structure their
revenue systems is a core element of sovereignty that must be respected
by the federal government. Congress therefore can best support state
tax modernization by avoiding federal action that will restrict the
ability of states to craft meaningful reforms.
background
In 2000, NGA's Center for Best Practices issued a paper calling for
Governors and state legislators to ``reexamine the state and local tax
treatment of the telecommunications industry.'' (``Telecommunications
Tax Policies: Implication for the Digital Age,'' NGA Center for Best
Practices, 2000). The report concluded that existing state and local
tax systems were ill-suited for the modern telecommunications
marketplace, stating:
``[S]tate and local telecommunications tax systems are not
competitively neutral. In many cases, the current tax structure
favors some segments of the industry over others. In other
instances, the tax burden on the telecommunications industry is
greater than that of other industries. In either case,
telecommunications companies are not competing on a level
playing field. The current tax system forces these companies to
compete not only on the basis of economic factors, but also on
the basis of the tax differential among them.''
The report went on to recommend that state policymakers review
their state telecommunications taxes with goals of increasing tax
efficiency, competitive neutrality, tax equity and administrative
simplicity. Importantly, however, the report recognized that many of
its reforms are not revenue neutral and that the fiscal impacts of any
changes on state and local government ``need to be a major focus of any
proposals.''
state telecommunications tax reforms
Since 2000, several states have taken up the mantel of
telecommunications tax reform. As noted in the Council on State
Taxation's 2004 State Study and Report on Telecommunications Taxation
(COST Study), simplification reforms in Florida, Illinois, Ohio,
Tennessee and Utah decreased the number of tax returns that a
telecommunications provider must file by 18,610. More recent reforms in
Missouri and Virginia have gone even further. The Missouri law, which
will take effect Aug. 28, 2006, expands the municipal tax base by
making it clear that providers of cell phone and other wireless
telecommunications are subject to the same tax as wired
telecommunications. In return, the state (rather than municipalities)
will collect the tax and apply a new 5 percent ceiling to all
municipalities by 2010.
Virginia's new communications tax law is even more comprehensive,
streamlining existing state and local taxes into a statewide, flat-rate
structure and eliminating local cable-franchising fees. Beginning
January 1, 2007, the commonwealth will collect the tax and disburse
rebates to municipalities on a share basis reportedly equal to what
they now gather from the existing tax structure. In addition, a
statewide rights-of-way use fee will be applied to all cable-TV service
lines in the same way it is currently applied on all local exchange
telephone lines. Supporters of the law maintain the new measure will
raise approximately the same amount of revenue that municipal
authorities now receive from local taxes and franchise fees. The
standardized rate is distributed evenly among communication services
resulting in reductions in the monthly phone bill for most residential
customers.
States have also supported wide-ranging telecommunications tax
reforms as part of the Streamlined Sales and Use Tax Agreement. Under
the Agreement, states are required to adopt uniform definitions and
administrative rules in return for collecting sales taxes from remote
vendors that volunteer to participate in the Agreement. The Governing
Board (the governing body for the Agreement) recently adopted uniform
definitions for telecommunications services that will require changes
to the tax laws of the Agreement's member states. The benefits of the
Streamlined Agreement--central collection; uniform definitions,
customer remedy procedures and sourcing rules; and notification of and
limitations on local rate and boundary changes--represent critical
reforms that will significantly reduce complexities and ease providers'
administrative requirements.
opening a dialogue
While states worked individually to modernize their tax systems, it
was the debate over how to best extend the federal Internet access tax
moratorium that underscored the need for states and local governments
to work with communications providers to address state tax issues.
A key part of the extension debate was how to level the perceived
tax disparities between telecommunication and cable broadband offerings
and address the rise of new Internet-based services such as Voice-over-
Internet-Protocol. Those industry sectors not subject to the moratorium
argued for their inclusion to promote competitive neutrality. Those
subject to the moratorium argued to preserve their exempt status; and
those outside the moratorium fought to prevent the transfer of any
additional tax responsibility to their industry. The debate illustrated
the difficulties states face in modernizing their tax systems to make
them competitively neutral: industry sectors that stand to gain from
reform support state efforts; industries with an existing competitive
advantage due to state or federal restrictions fight to maintain the
status quo.
Following passage of the extension, NGA called for an open a
dialogue between state and local elected officials and industry
representatives to examine current taxation practices, compare
principles and priorities for reform, and determine whether any
consensus exists for modernizing state and local communications taxes.
State and local government associations worked together to develop
key principles to help guide discussions with industry. First, reforms
should be technology neutral, focusing on the service provided rather
than the technology used to provide the service. Such a change would
decrease discriminatory tax treatment between competing service
providers and allow for greater certainty for new entrants.
Second, reforms should be revenue neutral for state and local
governments. Estimated at over $20 billion annually, telecommunications
taxes not only support general revenues, but are often allocated at the
local level to pay for specific purposes ranging from education to
improving public safety systems. The potential to significantly reduce
state and local revenues is one of the primary difficulties with simply
subscribing to the demand of the telecommunications industry to be
taxed like ``general business.'' The COST study asserts that the
average effective rate of state and local transaction taxes for
telecommunications services is 14.17%, compared to only 6.12% for
general business. Mandating a reduction of telecommunications rates to
those of general businesses would therefore require a 51% decrease in
state and local tax rates. Actual revenue losses would likely exceed
the $6.987 billion difference estimated in a November 2001 study
prepared by Ernst & Young LLP for the Telecommunications State and
Local Tax Coalition.
