Chaired By: Representative Stephen Ira Cohen
Witnesses: Robert D. Atkinson, Ph. D., President, Information Technology And Innovation Foundation, Washington DC; Mara Candelaria Reardon, Indiana House Of Representatives, 12th District, Indiana; Joanne Hovis, President, Colombia Telecommunications Corportation, On Behalf Of The National Association Of Telecommunications Officers And Advisors, The Government Finance Officers Association, And The National League Of Cities, Kensington, Maryland; Joseph Gibbons, Florida House Of Representatives, 105th District, Florida; Don Stapley, President, Maricopa County Board Of Supervisors, On Behalf Of The National Association Of Counties, Phoenix, Arizona.
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REP. COHEN: (Sounds gavel.) This hearing of the Committee on Judiciary, Subcommittee on Commercial and Administrative Law will now come to order. Without objection, the chair will be authorized to declare a recess of the hearing. And I'll now recognize myself for a short statement.
In 2000, the National Governors Association issued a report concluding that existing state and local telecommunications tax systems were inefficient, complex, and not competitively neutral. However, only some states have reformed their telecommunications tax policies, with many others possibly losing out on economic growth while costing the residents billions of dollars in taxes and fees.
Most state and local tax policies do not reflect today's market for communication services, particularly the wireless industry. For example, some jurisdictions impose both a gross receipts tax and a general sales tax on wireless services.
Others impose higher tax rates on wireless services when compared to other services. Still other states arguably discourage investment in telecommunications infrastructure by imposing excessive taxes on the telecommunication industry's capital investments.
These forms of discriminatory taxation affect the pocketbooks of consumers. This has been the effect of -- has the effect of chilling investment, and impacting interstate commerce. Having been a legislator, I'm aware of the need for revenue and also the difficulties sometimes in catching up with technology.
Today we hold a hearing on H.R. 1521, "The Cell Tax Fairness Act Of 2009." H.R. 1521 would impose a five-year moratorium on any new discriminatory tax with respect to mobile services, mobile service providers, or mobile service property.
The legislation will prevent increasing taxes imposed solely on wireless subscribers and wireless providers. More importantly, the five-year moratorium would provide the telecommunications industry and the state and local governments the opportunity to come together and work on reforming the current communications tax structure.
Doing so will maintain a steady stream of revenue for state and local governments, while ensuring a fair tax burden among communications mediums, including wireless services. Reminds me of Lyndon Johnson, "let us come together."
This hearing will provide members of the subcommittee the opportunity to hear testimony about state and local governments' reliance on taxes and fees on wireless services. Members will also hear testimony about how those taxes and fees impact consumers and wireless providers.
Finally, members will hear testimony about how important affordable access to wireless services is to the growth of broadband access in this country. This testimony should help us determine whether Congress should intercede with this legislation.
I'm cognizant of the current plight that state and local governments are experiencing vis-a-vis revenue; they're all cash strapped. And I can sympathize with their concerns; they receive lower revenues, but still are expected to provide essential services.
This legislation is not intended to affect current state and local government revenues. In fact, H.R. 1521 will not prevent taxing authorities from continuing to tax wireless services and providers. It merely imposes a short moratorium on certain new discriminatory taxes. And we need fair tax policies to encourage capital investment to help consumers. Accordingly, I look forward to today's testimony.
I now recognize my colleague, the distinguished ranking member of the subcommittee, Mr. Franks, for his opening remarks.
REP. TRENT FRANKS (R-AZ): Well, thank you, Mr. Chairman.
Mr. Chairman, I'd like to start by thanking the chair for holding this hearing. I really appreciate what you're doing today. Today's hearing is the second in less than a year on this topic, H.R. 1521; the Cell Tax Fairness Act of 2009, has 112 co-sponsors in the 111th Congress. This is a nearly identical amount of support to a similar bill in the 110th Congress.
Mr. Chairman, I'm honored to be one of those 112 sponsors, as I know you are. And I hope that with your leadership, and that of Ms. Lofgren, we can have a markup of this legislation in the near future.
I support the legislation because it's my belief that states and localities unfairly burden cell phone consumers with excess taxes. Nationwide, the average tax on wireless services is 15.19 percent, which is more than double the average sales tax rate for all businesses, which is 7.07 percent.
These tax rates are more in keeping with sin taxes, that's taxes on alcohol and tobacco, than with general business taxes. It's my understanding that these taxes on the wireless industry are estimated to be over $15 billion a year.
That's an astonishing number and something that warrants the attention of this subcommittee. I know that discrimination at least in this context is often in the eyes of the beholder. However, by any definition, imposing taxes on a wireless provider that are more than double of what general businesses pay should be considered discriminatory.
And I'll also continue to oppose discriminatory taxes on -- or excises taxes that are imposed by states that excessively punish individual industries. I strongly believe that consumers should be the ones to pick winners and losers and not government.
And finally, I'm heartened to see the two state representatives testifying today. Because I know that many states are hurting financially. My state is currently trying to close a $3 billion deficit. And I respect those concerned about this bill's effect on state revenues.
However, this legislation merely freezes current tax structures on wireless services for five years. And I believe that's a worthwhile purpose, and one that will benefit consumers and technological advancements in the long run.
And Mr. Chairman, I would like to welcome one of the panel members, especially today. Don Stapley is a member of the board of supervisors in my county, and he's a good friend, and I appreciate him being here. He's a little disoriented on this legislation today. But that's all right, we understand. That can happen even to people in from Arizona, but very grateful for him showing up here.
And if it's -- with the chairman's permission, I'd like to yield the balance of my time to Mr. Jordan for a brief opening -- he's just going to go 60 seconds and I guess --
REP. JIM JORDAN (R-OH): Yeah, that's it.
I thank the ranking member, and I want to also thank the chair and Ms. Lofgren for sponsoring this legislation. I have to go to an Ohio delegation meeting here at noon, so I won't be able to stay for much of the testimony.
I just want to say that I appreciate that this bill is being brought forward. I'm a co-sponsor, and like the ranking member indicated, it's good to see some state legislators here who support this legislation as well.
I understand that tax fairness is important particularly in this area. So with that I would yield back the balance of my time. And thank the chairman for -- the ranking member for yielding.
REP. COHEN: Thank you. I'd now like to recognize the distinguished lady from California who's the sponsor of this legislation, if she'd like to make some remarks, Ms. Lofgren.
REP. ZOE LOFGREN (D-CA): Thank you, Mr. Chairman. And I very much appreciate that you've scheduled this hearing today.
I introduced this bill because I believe that wireless services and mobile devices are increasingly essential to affordable broadband access in the United States. Now, there's no doubt that expanding broadband speed and access should be a national priority. We rank 15th out of 30 members of the OECD in broadband adoption per capita. So we have a lot of catching up to do. Only about half of American households have access to broadband, most to relatively slow service, especially compared to what is widely adopted in other countries, like South Korea and Japan.
Our President Obama has recognized the imperative of building broadband capacity. The FCC is developing a comprehensive plan for national broadband, as mandated by the stimulus legislation Congress passed a few months ago.
