Posted on February 24, 2004
Mr. Chairman, members of the Committee - thank you for the opportunity to testify as you take a first look at "voice over Internet protocol" (VOIP) technologies - a technology that could soon lead to most of our telephone calls being made over the Internet. During his testimony this morning, Federal Communications Chairman Michael Powell undoubtedly will repeat what he told me just a few weeks ago: that, suddenly, more and more Americans are making telephone calls over the Internet and that this is a marvelous technological innovation coming down the track like a speeding freight train. I'm here today to make sure that our state and local governments aren't tied to the tracks ahead of this train. I am here to urge that, in our excitement about the promise of this new technology, we do not forget about one of the most important principles that unite us as Americans - our federalism. Historically, state and local governments have shared the responsibility for regulating the telecommunications industry. This shared responsibility has given states a major say in who has telephone service, in whether low income Americans can afford service, in whether Americans who live in remote places have service at all, and in how emergency services are provided. Now, both Congress and the Federal Communications Commission are considering how telephone calls shall be regulated and taxed when they are made over the internet. Chairman Powell has already indicated that in order to encourage their growth, he believes that many VOIP technologies should have minimal regulation. I have no quarrel with that conclusion. The growth of these technologies is important to our economy. But economic growth is not all there is to consider. In our federal system, Congress and the FCC will want to make sure that state and local governments are able to maintain traditional telephone services, are able to make those telephone services available to low-income Americans as well as to those who live in remote areas, and are able to maintain effective 911 and other emergency services - especially during this time of emphasis on homeland security. The second area of telecommunications policy in which federal, state and local governments have shared responsibility is taxation. The federal 3 percent excise tax on telephone service collected nearly $6 billion last year. Last year state and local governments collected more than $20 billion in taxes on telephone services and service providers. Six billion is a drop in the bucket in the federal treasury but $20 billion begins to fill up a lot of state and locals treasuries. For example, Tennessee collected $361 million last year in taxes on telephone services, about 5 percent of all the state tax dollars it collected. Texas and Florida each collected more than $1 billion last year in taxes on telephone services. Taxes on telephone services are at least as important to local governments. Sen. Dianne Feinstein said on the Senate floor that many California cities rely on telephone tax collections for between 5 and 15 percent of their budgets. Congress has always respected the importance of these revenues to the stability of state and local governments. In the Telecommunications Act of 1996 Congress specifically provided that "nothing in this act or the amendments made by this Act shall be construed to modify, impair, or supersede or authorize the modification, impairment or suppression of any state or local law pertaining to taxation." Congress and the FCC are now just beginning to consider how to approach issues of regulation and taxation as traditional telephone services migrate to the Internet. Still, it is not too early to wave the red flag of federalism. Earlier this session, the House of Representatives unanimously passed a bill that could put at risk the entire $20 billion state and local government collect annually on telephone services and telephone providers. The House did this in the name of making permanent the federal moratorium on state and local Internet access taxes that began in 1998. The House bill sounds innocent enough. But if the FCC should decide, as it has indicated it might, to designate VOIP as an " information service," then the language of the moratorium legislation bill would likely permanently ban states from collecting taxes on telephone calls made over the Internet. The current Senate version of this bill, S. 150, is now somewhat less of a threat. But, according to the Congressional Budget Office, it still could cost state and local governments more than $10 billion in annual taxes collected on the sale of telephone services. There is no justification whatsoever for Congress deciding to give telecommunications companies such a bonanza - and then turn around and send the bill to state and local governments. This is the worst kind of unfunded federal mandate - a cost on state and local governments imposed by Congress without Congress reimbursing. The Republican majority of this Congress came to power in 1995 promising to end such unfunded mandates. Three hundred Republican members stood on the Capitol steps in 1994 and said, "No Money. No mandates. If we break our promise, throw us out." Stopping states from collecting telephone taxes they are now collecting violates the Unfunded Mandate Reform Act of 1995 for which 62 senators still serving voted. Banning a tax is just as much an unfunded mandate as requiring a service - without paying the bill. If Congress really wants to pick and choose among American business enterprises and decide that the high-speed Internet access business is one that we want to subsidize, then Congress should pay the bill - not send it to the states. I am not at all convinced that Congress should adopt such an "industrial policy." More than 24 million Americans are already paying for high- speed internet access, more than in any other country. According to the Department of Commerce, high-speed Internet access is growing today more rapidly than color TV, or cell phones or VCRs at a similar stage in their development. It is no surprise, therefore, than the Congressional Budget Office reported to us last year that a government subsidy for high-speed Internet access is unnecessary. The free market will do just fine, thank you. But if Congress should insist on a subsidy for the high-speed Internet access, there is a much less expensive and more efficient way to do it than by giving an up to $20 billion a year tax break to the telecommunications industry. The model comes from Texas when George W. Bush was governor. Governor Bush signed legislation that gave every Texas citizen a sales tax exemption for the first $25 per month (or $300 per year) that citizens paid for Internet access. If there is to be a national subsidy for high-speed Internet access, I propose we adopt the George W. Bush Texas plan. Let every state and local government give a $25 exemption from sales taxes to consumers who buy Internet access. If there were 100 million subscribers, the total national bill would be about $2 billion. In order to avoid unfunded federal mandates, Congress should pay that bill and reimburse states and cities each year for their costs. To pay for the $2 billion drain on the federal treasury, Congress should raise the federal excise tax on telephones from 3 percent to 4 percent. Chairman Powell stated on January 14, 2004, at the National Press Club that the goal of the FCC in regulating phone calls over the Internet should be to "do no harm" to the industry. I agree, and suggest that given the importance of the principle of federalism in American life, that the goal should be at the same time to do no harm to state and local governments. That is why Senator Tom Carper and I, along with nine other Senators of both parties, all of whom have been state and local officials, have proposed a two-year extension of the present moratorium on the state and local ban on taxation of Internet access. Such an extension would permit Congress to consider its findings in this hearing and in subsequent hearings, to consider the deliberations of the FCC and to make the best possible judgment about what sort of regulation and what division of taxation responsibility should exist when most American phone calls are made over the Internet. Most of our decisions in the Senate are about conflicts of principles with which almost all of us agree. For example, I know that I agree that in order to encourage economic growth, taxes should be as low as possible. But I also believe that in order to preserve our federal system, Congress should pay the bill if it imposes a service or bans a revenue source. And, I believe that the free market, not a government subsidy, should decide which technological innovations should succeed. I am here today with the hope that in your deliberations you will consider all three of these principles as you come to an appropriate decision about how to regulate and tax the migration of telecommunications services to the Internet.