Press Conference Re: Internet Taxes

Federal News Service

HEADLINE: PRESS CONFERENCE RE: INTERNET TAXES

PARTICIPANTS: SENATOR THOMAS CARPER (D-DE); SENATOR LAMAR ALEXANDER (R-TN); SENATOR GEORGE VOINOVICH (R-OH); SENATOR BOB GRAHAM (D-FL)

LOCATION: SENATE RADIO/TV GALLERY, THE CAPITOL BUILDING, WASHINGTON, D.C.

BODY:
SEN. CARPER: Good morning, everybody. Thank you for joining Senator Lamar Alexander, Senator George Voinovich, Senator Bob Graham. Gathered before you today are four people who have served as governors of our respective states. Three of us have actually served as chairman of the National Governors Association. Two of us, not George or I, but two of us have actually run for president of the United States, one in each party. We have a past and, actually, it's one that I think we can be proud of. I'm privileged to serve with them and have served with them in other capacities, and delighted to serve with them today.

I want to mention-to start off, I'll just mention a couple of things and maybe talk about some principles that unite us. One, we're not interested in taxing anybody's access to the Internet. Let's make that clear right from the start. We're not interested in taxing the e-mails that we send or that anyone else in this country sends. In fact, we're opposed to the notion of taxing access to the Internet. We're opposed to the concept of taxing e-mails. We don't believe those should be done.

Having said that, we are in favor of complying with federal laws, including one that eight years ago, 91 senators voted for, 63 of whom serve today. That was a law that says we shouldn't impose unfunded mandates on states. We should not tell states how they have to spend their money without compensating them for the monies that they would be spending. We cannot deny states the ability in most instances to raise revenues as they see appropriate, unless we're willing to step in and make up the shortfall.

The legislation that's coming to the Senate floor, probably today, perhaps tomorrow, violates the 1995 unfunded mandates law. And Senator Alexander will talk more about that later.

Further, the moratorium that was adopted five years ago, it is a moratorium that I believe we feel should be extended for at least two years. And I just want to back up and take just a moment and just talk about what was the moratorium intended to do, and how did it work?

Five years ago, five, six, seven years ago, states, local governments, were beginning to find ways, think of ways to raise revenues by taxing access to the Internet. Congress passed a law five years ago that said you can't do that anymore, but we'll grandfather in the rights of 11 -- I believe 11 states, to tax access to the Internet. They were grandfathered-in in one way or the other.

Three things are covered by that moratorium.

One, our bills from-monthly bills from America Online can't be taxed by state or local governments. Two-unless you're grandfathered in.

Two, the legislation-the moratorium says if two states want to tax the same transaction that occurs over the Internet, you can't do that. Can't be multiple taxation by counties in same state or by two states of the same transaction.

Three, there can't be discriminatory taxes that apply to, for example, purchases made over the Internet. You can't say, on the one hand, if you buy a good or a service in a local-from a local merchant, you don't pay a tax, but on the other hand, if you buy the same good over the Internet, we're going to tax you. That's a discriminatory tax, and it's made illegal by the moratorium.

We believe that moratorium should be extended. We'll be proposing, later today or tomorrow, legislation to extend the current moratorium by an additional two years, to give states the opportunity to continue the work that they'd begun when we were governors, actually; that would enable them to simplify their own sales tax collections, sort of homogenize their own sales taxes within their state, and to give them the ability to go forward and to collect taxes-sales taxes from Internet or from remote vendors.

We changed the moratorium in one way. We changed the moratorium so that-to provide a level playing field for those who access the Internet using DSL or broadband. And if we did not do that, if we did not do that, we would put a number of service providers at an economic disadvantage, an unfair advantage, and we want to make sure that that does not happen.

The problem with the bill that comes out of committee and comes to the floor goes well beyond-it's not just simply extending the moratorium on those three things. It's not just providing a carve- out, if you will, and an extension of protection for those who access the Internet using DSL or broadband. It goes well beyond that. And it frees up-and others will talk about this, but it frees up-takes away the ability of state and local governments to ever tax business-to-business transactions as well. And it's just an encroachment on the ability of states to raise revenues at a time when they are hemorrhaging. And we feel that it's incumbent for us to stand up, to stand up for the 1995 law; at the same time, to make sure that we protect consumers and we do this in a way that's fair to the industry as well.

That having been said, let me turn to Governor-Senator Voinovich and --

SEN. VOINOVICH: Thank you, Governor. Yeah.

SEN. CARPER: (Chuckles.)