Broadband internet is critical infrastructure, just like highways, or ports, or the power grid. It's essential to daily life and to future economic growth. We've come quite a long way with the wireless, but this is still an emerging technology, and we have a long way to go.
In the first quarter of 2008, 37 percent of U.S. mobile subscribers paid for access to the internet. And 15 percent used it at least once a month. Use of the new spectrum, from the 700 megahertz auction, and the deployment of 4G networks are just beginning.
These technologies have tremendous promise, not just faster internet access, but also lots of new innovative applications. Anyone who has spent even a few minutes looking at applications on the iPhone, my favorite toy, has caught a glimpse of what the future might hold. And we can't let discriminatory tax policies deter innovation.
Now, wireless is increasingly important to internet access for working class and lower income Americans, and that makes a lot of sense. Cell phones have become an essential tool in life for nearly everyone. If you're well off, you can afford multiple internet connections, such as cable and DSL at home. But if you don't have as much money, you might rely on what you can get on your phone.
Wireless users earning ($)20,000 to $40,000 a year access mobile data applications more than users earning ($)100,000 a year. And 39 million wireless subscribers have incomes of less than $25,000 per year.
Wireless is also crucial to extending broadband to underserved rural areas. According to the FCC at the end of 2007, wireless broadband was the most widely distributed of all internet connection technologies; 94 percent of all zip codes had it.
Despite the importance of wireless services, they face a disproportionate and growing tax burden. The average wireless customer pays 15.2 percent in federal, state, and local taxes and fees, as opposed to 7.1 percent for other goods and services.
Taxes on cell phone services have gone up four-times faster than taxes on other goods and services, between 2003 and 2007. These discriminatory tax rates will discourage both consumer spending and industry investment in more advanced wireless services, like faster mobile data.
The five-year moratorium in this bill will spur investment in the near-term. It will also encourage state and local governments to harmonize and modernize their taxes in the longer term. We have a similar moratorium on internet taxes that has spurred investment and innovations on the internet.
These taxes are also regressive. This is not only because lower income Americans rely more on their cell phones, the taxes themselves are often highly regressive, such as per-line flat fees.
I do recognize the concerns of state and local governments, and until this year, I'd actually spent more time on the board of supervisors in Santa Clara County than I had in the House of Representatives. I know that times are tough, and I'm very sensitive to the concerns of state and local officials.
However, this bill would not affect existing taxes. It only has to do with new discriminatory taxes; taxes put in place after enactment. And it would also not prevent states and municipalities from raising taxes on wireless services unless the taxes were discriminatory.
So if you have a tax that you're adopting on everything, wireless would not be exempted. Now, I respect the autonomy of states and localities, but when you have a nationwide need to deploy broadband as we do, we can't allow local tax deployment plans to really interfere with that national goal.
So I am grateful for this hearing, Mr. Chairman. And I look forward to hearing from the witnesses. And I yield back the balance of my time.
REP. COHEN: Thank you Ms. Lofgren.
I'd now like to recognize the ranking member of the full committee, a lion from the state of Texas, Mr. Smith.
REP. LAMAR SMITH (R-TX): Thank you, Mr. Chairman.
Mr. Chairman, first of all, I thank you for having this hearing today on such an important piece of legislation. And I'd also like to thank our colleague on the Judiciary Committee, Ms. Lofgren for introducing H.R. 1521; "The Cell Tax Farness Act of 2009," of which I'm an original co-sponsor.
There are now 112 co-sponsors of this bill, Republicans and Democrats alike, including members -- many members of this committee. That is a strong indication of the popular support that this legislation enjoys.
It has become clear to me that telecommunications firms and consumers, and in particular wireless services are taxed higher at the state level than many other businesses.
In our increasingly mobile economy, we should encourage the deployment of cell phone and wireless devices, not inhibit their use through higher taxes. The fact that these devices facilitate interstate commerce certainly gives Congress the authority to constrain the state's taxing authority.
However, just because Congress has the authority to do something does not necessarily mean that it should exercise that authority in every case. The taxing power has traditionally been within the jurisdiction of the states. And given the state of our economy, I sympathize with states' concerns about losing because of congressional intervention.
However, I also know that promoting mobile telecommunications is one way to increase American commerce and generate American jobs. This bill is specifically written to prevent discriminatory taxes after the date of enactment.
Any taxes already in effect will remain untouched. So states will not lose any revenue as a result of this proposal. I do look forward to hearing from all of our witnesses to see how we can balance the problem of disproportionate taxation of telecommunications firms and consumers against the needs of states' treasuries.
Unfortunately, since I won't be able to stay much longer at this hearing, because of a previous commitment, I do have some questions that I will submit for the record. But I want to mention those questions now in the hopes that the panelists might address them.
One, are wireless taxes regressive? And do they disproportionately impact lower and middle income consumers? Two, does the bill limit state's rights? And three, if Congress passes this legislation, what impact would it have on state and local revenues, on consumers, and on the wireless service providers?
Mr. Chairman, thank you. And now, I yield back.
REP. COHEN: Thank you, Mr. Smith.
If there are no other statements from the members, I'm pleased to introduce our first witness. And we introduce the witnesses before their testimony. I'm going to thank each witness on the front-end for participating. Without objection, your written statement will be placed on the record. And we would ask you to limit your remarks to 5 minutes.
We've got a lighting system that shows the green says you're starting and you're somewhere in between the first four minutes, and yellow means you've got a minute to go, and red means you need to close. After each witness has presented his or her testimony, the subcommittee members will be permitted to ask questions; they also have a five-minute limit.
Our first witness is Mr. Robert D. Atkinson. He is the founder and president of Information Technology and Innovation Foundation, a Washington, D.C.-based technology policy think-tank. This is -- he's also the author of State New Economy Index Series, and the book, "The Past and the Future of America's Economy: Long Waves of Innovation that Power Cycles of Growth."
He has an extensive background in technology policy, has conducted ground-breaking research projects on technology and innovation, is a valued advisor to state and national policy members, and a popular speaker on innovation policy, nationally and internationally.
Before coming to ITIF, Dr. Atkinson was vice president of the Progressive Policy Institute, and director of that institute's technology and new economic project.
Previously, Dr. Atkinson served as a first executive director of the Rhode Island Economic Policy Counsel, a public/private partnership including as members the governor, legislative leaders, and corporate and labor leaders, and prior to that he was project director of the former Congressional Office of Technology Assessment.
He's testified several times before a number of committees in Congress, so he knows what to expect. He's appeared in various outlets including CNN, Fox News, MSNBC, NPR, and NBC Nightly News.
Thank you, Dr. Atkinson. I'm looking forward to your testimony. I'm always amazed at people who have think-tanks. It's better than the other tanks. And thank you for being here.
You can begin your testimony.
MR. ATKINSON: Thank you, Mr. Chairman. We're certainly a think- tank, not a do-tank. So we think about things.
And thank you also Mr. Franks for the opportunity to be here today, to talk about the impact of discriminatory taxes on wireless telecommunication services, and on economic growth.