Third, the federal government should not preempt state and local
taxing authority. Governments at the federal, state and local level
have long recognized that communications services play a unique and
critical role in modern society that may require different regulatory
and tax treatment from those imposed on general businesses.
Furthermore, state and local jurisdictions are generally required to
balance their budgets. A federally mandated reduction of more than $7
billion in telecommunications tax revenue would require spending cuts
or revenue increases to cover the loss. The ability of states to
structure their revenue systems to fund government services is a core
element of state sovereignty that should not be undermined by federal
authorities.
Fourth, the role of state and local government in preserving public
interest obligations should be maintained. The responsibility of
managing public-rights-of-way, funding public safety infrastructure,
providing consumer protection and promoting universal service are
critical state and local functions. Reforms to state and local tax
systems should not undermine government's ability to carry out its
responsibilities to protect the public interest.
Fifth, reform cannot happen overnight. The complexity of state and
local tax systems does not lend itself to an immediate or one-size-
fits-all solution. Reform should incorporate the interests of all
affected parties and allow for sufficient transition time to fully
implement comprehensive reforms.
conclusion
A modern communications infrastructure that provides high-quality,
reliable, and affordable communications services is essential to the
economic competitiveness of states and the nation. Recent technological
advancements in communications services are fundamentally changing the
manner and means by which consumers communicate with one another. These
changes have led to the development of new services, greater
competition and increased consumer choice. Technological advancements
also pose challenges for states, which generally tax communications
services based on the technology used to provide the service rather
than the service itself. Left unchanged, these laws will create
inequities between competing service providers and diminish state
communication tax bases as new technologies evolve beyond existing
laws.
Although NGA's efforts to develop consensus recommendations for
reform were not immediately successful, Governors continue to support
state efforts to modernize their tax systems in a manner that promotes
innovation and competition, encourages investment, preserves state
authority, provides necessary resources and advance the public
interest.
Mr. Cannon. Thank you. We've got a bill for a vote. We have
a couple of votes, but I think we have time, Mr. Mackey, for
your testimony and we will come back and do questioning
afterward.
STATEMENT OF SCOTT R. MACKEY, ECONOMIST AND PARTNER, KIMBELL
SHERMAN ELLIS LLP, MONTPELIER, VT
Mr. Mackey. Thank you, Mr. Chairman, Representative Watt,
and Members of the Committee. As you said in your introduction,
Mr. Chairman, I have looked at this issue from both sides now.
I've worked with the wireless industry for the last 5 years,
specifically trying to address the discriminatory and excessive
State and local tax burdens, and also, when I was at NCSL I was
working on it too. I think--seeing it from both sides--it is
clear that the problem, as defined on both sides, is the same.
Everyone acknowledges there is a problem, and of course, the
stumbling block is how to solve it.
I am going to focus on something that you, Mr. Chairman,
and Representative Watt mentioned in your opening statements,
which is the economic impact of some of these taxes. I'm going
to talk specifically in my short time about consumers and about
the overall economy, because these taxes and the tax systems
that we've allowed to sort of become institutionalized really
have impacts that--broadly on the national economy and on
consumers that don't get a lot of attention but perhaps really
should.
On the first point concerning consumers. Everybody in the
State and local world knows that consumption taxes are
regressive, and I think what you see with telecommunication
taxes is you have a layering effect of one regressive tax on
top of another regressive tax on top of another, you know,
where you have multiple taxes at the State and local level all
being layered on the consumer. And as a result, you have sort
of a very regressive tax system on our people on fixed incomes
and our low income households. When you have average effective
rates of 15 percent--as has been talked about in the COST
study--obviously a tax on telecommunications and other
communications services is going to have a much bigger impact
on somebody with a lower income than a higher income.
A troubling trend recently is some jurisdictions actually
imposing flat rate taxes. For instance, in the City of
Baltimore, where the city imposed a $3.50 per line tax on
wireless and wireline phone lines. Well, obviously, at $3.50 as
a percentage of a $25 cheapest plan you can get is a lot higher
than $3.50 on a $100 plan. And the impact can be even magnified
in households where you have families--at least in the wireless
side, for instance, you have, you know, buy your first phone
and sign up for a second or third line for only $10 more a
month. Well, the marginal rate on some of those second and
third lines is 40 percent if you are only paying $10 more and
you are adding $3.50 in tax plus 5 percent tax.
So we really have a situation where the regressive nature
of these consumption taxes is really, really magnified in the
area of communication services tax.
Now consumers are burdened, but consumers are also wage
earners. They're also out there trying to earn a living. And
the other point I wanted to make is the economic impact of
these communication services taxes really affect the whole
economy because, as others speakers have alluded to, we've
moved from a monopoly structure where there wasn't choice,
there wasn't competition for consumers. Taxes were buried in
the bills and essentially taxes didn't matter. You were buying
plain vanilla communication services and the tax that you pay
really wasn't going to affect what you were buying. Now we are
in a situation where consumers have choices of providers,
choices of technology. And they're really--more and more of
their dollars are being spent not so much on plain vanilla
communication services, but on other things: downloads and
things like that.