SEN. VOINOVICH: It's a pleasure to be here with Tom and with Lamar and with Bob. It's interesting that when I was chairman of the National Governors Association, Senator Carper was my vice chairman, and here we are, both in the United States Senate. And Lamar is a former chairman of the National Governors Association.

I'd like to underscore what Senator Carper had to say, and that is that this is not about taxing e-mail. In fact, I'm going to introduce an amendment, in the form of a sense of the Senate resolution, to articulate that federal, state and local governments should not tax e-mail.

I think the Cincinnati Enquirer, which is one of our more conservative papers, had a headline saying, "Halloween Scare: Internet Taxes." And it said, "Senator George Voinovich of Ohio has been boiled in a witch's cauldron this week by critics angered that he helped block an expanded ban of taxes on Internet services. The current Internet tax moratorium, which (we ?) support, expires Saturday. Anti-tax groups making Voinovich"-and many of us, all of us here-"out to be devil incarnate are roasting the wrong guy. Voinovich favors keeping the tax moratorium on Internet access. He helped negotiate the Internet Tax Freedom Act of 1998, supported its renewal in 2001, and opposes new taxes on telecommunications. And yes, he strongly opposes tax on e-mail," end of quote.

In my office, if you come and visit me, there is a pen that I display quite proudly, and that is the pen that President Clinton used to sign the unfunded mandates relief legislation. I was there in the Rose Garden, with bob Dole. I was representing state and local governments who had worked over a four- or five-year period to get unfunded mandates legislation passed. It was a big deal. And if I recall, it was one of Newt Gingrich's, number two on this Contract for America. I remember being at Williamsburg saying that we were going to get this done.

The fact of the matter is, is that unfunded mandates have been a long-time problem in this country, and we thought we did something about it when we got that legislation passed.

During my tenure-as I mentioned, I was chairman of the National Governors Association. And when we got into this whole issue of taxation of the Internet, I worked with Governor Mike Leavitt, who is now the new administrator of the EPA, to negotiate a moratorium on Internet taxes, which was signed into law in 1998 and then again in 2001. And we supported that moratorium then and I support that moratorium today.

But the fact of the matter is that the moratorium that is being presented to us presents some real problems, in that, number one, it does not allow us to figure out just exactly how much of regular taxes that states are collecting today would they not be able to collect if the moratorium went into effect. CBO-I will quote this on the floor of the Senate-but the last thing the CBO said-and I think, Lamar, you've got another letter from CBO-it said, "Revenues could also be lost if Internet access providers choose to bundle products and call a product Internet access. Such changes would reduce state and local revenues from telecommunication taxes and possibly revenues from content currently subject to sales and use taxes. However, CBO"-listen to this-"However, CBO cannot estimate the magnitude of these losses, some say $4 billion, some say $20 billion that could be lost."

And if CBO can't figure out the definition and what it would do, why are we now taking this on at this time?

And I share the point of view of senators that are here today that what we ought to do is extend this moratorium during a two-year period while we try to figure out what the definition-what the impact of the definition will really have on the states.

And it's particularly important right now because Michael Powell, the head of the FCC, says that the current telecommunications act is broken. This thing is moving so rapidly that it would be terrible if we just went ahead and extended this into infinity without looking at what it's going to do to the revenues of our respective states-states, by the way, that are in the worst financial shape that they've been in possibly in the last 25 years.

So what we're saying is this is an unfunded mandate, the point of order should be upheld, and once it's upheld, we have a substitute for the permanent extension of the moratorium. And that is a two-year moratorium that adds to the definition not taxing DSL, which will even the playing field for the telephone companies with some of the others that are their competitors, and give us the time to really study this issue and its impact on the future of our country.

SEN. ALEXANDER: Thank you. It's good to be here with Senators Voinovich and Carper, former governors, and especially with Bob Graham, with whom I served as governor for eight years when he was governor of Florida and I was governor of Tennessee.

As you can sense, nothing stirs up governors and mayors and legislators, local officials, more than politicians who get elected to Washington and suddenly get all these great ideas and pass them and then send the bill home to be paid. All of us here, when we go home to-Memphis, for example, the Shelby County School Board, if I walk in their meeting, the first thing they say to me, "Well, that was a great idea to help children with disabilities, but why are you only paying half the bill?" Or if I go over to Germantown and the mayor talks to me, she says "Well, great idea about storm water runoff, but why don't you pay the bill if you make it a law or make it a regulation? Why do we have to raise local property taxes and local sales taxes and consider state income taxes in order to pay for all these good ideas that Washington is imposing?"