It's clear from looking at the evidence from a wide array of economists that the U.S. economy has been transformed in the last 15 years by information and communications technologies, including wireless communications. One of the reasons why U.S. productivity growth has been so strong compared to the prior period, there's a clear consensus among economists that it's due to the IT revolution.
What's also important is that innovation and IT continues to emerge. We see that as Congresswoman Lofgren's example of the iPhone. But that's really just the tip of the iceberg. We're going to see a whole wide array of new wireless uses.
This is not a bill about cell phones alone. This is about a revolution that's occurring in the U.S. economy, where wireless devices and wireless services are going to be ubiquitous.
And one of them, but certainly not the only one, is going to be wireless broadband. We're poised to see the deployment of new technologies in the next -- really the next 12-months of what's called 4G, where you'll get services of up to maybe 60 (megabits)-70 megabits per second on a wireless device.
This now provides the opportunity for what we call a third pipe going into the home, and importantly, a new opportunity for people who might not have been able to access broadband, particularly rural residents or lower-income residents.
When you look at taxation, there are basically three principles of optimal taxation. One, it should induce little change on consumer behavior. Second, that it's not borne disproportionately by low income individuals. And third, it's not placed disproportionately on activities with positive externalities.
Unfortunately, discriminatory taxes on cellular telecommunications violate all three principles. There's an argument that opponents of the bill make that this doesn't affect wireless adoption.
It may not affect wireless -- it may not affect consumers getting a cell phone. It's clear that most consumers value that and have to have it. But what it does affect is consumers getting ancillary services, buying more minutes, getting broadband on wireless, getting a whole array of other things.
And there have been several academic studies that show this quite clearly. Rappoport, Alleman, and Taylor found that for every new dollar of discriminatory tax on wireless services, expenditures by consumers go down by $1.60. Ingraham and Sidak found slightly lower numbers, $1.23 to $1.29 negative elasticity, in other words, consumers spend less.
In thinking about broadband and wireless broadband; Austan Goolsbee, when he was at the University of Chicago, Dr. Goolsbee is now at the CEA. He found that actually it's much bigger for broadband, with $2.75 negative elasticity. So a tax of -- a $1 tax on wireless broadband reduces the consumption of that service by $2.75.
Not only that, but Goolsbee's work has shown that taxes on wireless don't just affect the consumer side; they affect the producer side. And will reduce deployment particularly in slightly high cost areas.
Secondly, these have discriminatory effects on individuals based on income. One study, Rappoport, Alleman, and Taylor found that low income individuals were as likely to adopt cellular internet services and wireless internet services as high income individuals. So essentially, this is not something that just high income people are getting and we can justify a tax that way, which may be legitimate.
But that's not what's happening here. Low income people are bigger -- big users of this. And importantly, as GAO noted in a recent report, price is a barrier to adopting broadband services. A recent study by the Pew Internet and Society found that 35 percent of dial-up users say the major reason for not switching to broadband is price.
Thirdly, again, really I think the key point here is that these -- this is a service, a wireless service as well as IT in general has what economists call, large expositive externalities. In other words, what a consumer does with this device doesn't just benefit the consumer, it benefits all consumers; it benefits businesses, as it benefits government.
And the reason, there are several reasons for that. One is a traditional notion of what are called network externalities. In other words, as each individual user is able to use one of these, other people are -- it makes it easier and beneficial for other people to use this.
Again, a study by Austan Goolsbee and Klenow found that this -- that there are these positive externalities. And in neighborhoods where they're controlling for income, and all these other factors, in neighborhoods where more people are using broadband, it makes it easier for other people to use broadband.
And the reason is because when some people in the neighborhood use it, other people know about it, they talk about it. And so there is this, as I said, a positive externality.
How much is that positive externality? Ingraham and Sidak found that for every dollar of tax on wireless services, national economic welfare falls by $1.23 to $1.95. So in other words, adding $1.00 reduces overall economic welfare by $1.23 to $1.95.
Hausman, at MIT, found slightly smaller numbers, between $0.72 and $1.14 loss. So again, either number you use, those are quite significant. Finally, the numbers on broadband are even higher. Goolsbee finds that it's anywhere around $3.50 national welfare loss.
I'll just close by saying I -- having worked for a governor before in my past; I understand the issue of states and their rights here. But this is an issue where essentially what states do, impacts the country as a whole. State taxes benefit the state; they hurt the entire country, which to me is a reason for Congress to act on this.
Thank you, very much.
REP. COHEN: Thank you, Dr. Atkinson.
Our next witness is a state representative, Representative Mara Candelaria, from the state of Indiana. She has experience in Congress, having worked for U.S. congressman, Peter Visclosky, and has worked with the Democratic Party. And as a former NCSL executive committee member, I welcome you here. And I appreciate your work in the Indian State House of Representatives.
Would you begin your testimony?
REP. REARDON: Thank you.
Chairman Cohen, and Ranking Member Franks, and members of the subcommittee, my name is Mara Candelaria Reardon. And I have the honor of representing the 12th House district in Indian.
I serve on the Environmental Affairs, Government Regulatory Reform, and Ways and Means Committee, in Indiana's House. Thank you for the opportunity to appear before you this morning to offer my support for H.R. 1521, the Cell Tax Fairness Act of 2009.
The Cell Tax Fairness Act takes a thoughtful, pro-consumer, pro- broadband approach that will help to ensure affordable wireless services for my constituents in Indiana's nearly 4.7 million wireless subscribers. Congresswoman Lofgren and Congressman Franks are to be commended for the broad bipartisan support they have garnered with this legislation.
As a state legislator, and particularly as a member of the Government and Regulatory Reform in Ways and Means Committee, any federal legislation that places parameters on a state's ability to tax is something that I believe should be done sparingly, judiciously, and most importantly, does absolutely no harm.
I believe that H.R. 1521 meets these criteria. Our system of federalism grants state and local policymakers with the ability to determine how states should levy taxes on individuals and businesses that reside within their respective jurisdictions.
As a member of Indiana's Ways and Means Committee, I am sensitive to preserving the state's taxing authority to fund government services. But as a legislator, tasked with writing Indiana's tax laws, I also believe that another important precept of our nation's tax structure is that taxes should be levied equitably on our citizens, particularly when multiple jurisdictions have the ability to tax.
In Indiana, my constituents pay a 9.55 percent rate in state and local taxes, and a relatively modest combined rate of 13.74 percent in state, local, and federal taxes, fees and surcharges for their wireless services, as compared to the national average of 15.2 percent.
Nevertheless, Indiana's wireless consumers are now effectively taxed twice. They not only pay the state sales tax, like consumers of other goods, but also included is the Utility Receipts Tax.
In several states, consumers pay taxes, fees, and surcharges in excess of 18 percent on top of their monthly bills for their service. When tax rates reach those levels, as they do with alcohol and tobacco, the purpose is usually to inhibit use.
Wireless services are no longer a luxury in our society, they have become a necessity. Preserving affordability should be an important public policy goal. H.R. 1521 provides a measured approach by only precluding new discriminatory taxes and fees from being added on an already excessive level of taxation imposed upon wireless consumers.