So what you are seeing is consumers are a lot more price
sensitive today than they were in the monopoly era. And when
you impose taxes of 15 percent and as high as 20 percent and
more in some States, what you have is a real impact on
consumers' purchasing choices. One study that looked only at
wireless, but a lot of it, I think, is true for other
communication services as well, found that every 1 percent
increase in the price is going to reduce consumer demand by
between 1.1 and 1.3 percent. So you can imagine a system where
you have tax burdens that are 9 percent--7 to 9 percent higher
than what you buy at the store. That's going to translate into
a 10 to 12 percent reduction--in consumer expenditures on
communications.
So what does that mean to the economy? Well, obviously the
communications companies--wireless, wireline, cable--are
investing huge amounts of money to push advanced communications
network broadband out to more consumers so they can compete
with each other and get into everybody's business. And
obviously this benefits consumers because the more competition
there is, you are going be able to get a better deal. And what
we are finding is that these taxes that have an impact on how
much revenue, you know, cash flow from operations--that these
companies have available to invest back in their networks. And
these are not insignificant amounts of money. In the wireless
side, it's 20 billion a year. I am sure it is higher, even
higher in cable and wireline telecom as well. And this is how
these advance communications networks are going to be built: by
the private sector investing money to get these services out
there.
Now, the reason this is important is because study after
study has showed that there are huge productivity benefits to
the U.S. economy when we can get these networks out there and
get businesses and consumers and everybody using them to be
more productive. In fact, a study that was recently done by
Ovum and Indepen found that 80 percent of the productivity
gains in the year 2004 were estimated to come from information
technology and communications.
So obviously, the more money that companies have to invest
in networks, there is going to be more productivity benefits
that are going to accrue to everybody. And when we talk about
the revenue concern that the local governments have, those are
real concerns. But there is also the possibility that we can
create a bigger pie and have people spend more on services if
we didn't have some of these discriminatory taxes that are
going to result in more tax revenues coming in for everybody,
higher incomes, and all of the positive things that we saw in
the '90's with the Internet and the growth of e-commerce.
So these taxes do matter to the economy. And you know, to
the extent that these tax structures are retarding investment
in advanced communication services, that's a problem.
And I'll just sum up with a simple maxim that if you want
more of something, subsidize it, if you want less of something,
tax it. And unfortunately, we are taxing our way to slower
broadband deployment, less investment by the private sector in
advanced communication services. And we're doing that at a time
when State and local governments and their economic development
people are very serious about wanting to get this out there. On
the one hand, we have these tax structures that are retarding
investments and in some areas we actually have subsidization
going on to try to get more of it.
These taxes really do have an impact directly on the
consumer as a purchaser, but also the overall economy and
affect it that way. So it is a very important issue, and it is
great that this Committee is looking at it because of these
national implications of what we are doing, and I know you have
a vote. I look forward to the question period, and I thank you.
[The prepared statement of Mr. Mackey follows:]
Prepared Statement of Scott R. Mackey
Mr. Cannon. We will recess for about 20 minutes. Long
enough to go over and vote. Then when I get back, we'll
restart. So we will be recessed for a bit. Thank you.
[Recess.]
Mr. Cannon. The Subcommittee will come to order. All this
technology going on here. Modern communications are fixed to
the floor and worse, we have noise from the floor.
I think--Steve, do you want to stay for a question?
Thank you. We have another briefing going on elsewhere, so
I think we'll do questions. I'll ask you questions and we will
be a little less formal here, but I'd like to get up to that
briefing as well.
I apologize for that, the interruption. That's sort of what
happens in Committee. But we had some really interesting
discussion, and what I'd like to do is just get comments from
the various perspectives on this issue. Historically, the
richest guys in town were the guys who had the telephones first
and they got to call each other and the maids got to call the
maids in other houses. You had somebody who actually physically
pulled the plug and put it in so you connect to the circuit.
And so we taxed people pretty heavily on telecommunications
because it was a luxury.
The world has changed around us now. We don't--not only do
we not have plugs, but we don't have circuits any more. We have
the Internet and communication on the Internet.
I am wondering if given the regressive nature, and
certainly you'll testify on this, but I'd like to focus on the
regressive nature of the tax as telecommunications has become
so common. Is that not something that ought to concern us
significantly. We'll start Steve, with you and go down the
panel.
Mr. Rauschenberger. Absolutely it should. The aggressive
nature of telecommunications taxes is a problem. Because the
rate's high. Because consumption tends to, on traditional phone
lines, tends to be more concentrated in less affluent socio-
economic groups. And the other thing that we didn't touch on
but I think has been stated--the concept emerging since the
'20's and the '30's, the 1920's and 1930's in the United States
of a ubiquitous network where everybody's connected. The value
of the network is, in large measure, because everybody is on
it. I mean having a phone system that only connects half of the
Members of Congress is less valuable to everybody. So these
extraordinarily high taxes also discourages some people from
being on the network.