So what we're talking about is really the worst kind of unfunded mandate and really an unprecedented assault on states' rights and responsibilities. And when the Congress would come along and say to state and local governments, "We're just going to carve a big part of your tax base off and then you let the raise the tax on medicine, or raise the tax on income, or raise the tax on property to pay for it, or fire a bunch of teachers and close a lot of state parks. That's what's going on, and you can get a blood pressure rise out of every local official in America on this issue. (Chuckles.)

I want to limit my comments today to two things. One is I want to explain exactly why this is an unfunded federal mandate, which in plain English means it's Washington-it's Congress claiming credit and sending the bill to state and local government. That's what an unfunded federal mandate is. And then, summarize the arguments and turn it over to Senator Graham.

I have distributed to each of you who are here a copy of a letter from the Congressional Budget Office that defines why the proposed interstate tax unfunded mandate violates the budget law in three different ways; not just in one way, but in three different ways.

Now, what the law said when it was passed back in 1995 -- and Governor Voinovich was exactly right. This was a big deal for the Republican Party. I mean, the heart of the Republican revolution in 1994 was the Contract with America; 300 Republicans standing on the Capitol steps, saying, "We're going to restore states' responsibilities and states' rights," and saying further, "If we break our promise, throw us out." That is what they said. And then, in 1995, no wonder the law passed; 91 senators voting for it, as Governor Voinovich said. President Clinton signed it. It basically said: We're through with this. No more unfunded mandates.

Okay, here are three ways this bill violates that law:

One, it cancels the revenues that 11 states are collecting today on Internet access tax. That's $80 (million) to $120 million. That's in Tennessee, for example, a sales tax on your connection to the Internet, just like there's one on your cable or your television.

Number two, the new definition that this legislation proposes would cancel the state's ability to continue to collect the $40 (million) to $75 million on DSL services that it now collects. That's the second way that the amount of money is enough to be an unfunded federal mandate, an intergovernmental mandate, in violation of the budget law.

Number three, and most important to all of us-and this is really what's at the heart of the issue-it expands the definition of what is banned, so that it runs the risk of substantially banning a large part of the $20 billion that state and local governments collect today on telecommunications services. Twenty billion dollars is a lot of money. That's $2 (billion) or $3 billion in California. It's several hundred million dollars in Tennessee.

And the Congressional Budget Office says it can't tell from the definition just how much of the telecommunications services would be banned from taxation, but it is enough to make it an unfunded federal mandate, and then it further goes on to say that the total amount state and local governments collect from telecommunications services is $20 billion a year.

The language also says that the language is likely to produce lawsuits, which is the worst thing for governors and mayors drawing up budgets every year, is to have to set aside the amount and say, "Well, there will be a lawsuit over this, so we can't put it into a budget."

So this is not about taxes. It's not about the Internet. It's about the federal government telling state and local officials what to do. It's about congressmen claiming credit in Washington and sending the bills to governors and mayors. It's about politicians in Washington, who print money, telling local officials, who have to balance budgets, what to do. It's about an unprecedented attack on state rights and state responsibilities. It's about Republicans who seem to have forgotten how we won a majority in 1994 when we said, "We'll stop unfunded mandates, and you can kick us out if we forget our promise." It's about unfunded federal mandates that 91 senators voted to end and that 63 who are currently serving voted to end. It's about legislation that started out basically to benefit consumers and that is ending up, as proposed, benefitting companies.

So when this legislation comes up, three of us-Senator Graham, Senator Voinovich and I-will raise a point of order because this proposal violates the budget act in three different ways-specifically, the Unfunded Mandate Reform Act of 1995. And if a majority of the senators were to decide that we were wrong, and they waive that point of order-not that we were wrong, but if they decide to waive the point of order and to ignore the unfunded mandate, then we join Senator Carper in offering legislation that will basically extend the status quo for two years and give the Senate some time to think about it.

I'm opposed to any unfunded mandate, but a shorter one is better than a longer one, and a little one is better than a bigger one.

Senator Graham.

SEN. GRAHAM: Thank you.

SEN. CARPER (?): Good job.

SEN. GRAHAM: Thank you very much. It's a pleasure to be here with three of my colleagues today and colleagues in the past, as governors of our states.

But there are some people who are missing from this stage. The people who are missing are a representative group of public school students.