Importantly, the legislation recognizes the revenue needs of states and localities, and does not take away any existing revenue from state or local governments. In fact, H.R. 1521 allows states and localities to raise wireless taxes if done in conjunction with an increase in taxes on other general goods and services.
My focus here this morning will be to provide some historical context as to how we got here and where we are today, and why I believe taking a timeout from imposing new additional discriminatory taxes on wireless services is important to American consumers, and consistent with principles espoused by the National Conference of State Legislators.
The tax structure imposed on the communications industry today is a holdover from the days when the industry was operated my Ma Bell as a regulated utility. This tax structure was first instituted long before I entered public office, and well before the first wireless call was ever made.
As some may recall, as regulated utilities, telecommunications providers were subject to taxes under statues applicable to public utilities. The taxes imposed upon included gross receipts, franchise, and other industry specific taxes that were passed on to consumers in the rates as part of the regulatory rate setting process.
The phone company never had to worry about consumers looking for a cheaper alternative because there was no competition in the marketplace. State and local governments could tax telecommunications services at a much higher rate than other goods and services without worrying about constituent backlash, because the natural reaction was, "it's just the phone company raising my rates again.
Fast-forward to today, and the communications marketplace is drastically different that it was 20 years ago. Consumers have a myriad of options to choose from to be their communications provider, as well as a voice -- as well as voice and data plans to meet their individual needs. However the legacy tax structure remains in place.
Our federal and state income tax is structured such as that if you earn more, you pay more in taxes. That is not the case with respect to the payment of wireless taxes. As I mentioned previously, Indiana has approximately 4.7 million subscribers. Of that 4.7 (million), nearly 14 percent of Indiana's households have cut the cord and are wireless only.
As of October of 2008, 4.5 percent of Indiana's wireless subscribers had income levels of less than ($)50,000. And 61.7 percent had income levels of less than ($)75,000. Regardless of whether someone is making ($)25,000 annually or ($)125,000 annually, they will pay the same tax rate on their purchases of wireless services.
With a national average of 15.2 percent, consumers who are of lower or moderate incomes pay disproportionately more for the same services than those with higher incomes. Why is this important to bear in mind? Access to wireless services is no longer a luxury for a select few. But rather a vital necessity, particularly for those facing economic challenges.
In preparing for this hearing, I took the opportunity to read an April 27th "Dear Colleague" circulated by Congresswoman Lofgren and Congressman Frank. The "Dear Colleague" highlighted a March 23rd Washington Post article chronicling on how low-cost cell phones provide an essential lifeline to the homeless.
When you consider how important wireless services have become to consumers today, taxing those services at an excessive level is counterproductive. As I mentioned earlier, I am sensitive to the importance of preserving state and local government's ability to fund government services.
Current tax revenues in Indiana are down 8 percent from last year. But as policymakers, it is important that we also finance public services not to target one good or service for disparate tax treatment.
I'm going to wrap it up -- I can go on.
REP. COHEN: I know you can, but you also can't.
REP. REARDON: Okay. Well, thank you for the opportunity.
REP. COHEN: You're welcome. Thank you, Representative Reardon. We do need to try to keep to the red light scene.
Our third witness is Joanne Hovis. Ms. Hovis is president of Columbia Telecommunications Corporation, which is a communications, engineering, and consulting firm. She is an attorney; she's practiced both in Chicago and in Washington, is an authority on municipal and community broadband topics, and on government's role vis-a-vis. Represented several impressive clients, and knows when 5-minutes are 5 minutes.
You are recognized.
MS. HOVIS: Thank you, Mr. Chairman.
Chairman Cohen, distinguished members, thank you for the opportunity to speak to you there today. I am -- I serve as a member of the board of directors of the National Association of Telecommunications Officers and Advisors. And I am very pleased to be here on behalf of NATOA, as well as the U.S. Conference of Mayors, the National League of Cities, National Association of Counties, and the Government Finance Officer's Association.
I do focus on community broadband issues, working for state and local government and nonprofits across the country. And I am a long- time advocate for the need for a greater broadband, bigger broadband, more broadband, and more affordable broadband in the United States.
And so I commend all of you, and agree with much of what Ms. Lofgren said just a few minutes ago that the need for attention to this issue is enormous. What I'd like to talk about here today though is whether this particular piece of legislation will really result in deployment of a lot more broadband or affordable broadband.
The issue of tax policy -- tax is not my area. That is for elected officials to address because they are answerable to their constituency. I am -- I would like to rather correct what I believe are some of the misunderstandings surrounding the economics of the wireless industry, and the actual barriers to deployment of wireless broadband services to all areas of our country.
First and foremost, the current tax treatment of wireless services by federal, state, and local authorities has not hindered product innovation, service growth, or industry profitability. This industry, the wireless communications industry, is strong and successful. Growth has been explosive in high-density areas of the country, where the carriers have chosen to invest and to deploy networks. In 1995, there were just under 34 million cell phone subscribers in the United States; by 2008 that figure was 270 million, 87 percent of the nation's population.
That is for wireless voice service. On the wireless broadband or data-side, we are seeing similar growth. Indeed, it is wireless that represents the greatest growth and opportunity for the communications industry in a variety of ways. And by its own account, the wireless industry is very strong.
Verizon, the country's largest mobile service provider, posted profits of $1.65 billion in the first quarter of 2009, on wireless revenue growth of almost 30 percent. Most of the major carriers, as Dr. Atkinson mentioned, are moving very fast to deploy in the areas where they see a return on investment, 4G services.
They are -- there is explosive movement toward, and development toward deployment of next generation broadband wireless services. AT&T is upgrading existing networks, like the other carriers, and is expanding from 350 to 370 metropolitan areas in this next generation.
Given the strength and profitability of this industry, one wonders why the industry is seeking preferential tax treatment. And I would like to address the issue of whether or not they actually are seeking it in order to deploy more wireless broadband networks.
Given that the wireless voice and data industries are both profitable and growing at extraordinary rates in metropolitan areas of the United States, I think we should look at what is happening in the rural areas. Obviously, we're not seeing that kind of growth in rural areas. And I should say that America's local governments are as concerned and troubled by this lack, as is this subcommittee.
While I commend those who believe our nation should find new models for expanding deployment in less densely populated areas, it's important to understand that it is the economics of wireless communications that is the reason for the slower or nonexistent deployment. Deployment of communications networks is extremely costly; communication carriers are private, for-profit companies and they quite rationally allocate their investment resources to areas of the country where they are likely to achieve the highest return on investment, those areas that have relatively dense populations and thereby greater potential penetrations, and higher revenues per mile of construction.
The basic reality of these economics will not be changed by preemption of a particular tax or by removal of any single cost of doing business. Carriers will still invest their money where they are likely to get the greatest return on investments.
And this is the central broadband issue that we face as a nation in our rural areas that that return on investments simply does not exist in the same way in rural areas. That's a national problem, but this is not the solution.
Finally, let me just very briefly point out that this legislation is not timely and should await the results of the proceeding currently underway at the Federal Communications Commission, that Congresswoman Lofgren mentioned a little bit earlier.