Mr. Cannon. Thank you. That's a remarkably important
insight and I appreciate that. I don't mean to interrupt,
particularly, but if you could add to the commentary. You
might, in particular, want to talk about this. It seems to me
the wonderful thing about America is we have upward mobility.
The ideas of Americans that we have is that rights come from
God, individuals delegate those rights to Government, and we
protect those rights through the rule of law. And in that
environment, it doesn't matter who your poppi was, you know. It
doesn't matter where you were born or the color of your skin.
What matters is your initiative and your intellect and other
talents.
And so in America, we have this upward mobility that's
created by a system. No other country--I mean, there's been
stories about China for instance, where they would seek out the
smartest kids in the country, bring them into the bureaucracy
and the bureaucracy is what actually maintained and developed
upward mobility but it was very, very limited. Whereas in
America, any kid can fail his test here and there and not do
well, but finally get some initiative and make something out of
himself.
It seems to me that telecommunications is like a key factor
in letting that kid get an education, assert himself, connect
himself and move up. And am I missing something here but isn't
that an important part of it?
Mr. Rauschenberger. I would agree. I would again say the
danger we have in not dealing with this traditional silo tax
and regulatory scheme and simply avoiding doing it because it's
uncomfortable. It causes us to rethink how we do municipal
taxation or rethink how we do State taxation. There's no long-
term benefit to the United States or to any municipality or
State not reforming these.
So that's why--if you are going to have a network of
exchange of information, if intellectual property is going to
be one of the cornerstones of my children and your children,
and the United States has to build on as we compete in an ever-
increasing flattened world. We need to make sure our networks
are ubiquitous, that they're low costs, that they're broad
based and they're well distributed, and our tax policy today
does not--you know, I believe in the sovereign States.
I am a States' rights person. We need to work with the
municipalities and the States to make sure we do this right.
But we do need leadership on some issues from Congress to help
set time frames.
Mr. Cannon. And when you talk about a ubiquitous network
what you're talking about there is not only the whole system
where you better but the ability of kids or individuals to
emerge in the system. The record should reflect that Senator
Rauschenberger is nodding his head in the affirmative on that.
Thank you.
Mr. Kranz, or Mr. Quam----
Mr. Quam. I'd be happy to take that. I think you definitely
hit on an issue I think everybody here recognizes in that we
have a legacy problem that our tax laws are not keeping up with
some of the technological evolutions that we've seen. Some of
which have been evolutionary, if not revolutionary, just in the
last 6 years. The Internet, in particular, is now the
cornerstone in communications. This is no longer just wireline
and pack switches and that type of thing. And so States do need
to reform and take a look at the regressivity of some of the
taxes and the entire tax system as a whole. However, one of the
things I pointed out in my testimony--one of the things that
was critical during our discussions, was bringing everybody to
the table.
Again, this is not telecommunications anymore, this is all
communication services. You have what has traditionally been
defined not as telecommunication--telecom now offering telecom
type services. So if you are talking about reform of the tax
system, and again, States are really beginning to look at
reform at the State level where you can broaden the base and
lower that rate and possibly address some of these legacy
issues. You need to get rid of some of the restrictions that
prevent States from being able to broaden that base so that you
can craft a solution that really works at the State level.
I go back to the example in Virginia. Again, during that
process, which took a number of years, they reached out to
local government groups, all sorts of different industry
groups. Crafted a bill, established a rate, ran the tax numbers
to see if the revenues would be sufficient to make
municipalities whole and get the revenues that the State
needed, and also meet some of the competitive neutral aspects
that they were after. When it didn't, they went back out, tried
to bring, you know, talk to other industries, brought them in
to the point where you have a very comprehensive bill that
really could revolutionize State and local tax structures in
Virginia.
Now, it's important to note that that model can't be used
everywhere. Not every State is going to have the options that
Virginia did as far as moving taxes, increasing them some
places, lowering them in others. But the dialogue at the State
level, State and local level, and I would argue at the Federal
level, has got to be now, not about telecommunications taxes
but about communications, the entire industry. Ultimately,
reforms should be future proof, and I want to borrow a phrase
from one of my friends in telecom that said if we do that
right, you get to reforms where the next new entrant and the
next new thing fits seamlessly in there and provides
opportunities for everybody to use that technology and taxation
is no longer picking and choosing winners and losers, but it is
also meeting the needs of State and local government.
Mr. Mackey. Just briefly, Mr. Chairman. I absolutely agree
that we ought to be concerned with the regressivity. As you
mentioned, obviously, the networks are ubiquitous, but you also
have, you know, the demographics are changing in terms of who's
using and purchasing a lot of these services, and you alluded
to it in your opening statement about the kids doing the text
messages back and forth and you having to try to keep up with
your kids doing it.
I mean, we have got a lot of young people, a lot of people
on fixed incomes staying connected through this technology in a
lot of different ways, not just through voice. So it's
absolutely important and critical that we look at it. So I
would agree 100 percent.
One other thing, if I can tie it back to something I said
earlier, to the extent that--and this relates to the prices
that folks pay for communications services. To the extent that
we have tax policies that slow the emergence of competing
networks so that we have one provided by a cable company and
one provided by a landline company and one provided by a
wireless company, and others all able to provide broadband, to
the extent we slow that, consumers are denied the benefits of
competition, which are also going to lower the price that
consumers have to pay for those services.