I have recently been engaged in a presidential campaign. Whether it was in California, Iowa, New Hampshire or any other state, one of the recurring questions that was asked is, "What do you think the federal government should be doing to improve the quality of education?" I said there is one commitment that needs to be made which overwhelms all other possible answers to your question, and that is that the federal government should avoid undercutting the revenue base of states and local school districts, so that they can meet the responsibilities that they think are of greatest importance to the children in their state and in their community.

Unfortunately, we have been consistently violating that principle. Just to mention three quick recent examples, in the effort to increase the security of the homeland, we have passed a number of mandates on local communities and states, with the expectation that the federal government would pick up a substantial part of the cost. We have failed to do that, and therefore we have essentially directed states and local governments how they had to allocate their limited resources, at a time of economic distress.

We recently passed the No Child Left Behind legislation, with a commitment that the federal government would pay a substantial amount of the additional cost. We have failed to do that. Therefore, we are reprioritizing local school districts' budgets.

And in a very arcane way, when the estate tax-or, as some would say, the death tax-was repealed, prospectively, we allowed the portion of the death tax which applies to the federal government to continue, essentially unreduced, until the year 2011. But for states, which get about 30 percent of this source of income, the mandate is imposed as of the year 2005. So this burden is going to be imposed on states some five to six years before the federal government feels its impact.

Those are just three examples of legislation which, in my judgment, fly in the face of the philosophy of the-no unfunded mandates.

As it relates to education, this is a particularly serious issue. Education, for most states, represents the largest sector of their annual budget. The states, collectively, pay about 96 percent, in conjunction with their local school districts, of the total cost of public education in America. So when we hack away at the ability of states to fund these important public responsibilities, we are attacking the absent school children who are the ultimate targets of that legally impermissible passage of unfunded mandates.

So, I am pleased to join with my colleagues today, who understand the importance of this issue, in taking action to see that the unfunded mandate law is fully implemented, and then to offer an alternative which will responsibly deal with this issue, including providing a time certain within which some of the unknowns, the unresolved ambiguities of this legislation can be resolved.

Thank you.

SEN. CARPER: Before we open up to questions, let me just say, in addition to the children that Senator Graham alludes to, that are not represented here physically today, with us in spirit are Senator Mike Enzi, Senator Ben Nelson, Senator Fritz Hollings, Senator Mary Landrieu. Senator Enzi is in a markup in the Foreign Relations Committee on one of his bills at this moment. And I believe Senator Nelson is co-chairing a classified briefing this morning at the same time, and he cannot be here. They are here with us in spirit and will be supporting these issues on the floor this week.

Your questions.

Q Supporters of the bill have said their only intention is to make permanent this moratorium. What is it -- (inaudible) -- their definition that you're so worried about? They say this has nothing to do with taking away existing telecommunications taxes -- (off mike).

SEN. CARPER: Let me make a brief comment and then turn it over to my colleagues.

Our alternative makes clear that the prohibition against taxes on access to Internet remains intact for the next two years; discriminatory taxes are unlawful; and that multiple taxes by multiple units of government-state government or county governments-are unlawful. We also open it up to expand the moratorium just slightly for those who receive-have their access to the Internet over the DSL or broadband.

But legislation that comes out of the committee is far broader than-it is not a simple extension for two years or permanently for the existing moratorium. It goes way beyond that to cover a whole broad range of business taxes.

And when CBO says that the impacts, the financial consequences for the states are so difficult to calculate that we really can't do it, we know that it's enough that it violates the federal law against unfunded mandates, that suggests to you maybe we need to slow down and we need to understand fully what we're about to do to state and local governments.

SEN. ALEXANDER: If the sponsors of the bill in the House of Representatives had simply extended or even made permanent the same definition of Internet access that we have today, I doubt we'd be here. The answer to your question is, they wrote a new definition of Internet access which opens the barn door a mile wide. It begins to exempt from taxation a whole range of telecommunications services.

The multi-state tax commission estimated the cost of this new definition to state and local governments at $4 billion to $8 billion a year. The Congressional Budget Office recognizes that it is such a large new cost that it clearly violates the unfunded mandate; they just can't figure out by how much, and they point out that it's something below $20 billion a year.

So it's the new, broader definition, that opens the door to banning a significant part of the state and local tax base, that is the big difference between what happened before. If they had come forward with just a simple extension of what we now have, it would probably already have been enacted into law.

Q So, something the states had before, they've lost-they're losing ground on this, is what you're saying?

SEN. ALEXANDER: Well, one, states are losing $80 million to $120 million of tax -- 11 states are losing $80 million to $120 million of taxes they're now collecting on Internet access. Two, some states are losing up to $75 million of taxes they're now collecting on DSL.