As directed by the Recovery Act, the FCC is currently engaged in an extensive proceeding to develop a National Broadband Plan. And as part of that plan, the FCC released a notice of inquiry that included questions about a wide range of various things that could be hindering broadband deployment in the United States.
The FCC is undertaking a year of extensive analysis and this subcommittee should consider waiting to see the expert agency's conclusions before proceeding with this legislation, which is really a piecemeal attempt to deal with this issue. I know I'm out of time. I want to thank you for your attention.
REP. COHEN: Thank you, Ms. Hovis, I appreciate it.
Our fourth witness is a state representative from the sunshine state, Mr. Joseph Gibbons. He was elected in 2006. He has both Broward -- parts of Broward and Miami-Dade County's football stadium may be and their baseball stadium -- what do they call it now. Pro player?
REP. GIBBONS: Yes.
REP. COHEN: Yeah. Prior to selection to the House, he was in the Broward County Planning Council and has been a city commissioner from the city of Hallandale Beach. We appreciate your coming before the committee. And please begin your testimony.
REP. GIBBONS: Thank you, Chairman Cohen, and Ranking Member Franks, and members of the subcommittee. My name is Joe Gibbons and I am a member of the Florida House of Representatives representing the 105th District. One of the committees that I serve on is the Energy and Utilities Policy Committee. It is my commitment to my work on the issues of that committee that brings me here today.
As wireless services continues to evolve and becomes more about services other than voice, it is critical to recognize that consumers in this emerging environment are not the same individuals that could afford the expensive Internet experience. We should not create the same digital divide on broadband as we initially created on access to the Internet.
While federal legislators recognized the need to prevent excessive and discriminatory taxes on the Internet by passing the Internet Tax Freedom Act Amendments of 2007, and federal and state policymakers embraced the desire to accelerate the deployment of broadband services, the fact remains that the current level of state and local taxation on telecommunications services is misguided and directly counter to economic prosperity.
Unless the tax policies of the past are reformed to reflect the highly dynamic nature of the communications industry today, many of my constituents will be priced out of the ability to have affordable access to the most advanced wireless broadband services. The impact of the current level of taxation on wireless consumers is significant for the high level of seniors, African American, and Hispanic consumers who, as a group, have shown a high adoption rate and significant use of both wireless and voice data services. My poorest constituents are more likely to have only a cell phone as to having both a land line phone and a cell phone.
Taxation should not punish disproportionately those who can least afford it. And in Florida, that is the system in place today. I reach out to Congress today to help steer the course to telecommunications tax reform for all of my constituents, especially those that use their cell phone as a lifeline.
In 2000, to "simplify" the taxes and fees imposed upon communication services at the state level, legislation was passed that replaced 11 different impositions into one consolidated communications services tax. The base was expanded to specifically include wireless, even though several of the old impositions were for uses of the right of way or other public utility impositions.
The current taxes imposed upon the entire communication industry including wireless appear to be excessive. One of the recent trends that the industry has highlighted has been to take the existing franchise and utility taxes that are already applicable to landline services and extend them to wireless. State and local officials are targeting wireless, because the number of wireline customers are dwindling and they believe that wireless needs to fill their gap.
It is incumbent upon legislators like myself to advance the needed reforms to the current tax structure at home for this critical technology, a lifeline in the eyes of my constituents, is not tax at rates in excess of 20 percent of their monthly bill. This bill does not preclude communication specific fees, so long as the funds are solely used for that stated purpose, such as funding for E911 communication systems and universal service.
This bill prevents taxes or fees from being imposed on wireless service that is not also imposed on general goods and services. I believe that those taxes should be as broadly and equitably applied as possible, so that the cost of government is borne equitably by all constituents receiving the benefits of those services.
As a former city commissioner and part of the Broward League of Cities I am intimately aware of the need for revenue to fund critical government programs. Like any state policy maker, I take any federal intervention at the state taxing authority very seriously.
However, I believe that H.R. 1521 carefully walks that fine line of when federal intervention makes sense. This bill does not preclude my ability to tax wireless consumers or the industry in a rational way.
It only precludes my state from targeting these consumers for additional excess taxes. I believe that precluding new discriminatory taxes from being -- they have to strike the right balance between the different sovereign powers.
These services clearly operate within industry commerce and as such are within Congress's purview to address what they believe is a social good to do so. And again I repeat; a social good to do so.
Working with the states to address the existing tax burden on communication services has proven to be very challenging. This bill is seeking, simply a timeout so that the situation doesn't get worse during the time that the industry is continuing to work with elected officials to fix the existing problem.
The bill would not prevent state or localities from the key increasing sales taxes, property taxes or the broad based taxes that apply to wireless consumers and providers in addition to other taxable goods and services. This bill would benefit wireless consumers by preventing them from being singled out for new taxes.
I think, the federal, state, and local governments all have a role in working together to ensure that we don't burden this technology with an onerous tax structure. This legislation seems to strike the right balance in our system of federalism.
It is not creating an unfunded mandate by ordering states to eliminate existing tax revenues imposed upon such services. It is simply identifying that state and local governments should not target wireless consumers unfairly to raise additional revenues when their existing tax structure might come up short.
I believe precluding new discriminatory taxes from being enacted strikes the right balance between the different sovereign powers. Thank you again for this opportunity here today and I would be happy to answer any questions that members of the committee might have.
REP. COHEN: Thank you, Representative Gibbons. I appreciate it.
Our final witness is Don Stapley. Mr. Stapley is the chair of the Maricopa County Arizona Board of Supervisors, which is Phoenix, where the University of Tennessee won the national championship a few years ago.
MR. STAPLEY: Yes, that's right.
REP. COHEN: He has risen through the ranks of NACo to become president -- became president in Jackson County, Kansas City, Missouri. I, a former NACo member attended a national conference in NACo in Jackson county myself, many years ago. Welcome to the committee and we appreciate your testimony.
MR. STAPLEY: Chairman Cohen, thank you, and distinguished members of the House Subcommittee on Commercial and Administrative Law.
I will skip my introduction to save time for the complete presentation, but I do appreciate the opportunity to appear before you today on behalf of NACo as well as the Government Finance Officers Committee -- Association I'm sorry, the United States Conference of Mayors, and the National Leagues of Cities.
If there is one thing all of our organizations have in common, it is our long-standing opposition to efforts by Congress to preempt state and local taxing authority. This is especially true when it comes to telecommunications taxes.
How to levy taxes fairly, how to ensure there is no discrimination among companies that provide different forms of the same service, and how to protect the local government revenues, are all appropriate debates. But these debates belong at the state and local levels. And this is why our associations are united in our opposition to this bill.
Local governments exercise their taxing authority to the extent provided by state law. As a result, local taxing authority and practices differ from state to state. And oftentimes, taxing policy differs from county to county and city to city within the states.
But this is good. Because this means that every local government taxing authority tailors its tax policy by taking into account the sources of revenue available and the needs and the wants of its residents.