So there's the impact of the regressive taxes and slowing
of investments that's going to bring lower prices for everybody
as well.
Mr. Cannon. Thank you. I have another couple of questions,
but my time has expired.
Mr. Watt.
Mr. Watt. Mr. Chairman, I always like these hearings
because we spend all that time arguing about things that I
think everybody already agrees on. Taxes are too high, taxes
shouldn't be regressive, taxes are unfair, State to State is
inconsistent. I think pretty much everybody on the panel said
that in one way or another.
The point I am wrestling with, I don't even disagree with
any of that, is how the Federal Government gets there from here
and what our standing is to be setting a standard. And so I
guess my devil's advocate question, not to try to get to a
different conclusion than you all--I mean, Senator
Rauschenberger said that we need to do something to provide
incentives to, quote, enlighten State public policymakers.
Recognizing that there are some enlightened State public
policymakers, the problem is it sounds to me like they are all
moving in the direction and all of a sudden the Federal
Government is getting ready to do something preemptive, or runs
that risk.
So I am trying to figure out how we don't stifle those
enlightened State public policymakers, but don't overstep our
bounds at the same time, because if you accept the notion that
interstate commerce--and this is one of those--
telecommunications, I guess, is interstate commerce--but if you
accept the notion that the Federal Government can preempt, and
the next step is going to be no taxes on telecommunications, I
don't know how you get off that slippery slope. I don't know
how you get from the notion that you can do this on interstate
telecommunications, but there is still some intrastate, and I'm
not sure what authority we have as Congress to do this.
So I'm going to encourage you all--I'm going to stop
talking and encourage you all to have a discussion about some
of the things that we need to be focusing on, not the things
that we all agree on. Everybody will tell you taxes are too
high, but I'm sure Senator Rauschenberger is not going to tell
you that the State doesn't have the authority to set its own
tax structure, and I'm sure the local government is not going
to tell you that we've got to at least have some revenue coming
from somewhere if we're going to provide local services. And at
some point we've got to come to grips with who has
responsibility and authority to make these assessments, and you
all keep talking about providing incentives, or speeding up,
but I haven't heard anybody say where you think we ought to get
off, because once the Federal Government gets on, we don't have
much of a history of getting off of anything.
That's my question. Whoever wants to answer it.
Mr. Rauschenberger. Congressman, thank you for asking that
question. Two quick observations. Enlightened legislators,
State legislators, is not the same as military intelligence.
Sometimes it really does exist. I think State public policy is
moving in the right direction, but so are the glaciers in
Greenland.
I think at risk here is the speed that we need to
understand that we operate today 16th- and 17th-century
Governmental models which served the public well----
Mr. Watt. The States are operating under those same models.
The Federal Government is still operating under some of those
same models, too. So that doesn't answer my question.
Mr. Rauschenberger. Which is why public policy falls
behind.
I would make three recommendations to you. First of all, I
think preemption is a dangerous place to go, but if the Federal
Government or the Congress were to consider putting out there a
set of guidelines and recommendations to States, much like they
did with the Mobile Sourcing Act where there was a requirement
that States over a period of time act to modernize their
sourcing rules or they lost the ability to levy those taxes. In
the end, we had 50-State compliance because people had time to
react to it. It set an agenda for State legislators.
I would also recommend that as this Committee looks at it,
you need to consider defining communication services broadly
enough that State legislatures can broadly tax all
communications services at a lower rate rather than focusing on
some technologies. The concept that Voice Over Internet
Protocol or Internet speech ought to somehow be treated
differently than wireline communications is not something I
think is in the public's best interest in the long run.
I think also I would recommend, whatever you do, that you
allow sufficient time frame, keeping in mind that some State
legislatures still only meet every other year. I would argue 4
to 6 years at the minimum, is the shortest time period to
mandate to work with the States to modernize because some
legislatures don't meet often enough.
The last thing I would urge you to consider in this short
laundry list is the understanding that States are going to have
a difficult time mitigating the impact on local governments. So
giving States resources to work with; for example, I have
always believed that the best opportunity to actually get
telecommunication tax reform done at the States, is
simultaneous with modernization of State sales taxes in the
streamline bill where there's resources from the modernization
of the sales tax occurring simultaneous with the loss of
revenue in telecommunications. So we can improve both those tax
systems.
Mr. Kranz. Mr. Chairman, Representative Watt, I think if
you take the problems we've described and break them down into
two separate pieces, the tax rate burden and the discrimination
that occurs there and the administrative or, as I call it, the
accounting burden, those two problems can be solved with very
different solutions. And the rate burden, the discrimination,
there are models out there, the 4R Acts that Congress passed,
preventing States from discriminating against transportation
companies in their taxing positions. There's a markup later
this afternoon on a bill that would prevent States from
discriminating in natural gas pipelines.
That's the kind of Federal solution that could be crafted
here, and my job isn't to advocate any solution. Our study is
intended to discuss the lay of the land out there.