But three, and this is the biggest issue, is what could happen in the future. The new definition exempts a large part of the telecommunications industry from taxation, and that is a very important part of the tax base and could cause many states either to close the schools or to raise taxes on medicine or food or gasoline or income, which are their other main sources.

SEN. VOINOVICH: In our state, for example, we were on the phone with the manager's amendment that Senator Allen has talked about proposing to the underlying bill. The underlying bill would have cost Ohio around $350 million a year. The underlying-the manager's amendment, we calculate, would cause us to lose about $70 million per year, or about $150 million over the state's biennium.

And by the way, most of the states have passed their budgets. Our budget in Ohio, for example, was passed on January the 1st. It's a biennial budget. They were very close to not balancing their budget. If this passes, it means that in my state, the legislature will have to come back and either find further areas where they can cut or look at other areas where they can increase taxes. The bottom line is that those will be shoved off either in cuts in services or in increased taxes in some other area to pay for them.

In addition, the real concern is this future. Where are we going in terms of the future, of the uncertainty? And I think that people should know that in states today, they collect taxes on telephone service and other things. If these things are bundled and stuck on the Internet, and the states lose those dollars, again, you're back to a situation where they're going to have to figure out how are we going to make up those dollars. And the purpose of the unfunded mandates relief legislation was to-was not to do that to the states.

Yes, sir?

There's someone right here. This gentleman.

SEN. : This is the last question. We have another conference -- (off mike).

Q Okay. I'm just a little confused about the $40 (million) to $75 million on the DSL, because what I'm hearing is that if the House has just gone with the original language, you guys wouldn't necessarily have any (big ?) objection. If I'm not mistaken, that is a tax on Internet access that happens to be one form of that. And that's not part of the grandfather, as Senator Alexander said; it's separate. These taxes were imposed after the original moratorium. So, it sounds like here what we're trying to do is --

SEN. VOINOVICH: No, no. Wait a second. The-we were one of the grandfathered states, $18 billion. We had put a tax on DSL for businesses only. And those were grandfathered in at the time of the extension to the moratorium, along with many other states. And that's the $60 (million) to $70 billion-million that Senator Alexander's talking about. Our extension of the moratorium would prevent the-any other taxation on DSL.

Q So, this $40 (million) to $75 million would be out of there --

SEN. VOINOVICH: It continues to be grandfathered in. But I have said to the sponsors of this legislation that we would be more than happy to give up that DSL if we had a definition that didn't open up Pandora's box in terms of the future loss of revenues to our respective states.

Q Have you proposed alternative legislation that would not open the barn door?

SEN. VOINOVICH: Well, we talked about it when we were negotiating this last week. But the fact of the matter is, is that we are not opening the barn door. The current statute-look it, we've had it on since what, 1998. There has not been some great rush to try and tax the Internet because we have a moratorium on the Internet. So it's not one of these deals where, you know, all of a sudden they're going to get clobbered.

What bothers us is that they want to have a new definition that will take away the opportunity from the states to tax things that they traditionally received money from-phone lines and other things if they bundle them up, stick them on the Internet and say, "Voila! It's all gone." And when we were on the phone with some of the people that are promoting this legislation-we were on for about an hour with our tax commission-they basically said, yeah, $57 million, or $150 million over a two-year period, yeah, that's right, that's the way it is. And it was like: Well, that's the way it is. And the fact of the matter is, is that what do you say to the state and local government people that are going to lose that revenue?

I mean, what we're doing here today really is we're trying to accommodate the telecommunications industry who, by the way, contributes substantial money to both political parties and to political candidates, and do it to the detriment of state and local government, where we came out and we're firmly saying we don't want to do this to you, okay? When we did the study in 1991 about unfunded mandates that cost us, it was the first real evaluation of unfunded mandates. From 1991 to '94, we lost about a billion seven hundred million dollars. Those were additional costs that we had because of these unfunded mandates. We said we're not going to do that anymore to the states.

And when you have a situation today in this country where the states are in dire shape, it seems to us the responsible thing to do would be to extend the current moratorium, which has worked, and we're willing to add in saying you can't get DSL, you can't tax DSL because of the fact that it puts the Verizons and some other companies at a disadvantage to their competitors.

Q Doesn't that mean -- (off mike) --

SEN. : We have to go.

SEN. CARPER: I'll tell you, we'll be around. But apparently somebody else needs to come in. Thank you very much for joining us.