I was first elected to the Board of Supervisors of Maricopa County, Arizona, in 1994. More than two-thirds of the population of Arizona lives in my county, which is also home to the state capital of Phoenix. Three weeks ago, the board adopted a tentative fiscal budget for years '09 and '10 of $2.1 billion. This represents a 5.4 percent decrease from the current year's budget.
The board adopted a strategic plan to exercise sound financial management and build the county's fiscal strength. To this end, we cut jobs, programs, and some services, and delayed capital projects, which resulted in the savings of, in excess of $122 million.
Much of the county's revenue comes from property taxes, sales taxes, vehicle license taxes, and jail taxes. We choose to continue minimizing the property tax burden that we impose upon our citizens. Because of the rapid growth that has taken place within the county, the board has lowered or maintained the overall property tax rate for the past 15 years.
In today's difficult economic times, where state aid to local governments has decreased dramatically, local taxing autonomy is crucial in helping to ensure that the needs of local citizens, our mutual constituents, are met. The ability to make taxing and other fiscal policy decisions at the local level and without federal interventions has enabled Maricopa County to provide the quality services that our constituents have come to expect.
Some argue that the proposed five-year ban set forth in this bill doesn't hurt state and local governments, because they can still continue to collect the taxes they currently impose. But this misses the point.
What this legislation does is preempt state and local taxing authority and represents a federal intrusion into historically- protected state and local tax classifications. Enactment of this bill would lead other industries to seek similar special federal protection from state and local taxes.
It is important to remember that state and local governments, unlike the federal government, must balance their budgets. In this tough financial climate, this isn't an easy task. Hard choices, like those made in my county, must be made.
Essential services may be cut. Public employees may be laid off. Infrastructure repairs and construction may be put on hold. And yes, taxes may even have to be raised. But what is important to emphasize is that when balancing the budget, all options must be on the table.
What this bill does is takes away one of those important options, to tax the wireless industry at the expense of other taxpayers and businesses. This bill fails to recognize the plain fact that all -- not all jurisdictions depend on identical revenue sources.
Some have an income tax, others don't. Some tax food, others don't. As a result, some jurisdictions may necessarily have to tax wireless services at a higher level than others. Enactment of this bill would force those jurisdictions to rely even more heavily on other types of taxes, thereby shifting the tax burden to those in the community less able to tolerate it.
However, whether a particular state or local government has imposed too high a tax burden on the wireless industry is an issue that should be addressed at the appropriate state or local government level. The federal government should not step in and impose a uniform, nationwide taxing scheme that provides preferential tax treatment to a single industry, the wireless industry in this case, while preempting state and local taxing authority.
Those who support this legislation must ask themselves whether the preemption of state and local authority is warranted. I urge that in this case, where the legislation seeks to protect an industry that continues to experience explosive growth and profits at the expense of other taxpayers, it is most definitely not. I urge you to speak out against this measure.
Thank you for your time, Mr. Chairman, and the opportunity to do before you this today. And I'm happy to answer any questions.
REP. COHEN: Thank you, Mr. Chairman. Let me start -- I'm going to first of all start with the questions. I recognize myself for five minutes.
Representative Reardon, you mentioned in your remarks that a national average wireless tax rate is now 15.2 percent and that consumers who are lower and moderate income levels pay disproportionally flat rate for the same services for those with higher incomes. I would like each of the representatives and the county commissioner to discuss the idea of regressive taxes such as this and its effect on people. Representative Reardon.
REP. REARDON: Well, there is the regressive nature of the tax is based on the economic -- if you look at the income of the average wireless customer by the Pew -- there is a Pew Hispanic study here where it's just a disproportionate -- 84 percent of Hispanics now have wireless service that wouldn't potentially be able to afford the services that we are talking about, the access to the wireless.
Dr. Atkinson mentioned the services that they can get if they are paying $15 to $10 -- $10 or $15 in taxes, those are services that they are unable to access for e-mail and other lifelines that they have to the community. And there is that article in -- that this is a lifeline for a lot of homeless people trying to access services for job opportunities and --
REP. COHEN: Is wireless a necessity today, do you think?
REP. REARDON: Pardon me?
REP. COHEN: Do you think wireless communications is kind of a necessity?
REP. REARDON: I think it's becoming a necessity. These people that are living in homeless shelters, it's their only line of communication with checking on their housing situation, job opportunities.
It is a way for them to stay connected to the world when they are living in a shelter. And they miss the phone calls for job opportunities, because they are using a pay phone or they don't messages in a timely fashion. I think it's becoming more and more a necessity in today's society for everybody.
REP. COHEN: Representative Gibbons, do you have some thoughts to contribute on this subject?
REP. GIBBONS: Yes, thank you, Mr. Chair. I think that it hinders access actually. You know, it's not just about voice any longer. It's about all these other services that are part of what I consider economic development and cost-cutting.
You can access all kinds of medical records and all kinds of medical services online now. If you don't have access to that then you cannot take advantage of the fact that there are savings involved in having that kind of access.
What we are trying to say is, as we deploy or say that we want Internet access -- or when Internet services were first provided, there was a digital divide created. There were people who could afford desktop computers and people who couldn't afford desktop computers. Those who could afford desktop computers had instant access and it opened up a whole new world to them.
Well, the same thing is going to happen with broadband now. All I'm saying is let's not leave anyone behind. Let's make sure that everyone has equal access to the opening up of this whole new world.
Because again, we doesn't want two societies, and -- but we don't have the opportunity to be exposed to things because you know, an opportunity is not an opportunity unless you have had the exposure to see it as such.
So if I blocked your exposure, I block your opportunities. And so that's the regressive nature of this, blocks opportunities and it blocks exposure, and it keeps people living in certain conditions.
REP. COHEN: Thank you sir. Mr. Commissioner Stapley, Mr. Chairman.
MR. STAPLEY: Yes, you know, I think your question was, has this tax become aggressive in some jurisdictions, and the answer to that is if it has, I don't know. It certainly hasn't in my state and in my county. We don't tax cell phones in my county. We don't have the authority to.
They may be taxed at the state level. But I can assure you that if it becomes a regressive tax, it is a lot easier to get rid of those politicians at the local level, by the local -- their local constituents, than it is to turn Congress over, because they placed a ban on these taxes through a moratorium -- a five-year moratorium. So in my opinion, it's a preemption question, not a question of regression.
REP. COHEN: Let me ask you this. So you believe that the Congress should not take a position and leave it up to all the locals and the states to have maybe different taxing levels, even though this is you know, different than fixed communications? Wireless folks can be moving from state to state, making calls from everywhere, and it's kind of a national form of communications. Do you not see a distinction of that in the old traditional Alexander Graham Bell?
MR. STAPLEY: No -- I get your point, Mr. Chairman, and I understand it, but I do believe that government works best that is closest to the people. And in my opinion, taxes on cell phones should be the same.
You know, one of my colleagues next to me pulled out a new phone the other day and he said, I threw away that expensive one and I just got this one and I'm only paying $45 a month for unlimited service anywhere in the United States. It's a new program, it's great.