On the administrative or accounting burden, a solution
could be fashioned at the Federal level similar to what State
Senator Rauschenberger mentioned in the streamline bill. There
Congress can provide a carrot incentivizing the States to get
to a simpler world.
Those are possibilities that I think should be considered.
I know that our friends at the State level don't want Federal
solutions to these problems, but I do agree that the icebergs
in Greenland are moving faster.
Mr. Quam. Mr. Watt, I am going to, surprise, surprise,
disagree with some of my panelists. Having the Federal
Government somehow proscribe a solution here or preempt the
States in coming out and asking for that as a potential
solution seems to be saying, please help States--please save us
from ourselves.
The last time I checked, States and local officials, they
answer to voters, and they are subject to elections, and they
are making those decisions. That's ultimately where State and
local tax decisions need to remain.
In my testimony I mentioned that one of the biggest things
Congress could do in this field, because States are reforming
taxes, is support modernization by just avoiding Federal action
that will restrict the ability of States to craft meaningful
reforms.
I get back to one of the best ways to ultimately allow
States to reduce rates, if that is an ultimate goal, is to be
able to broaden the base and create some tax equity and some
competitive neutrality among competitors. I think that is a
worthy goal, but a goal that has to be pursued at States.
Finally, I think Senator Rauschenberger is right on the
mark with regard to streamlined. The streamlined bill has been
a remarkable effort by States on a volunteer basis to modernize
sales tax systems, to address an incredibly complex systems of
sales tax laws, find agreement and work together in a sovereign
way, because it's States making State decisions and working
together and ultimately having the Federal Government support
that effort and partner with States I think will be a large
step forward with regard to taxes and promoting that type of
simplification, administrative simplifications.
Mr. Mackey. Mr. Chairman, Mr. Watt, just briefly. The
problem is I think if we just say just leave it to the States,
I mean, we have a history of about 10 years where everyone has
said there is a problem, and we've had, as others have said,
very little movement.
I absolutely agree that the federalism issues are very
tricky, and you guys are drawing that line, but, I mean,
Congress is uniquely, I hope, positioned to look at the broader
economic issues of balancing federalism between the national
economy and some of the impacts that some of these taxes are
having on our ability as a Nation to compete globally and to
get the networks out as quickly as possible. That is a
difficult balancing act. Certainly if this were an easy thing
for States to do, more would have done it.
I guess the problem from the communications industry side
is just that it's difficult and frustrating when everyone
agrees that there's a problem, and there is not much action or
no action, or, I guess, one State moves to fix it.
That's the dilemma that we face, and we're glad that you
guys are having this hearing so we can talk about some of these
issues, and you can weigh where you come out on that balancing
act.
Mr. Cannon. Thank you. Without objection, we'll go to a
second round of questioning.
Mr. Watt just asked pretty much my second question that I
wanted to talk about. Let me refine it now a little bit,
because I am highly reluctant to preempt States. On the other
hand, there are some issues that really cry out in our
constitutional environment for Federal national policy.
I think, Mr. Mackey, you talked about the value of the
network, in fact, several talked about the value of the
network, being more valuable as more people get involved, and
to the degree that that network becomes a huge national asset.
And, in fact frankly, the foundation for the wealth not only of
America, but for the rest of the world, it seems to me that
that cries out for national policy in a world where any given
State can distort that network fairly substantially.
Does anyone want to comment on that with particularity? If
you say it, it's better in the record than if I say it.
Mr. Rauschenberger. Let me say again, whether you are
talking about the first intercontinental rail system, the
movement toward standard gauges for railroads in America, or
the National Highway System where States surrendered small
parts of their State sovereignty--we all agreed lane width
would be 13\1/2\ feet, yellow paint would separate oncoming
lanes of traffic--those networks have always had more value
because there was consistency and leadership at the Federal
level. No governor and no mayor is in a position not to see
from 30,000 feet the value and the importance of being part of
a ubiquitous, seamless network.
For Congress to set a 6- or an 8-year reasonable deadline
requiring States and local governments to reform and bring
their tax system into compliance so they don't discriminate
against a particular type of technology does not seem to me to
be overly intrusive. I don't think any of us are suggesting
here that we manage the network from the Federal Congress.
We're talking about what everybody agrees is clearly a
discriminatory taxing system that's affecting this network,
which we all agree has value. I think your point is on target.
Mr. Quam. Mr. Chairman, I see a fundamental difference
between sort of highways and railroads and the role they played
and the network they served when they were being built and what
we look at today. You're absolutely right, the value of network
is absolutely proportional to the number of people on it, no
question about it.
No one would say, however, that the wireless industry has
somehow not been successful in the last 10 years when you look
at the number of subscribers. No one would argue that some of
the large Bell companies who are investing in fiberoptics and
broadband and aggressively going out there aren't competing and
competing well and competing at the highest levels. The COPE
Act itself is about establishing market-based reforms to
increase that competition.
When you're talking about the railroads and the highways
and a national presence, that was needed in some sense just to
get the roads built, just to get them across the States. We
have networks in place right now; I can go buy a roaming plan,
and my phone will work anywhere in the United States. That's a
pretty robust network.