It allows -- I mean, it fosters competition. But when you take a whole industry and you treat it differently than other industries, I think you run the risk of --
REP. COHEN: But isn't it different where I can hold this phone that is got a Memphis area code, and dial from Washington to Phoenix and talk on Phoenix ESPN radio with you know, whoever. And it shouldn't -- and maybe it's different than if I was picking up a phone that was attached to the wall, and you know, kind of pull it around and put it to my ear and not get too far and call Phoenix from Memphis. Isn't that a little different?
MR. STAPLEY: It is different.
REP. COHEN: Yeah.
MR. STAPLEY: Right, but let me give you an example why this preemption issues is the issue we are about, and this is more important than any of the other issues and that would be the example of the federal government placing a tax on telephones.
The kind that you are talking about, Alexander Graham Bell fixed on the wall line, to fund World War I, I believe, if I'm not mistaken. That tax is still there. It's never been taken off. The express purpose of that tax, I think it was 11 percent, was to fund World War I. And Congress had never gone back and removed it. So --
REP. COHEN: Does that maybe speaking to why we shouldn't have a moratorium, because it's difficult to repeal a tax once you passed one? And that you should do it right the first time rather than just have a hodgepodge?
MR. STAPLEY: I agree with you, except I think it's much more difficult at the federal level than at the local -- state and local level.
REP. COHEN: Thank you, sir. Thank you. Is my time up?
Abiding by the five-minute rule, I now recognize the new ranking member, the ranking member once removed, Mr. Issa of California.
REP. DARRELL ISSA (R-CA): Thank you, Mr. Chairman, and by the way you've got a missed call on your phone, I noticed. It's the problem with being here on the dais, where there is so much, and as you say Chairman, so little time.
REP. COHEN: It's Speaker Pelosi. She was really calling for you.
REP. ISSA: Okay. As soon as I'm done here, I promise.
Well, you know, Mr. Stapley said we must ask, we who cosponsored this bill, so I guess I will. Dr. Atkinson, in -- just a couple of quick questions. First of all, don't we inherently use less of what we tax? And can you think of any reason we would want to limit communication, either digital or voice? Is there any public interest in limiting that? Is it a bad thing in some way other than well driving down the road, not on your ear piece?
MR. ATKINSON: Economists talk about elasticities of demand, so in other words, what is the relationship of demand to the price. And there are different elasticities for different things. Elasticity for example of milk is quite low, your food. But the elasticity for cellular or wireless communication services is quite high.
REP. ISSA: Okay, so let's -- going through that logic, again -- Mr. Stapley was kind of, you know, sort of saying, stay out of our business, we need to do what we need to do. Well, let's go through this for a second.
Wireline received access to public, state, city, county, access to roads, they got Right of Way. Were there any substantial Right of Ways granted by local municipalities? Isn't it true that wireless -- they pay for ever single booth and every single building that they put there cells on?
They paid very dearly for their bandwidth when they went to auction. What is it that a city or state gave to a wireline carrier? What asset did it give, loan, or provide?
MR. ATKINSON: To a wireline?
REP. ISSA: To a wireless, I'm sorry to a wireless. Is there any --
MR. ATKINSON: Wireless. I'm not aware of any on wireless.
REP. ISSA: So unlike wireline, they gave nothing. Unlike wireline, instead of being given, they had to pay. So where is the interest by a city or a county or a state in something that they -- that some harbor, some offset for which they have a special right to tax greater than the ordinary tax, which, if I understand my constitution we specifically have a prohibition on targeting taxes.
You know, it's designed to keep from targeting one rich landowner out of business, but in fact you target an industry, it's somewhat the same. Is there anything that is so evil in wireless communication as to receive a special burden?
MR. ATKINSON: No, it's to the exact opposite. I mean, it would be one thing if states or localities want to impose taxes that hurt their own economy or that hurt their own poorer, or low-income citizens. The federal government doesn't have a job to protect them from bad decisions.
The problem with this case though is that those decisions impact the rest of us. And they impact the rest of us by devaluing the value of the overall network. And that's what's --
REP. ISSA: And going to that -- isn't the commerce clause, probably the most cited reason for the federal government feeling that in fact the common good of all the citizens of the various states and the district are required to be protected by we in Washington and if in fact you were to have a local municipality that made it burdensome to do business there, that it could degrade the ability of the rest of the country to do business with, let's say Arizona?
MR. ATKINSON: Absolutely correct.
REP. ISSA: So we do have a public interest. We do in fact understand that when we tax more, we consume less of -- we do understand that there is nothing inherently wrong in that. Additionally, are there any offsets in the existing tax?
For example, E911, although it's a wonderful service and it's paid for out of the taxes on the system, in fact it's not a problem created by the system, but in fact an excess benefit created. I just want to make sure we understood that.
I guess -- Mr. Stapley, I've been referencing you, because you were so vehemently opposed to our preemption. I will ask you one question and then let you answer, sort of all of them. If in fact, the good people of Arizona urge you today, or Phoenix, and said, okay, fine, if that's the way he feels about it, we will all simply go get phones in another zip code, another area code, I'm sorry. And we are simply not going to pay your tax if we feel that it is one penny higher than the lowest tax in the nation.
Do you believe you would have any authority to do anything over your constituents, choosing to pick a lower tax area under national law? And if so, what we are proposing here, isn't it in fact for your own good that we want to, essentially say, since they have the ability to go shop elsewhere, we are simply keeping you from taking advantage of your constituents, simply because they want a area code that is convenient?
MR. STAPLEY: I think the best answer I can give you is that that those debates should be not here in Washington, D.C. Those debates need to take place in the states and in the county.
REP. ISSA: Well, you know, I appreciate that. But I'm a Santiagan, so I'm sort of in the suburb of Arizona all summer. And the Zonies all appreciate that.
MR. STAPLEY: Yes. Right, exactly.
REP. ISSA: We take advantage of you in Santiago in a huge way. You can't vote, and what do we tax at a disproportionate rate, hotel, motel, all the --
MR. STAPLEY: You are telling me.
REP. ISSA: -- TOTs, exactly. You've got huge taxes.
MR. STAPLEY: Yeah.
REP. ISSA: And do you know why we do that in Santiago? Because there is no constituency against it.
MR. STAPLEY: Correct.
REP. ISSA: Isn't in a sense when you say hold us accountable, we are the ones closest, we are going to have the election, isn't it true that basically there is nobody that's ever been voted out of office by putting a tax on something that is pretty invisible to the consumer, such as a hotel or in this case, even local ups and ads to a telephone bill.
And by the way, you have my personal apology that we haven't yet paid for World War I, and that we are still taxing it. Because I do think it's inherently wrong to be continuing to have these artificial taxes.
MR. STAPLEY: Well, I understand your point and do not disagree, but I do believe that the debates need to take place globally, and if there is a national problem, we can work together to solve that problem.
But I don't think by preempting state and local governments from assessing these taxes. Because again, for the very reason that I said in my testimony, every county, every city, has different revenues, has different needs, and constituencies have different needs.