The question becomes, Mr. Watt, I think you said yourself,
the commerce clause gives Congress very wide authority, and
arguably communications is interstate, and we give Congress
wide authority to come and interfere with State and local
taxation. However, the question has got to be should Congress
interfere with that. I think the 10th amendment ultimately
means that's got to be a very high bar to cross.
Mr. Watt. I think the question is where you draw the line.
Mr. Quam. I think that's absolutely right.
Mr. Watt. That's really the question. What you're doing is
making the case for a Federal taxing system. That's probably
more understandable than the argument you're making. I don't
see--I don't see a compelling Federal argument to provide an
incentive to do this in 6 years. I see a more competitive,
compelling argument that the Federal Government could take it
over completely and say don't tax it. That's what we did with
the Internet.
But you're on a slippery slope, and I'm just suggesting
that you need to be careful, and even there I don't know how
you say to a State and local government you can't tax local
phone calls, local communication. That's not----
Mr. Cannon. That's my next question. You're asking exactly
the questions that I think need to be asked, but can I just add
a little bit? We have already decided not to tax the Internet,
and we are talking about being neutral to technology. So, how
do we tax telecommunication systems when you have a system that
we're already agreed on a national level, with some exceptions,
not to tax?
There's been some talk, I think that's where you're headed,
and I'd like to get the opinions of these folks. Should we tax
the telephone number? Because if you tax a telephone number,
people will go to URLs, and that will clog a system that people
have come to enjoy. In other words, if you are going to be
technologically neutral, don't you need Federal leadership; and
secondly, don't you need to get away from taxation entirely of
a system that is fundamental?
We tax gasoline. We don't tax, except in cases like Utah,
and they are under the process of thinking about being stupid
on this point--we don't tax except generally speaking through
gasoline taxes.
Doesn't it make some sense to not tax communications
because that's the only way you are going to be technologically
neutral; and secondly, don't you need Federal leadership to
actually do that?
Mr. Watt. Except you should know for the Chairman it makes
sense not to tax anything.
Mr. Cannon. Very little.
Let's start with Mr. Mackey and move back, because, Steve,
you may want the last word on this one.
Mr. Mackey. That's a policy question that people would
argue about. I think what the industry is seeking on behalf of
its customers is fairness, and fairness defined as we're not
seeking to be exempt from all taxes. We feel like the services
that the communications services industry provides, which,
after all, are moving more and more away from plain vanilla
talking on a telephone and more toward a lot of digital goods
and other types of services that are really no different than
sometimes what you buy at a store, whether you buy a CD in a
store or download it onto your phone or onto your computer at
home--we think that the industry would argue that fairness
means being taxed like general business. Now, from an economic
development maybe you can make the argument that the rate
should be zero. This industry, communications industry, has
been subject to a discriminatory burden for so long that we
just want to get to where general business is. And we think
there are significant economic benefits to the economy of doing
that that, as I said earlier, will generate some money at local
governments to help them fill in some of what they think they
are losing.
Mr. Cannon. Mr. Mackey, do you know how many users Skype
has today? Last I heard, it was 28 million, but it's probably
doubled since then, 30, 40 million. Does anybody know? In other
words, we have something like 98 million landlines, something
like 100 million cell phones. Skype is now in the ballpark of
those. They are not taxed.
So I appreciate the fact that you're willing to take the
stripes of the normal tax burden here, but the normal tax
burden is not going to be normal for a year or 2 longer.
Mr. Mackey. I'll quickly follow up. To the extent you
maintain the high rates, you are just driving everyone to the
type of system you're talking about with them.
Mr. Cannon. Pushing the envelope a bit because I want some
feedback, we are rapidly becoming a system where not only is
the discriminatory tax outrageous, counterproductive, but any
tax is going to be marginalized by technology. So don't we need
Federal leadership on probably a quicker scale than you are
suggesting, Senator Rauschenberger, to deal with this issue so
America maintains its leadership and expands at a rate
unencumbered? And, of course, it does create a problem for
States; I'm not suggesting it does not.
Mr. Quam. Mr. Chairman, it won't be surprising that I'm
going to be contrary.
Mr. Cannon. When you disagree, would you tell me what we do
about taxing VOIP? I think taxing a phone number is silly.
That's probably what we do in the Senate with the COPE Act. I
think it's a stop-gap, and I hope the States think about how we
get away from that quickly enough so we don't distort the
system. That's what I'd really like to hear from you. What do
we do to tax Skype in a way that is not counterproductive to
the development of the Internet and communications services
generally?
Mr. Quam. Right now, and somebody can tell me if I'm wrong,
I believe Skype is a free service. Some of it is. So it's more
or less a free service. So forgetting the tax, you also have a
free service compared to other communications. So there are a
lot of economic factors involved in why Skype might be growing
the way it is.
More importantly, I want to get back to an important key
point, and this is the hearing and what you're talking about is
State and local taxation, it's not Federal taxation. The
Federal Government certainly can and should be a leader with
regard to Federal tax policy. I don't think the Federal
Government has to lead when it comes to State and local tax
policy.
Mr. Cannon. Would you deal with the issue of the national
policy toward telecommunications, communications, Internet, all
the bundle of things? In other words, if you say historically
we don't have a right to deal with local taxation of particular
items, well, we have constitutional issues that we've developed
over a long period of time, but we are not talking in a
context. Now we're talking about a future in which
communication can be virtually free, and that means free of
taxes and in some cases free of even cost other than the access
to the bandwidth.
The question in my area is now selling mostly bandwidth and
other things that go along with bandwidth. That's where they
view their financial future. And whatever services, whether
that's telecommunication or television, cable content or video
conferencing, they just want to get money--in other words, the
industry is saying we want value for what we provide, we don't
care what it is that you do.
So telecommunications, if you take an arbitrary identifier
like a telephone number, becomes an obstruction to the
development that might otherwise just happen, and the States
are in the middle of that, and we're looking at that from a
national policy view.
What do we do to distance ourselves in the areas of
innovation and communication? That's what I think I need to
hear from you, not that the States have rights, because they
do. But what do we do as a country so we go in the right
direction, and what is the most important economic force in the
world today?
Mr. Quam. I get back to, again, the point that was made
when we gathered all of our players for the discussion. That
was an issue I talked about before, and that is future-
proofing, which is really what you're talking about, the vision
for the future that will allow for the growth of new
technologies, new entrants, new paradigms really, and how do
those match up with Government responsibilities, ultimately.
The Federal Government certainly has a role in planning
Federal policy to do that. I don't disagree. Do I have the
answers? No. I don't think anybody in this room does, but it
could be one heck of a debate.
My issue remains that at the end of the day States do have
rights, States do have responsibilities, States do have public
interest that they need to enforce, and sovereignty means
something, and revenues do matter.
To the extent that the Federal Government interferes with
those State tax systems, I think that's a very high bar to
cross. Establishing a national standard with national
resources, absolutely, that's Congress's prerogative. But when
you cross into the State line, and I think we can be good
partners, and States can be innovators and will be innovators
moving forward.
Mr. Cannon. Mr. Kranz, you have something to say?
Mr. Kranz. The communication companies are inevitably in a
national playing field. Whether they're traditional telecom
companies, cable companies, the Skype or the Vonage that are
selling communication services online, they are in a national
playing field, and I think we've identified--and I hate to use
the phrase, but we've identified two nonlevel portions of that
playing field, and one is communication companies competing
with other communication companies and the disparity in
treatment there. That requires a solution.
The bigger problem that is addressed and I think the
traditional communication companies are very concerned about is
the difference between tax treatment of communication companies
and general business, and that's where you have the huge
disparities in rates and where there is a need for Federal
solution or Federal guidance that says you can't discriminate,
States and localities, you can't discriminate against these
communication companies.
And as you said, Mr. Chairman, it's no wonder that
consumers are being driven to other solutions, but you
eliminate the discrimination that's imposed, and the drive is
not going to be there.
Mr. Cannon. Thank you.
Mr. Rauschenberger. I think we either voluntarily or
involuntarily at some point surrender some of our freedom for
the security that government offers. We surrender some of our
resources for government to spend on common purposes. I think
tax systems work best if they're simple, broad-based and low-
rate. I would argue the solution that we ultimately need to get
to for State taxation is a low rate, fair, broad-based
consumption tax, a modernized sales tax across the States where
States still have the sovereign right to decide what they want
to exempt from taxation and the right to set their own rates.
The solution for telecommunication services, the solution
for cable services, the solution for the service that we don't
know about yet is simply to define it into the consumption tax
base. Make a decision later if you want to exempt it.
I know we're not supposed to talk about that other bill,
but really fundamental to solving a lot of these problems is to
quit treating telecommunications as if it's something
different. It's not Twinkies, it's the expenditure of funds. We
ought not to at the State level or the local level charge two
to two and a half times a tax penalty simply because we've
historically done it.
If you think of the tax system in the United States, you
think of a three-legged milk stool is what I tell people. On
the one leg, you tax wealth through the property taxes in the
United States, mostly in the States. You tax productivity
through income taxes. And the third leg of that stool is sales
taxes or consumption taxes.
The solution, I think, in the long run that doesn't
discriminate between technologies, doesn't pick favorites in
companies is to move all of those services into the base of the
consumption tax and make public policymakers who want to argue
that they shouldn't be in the consumption tax base argue why
they ought to be exempted or taxed at a higher rate.
Mr. Cannon. Thank you. I appreciate your time here today.
This is an issue that I think is remarkably important. I might
point out that State revenues are at an all-time high in part
because of the technology boom and in part because of Federal
tax cuts. Lots of things are happening here.
This seems to me to be the time States ought to be figuring
out to rationalize what they're doing. In part, that ought to
include allowing the driving force, which I think has been the
Internet, or the network, let's say, more broadly, the
opportunity for people to enter with a low threshold to get
over, and that ultimately keeping that threshold low for every
node on the Internet is probably pretty vital.
This is a complicated area, we recognize it, and we
appreciate your input on it, and I suspect we'll have more
hearings as we pursue the issue. Again, thank you all for
coming. We are now adjourned.
We had a markup scheduled, but because of the briefing on
Iraq, we don't have a quorum, and so we are going to adjourn
the Committee; not just the hearing, but the full Committee.
Thank you all.
[Whereupon, at 5:02 p.m., the Subcommittee was adjourned.]