REP. ISSA: Right. Well, just one question. Do you understand, because you didn't seem to, in your statement, that it is only discriminatory taxation that we are objecting to. If you want to tax -- if you want to have a 17 percent sales tax on everything, this bill would not preempt you in any way, shape, or form, from including wireless and wireline or anything else.
MR. STAPLEY: I do understand that, but I also understand that that's the basic premise upon which most politicians are unelected, so that's not the issue.
REP. ISSA: So what you are saying is that if you had a 17 percent sales tax, your people would be unelected, but if you have a tax on this particular subset, it may not show so much?
MR. STAPLEY: No, I think the point is I don't think that the tax on this subset should be done at the federal level or should be prohibited at the federal level. It needs to be dealt with at the local level.
REP. ISSA: Well, you know, we prohibit you from having a poll tax; do you think that is reasonable?
MR. STAPLEY: I do.
REP. ISSA: Okay, so you do look at some arbitrary or some punitive, or some discriminatory taxes that we prohibited as reasonable. You just don't like this particular preemption?
MR. STAPLEY: That's correct.
REP. ISSA: Thank you. Thank you, Mr. Chairman.
REP. COHEN: Thank you, sir. I'm going to -- in this policy of Chairman Conyers is going to recognize Mr. Watt next and then Mr. Delahunt, and then Mr. Sherman.
Mr. Watt you're recognized having been here for the longest period of time, today.
REP. MELVIN L. WATT (D-NC): (Off mike.)
REP. COHEN: All right. Then I would yield and recognize the vice chairman, Mr. Delahunt.
REP. WILLIAM DELAHUNT (D-MA): Well, thank you, Mr. Chairman. And I'm also the vice chair of the state rights caucus. The gentleman to my right, Mr. Watt, has been chairing that particular caucus, since I arrived here in Congress some 13 years ago.
He is, I'm sure, well known throughout the country for his advocacy for states rights, and it's good to see that there is a member in this branch that still believes in the viability of the 10th amendment.
But I've been asked to submit for the record a statement of the federation of tax administrators on cell phone taxation, and I'd like to submit it for the record, Mr. Chairman?
REP. COHEN: Without objection, so done.
REP. DELAHUNT: You know, this is a debate that plays itself out in a variety of different ways. You know, preferential treatment, the interstate commerce clause -- I've been very much involved in the issue of fairness as applied to the collection of the sales tax, you know, from out-of-state vendors.
But let me just put a -- if we continue hearing Congress to limit the sources of revenue, and I'm not even sure I am on this particular bill. But where are states and local governments and other subsets of states -- where are you going to get your revenue?
Mr. Stapley, do you have any ideas? Are we going to have a -- are we going to have to increase the property tax, or are we going to have to, which is clearly a regressive tax. This is a regressive tax. Or are we going to have to increase the sales tax rates, and maybe increase it on such items as food.
I mean, I think there are legitimate arguments on both sides of this issue. But let's presume that in Arizona, or in California for that matter, local governments are doing a good job. They are making some real tough decisions. And the budgets that they formulate, we could all agree on, where are they going to get their revenue?
In Massachusetts, because of the difficulty in collecting states sale tax from out-of-state vendors, we have a shortfall of some $400 (million) to $500 million. That's a pretty good plug. In California, Mr. Issa, I understand it; it amounts to billions of dollars in terms of shortfall.
REP. ISSA: That's $42 billion but rising.
REP. DELAHUNT: No, I'm talking about just the short fall because of the inability of the collection of sales tax.
REP. ISSA: Okay.
REP. DELAHUNT: You know, we can't continue to avoid discussion of this issue, which is how do state and local governments which deliver the real necessary services that people demand. How are we going to fund them? Any ideas?
Be creative. Mr. Gibbons?
REP. GIBBONS: Thank you. I can tell you what they are doing. They are increasing fees, water fees, fire fees, sewage fees, and -- because in Florida, we limited the local government's ability to raise property taxes to a certain percentage pursuant to the CPI. So what they did was, because of the falling property values, they started increasing fees. So, you know, they are many more like --
REP. DELAHUNT: Okay. We can increase fees --
REP. GIBBONS: That's what is happening.
REP. DELAHUNT: Okay. Ms. Hovis?
MS. HOVIS: Congressman, I am not a tax expert. I speak to the broadband issues. I don't know --
REP. DELAHUNT: Well, tell me where you would you get the money to fund these?
MS. HOVIS: I would say only that the -- I can't imagine how localities could exist if they don't have control over tax impositions at the local level. And that while I respect the tax issues here, I deeply respect those concerns.
I think that if this piece of legislation is about impacting broadband investments, it will have only effects at the far margins, that it will not solve the problem it purports to solve, even if it does have some kind of a basis in tax policy. There is not a broadband policy here.
REP. DELAHUNT: Thank you. Ms. Reardon, how do we fund the cops?
REP. REARDON: Well, I think that this industry in last year paid ($)21 billion in state, local, and federal income taxes and fees. In Indiana alone, $326 million was paid by these taxes and fees. At some point we have to look at --
REP. DELAHUNT: Well, what new revenue sources at the local level would you suggest?
REP. REARDON: Well, I think that, you know, first of all, I don't think that taxing the citizens any further without looking at efficiency is permanent. We're on -- we are doing some reforming --
REP. DELAHUNT: Well, I'm looking at the hypothesis that with all the efficiency that the local people are doing a good job, we are at a bare-bones budget, and we don't have enough money. How do you fund it?
REP. REARDON: I can't speak to that.
REP. DELAHUNT: Okay, thank you.
REP. REARDON: That land. I mean, we don't live there in Indiana. We have lots of efficiencies and reforms and I think --
REP. DELAHUNT: I understand, but I'm using a national argument.
REP. REARDON: Well, then you look at fees. You look at property taxes, I think that's the thing that --
REP. DELAHUNT: Fees, property taxes, fees, okay, thank you.
MR. ATKINSON: I would not tax a critical engine of economic growth and innovation.
REP. DELAHUNT: Okay.
MR. ATKINSON: Therefore, I wouldn't --
REP. DELAHUNT: Where would you tax?
MR. ATKINSON: Let me say it, what I would --
REP. DELAHUNT: I'm not asking you where you wouldn't, where would you tax?
MR. ATKINSON: I understand that. But I need to say that first. What I would tax, I would tax things that basically have less distorted impact. And most of the studies show --
REP. DELAHUNT: You know, I love your --
MR. ATKINSON: I'm going to say it in one second.
REP. DELAHUNT: -- and distorted is a great word. Where would you tax?
MR. ATKINSON: In about one second. One second.
REP. DELAHUNT: He is going to rule me out --
MR. ATKINSON: As I said, I would therefore tax property, income, and sales.
REP. DELAHUNT: Thank you. Property, income, and sales.
MR. ATKINSON: Income first, property second.
REP. DELAHUNT: Mr. Stapley, you are my last shot.
MR. STAPLEY: Well, first of all let me just say that as representing the associations, the national association of county, the legal cities, the conference of Mayors, we are not closed to telecom tax reform. We are interested in engaging and have engaged in that debate. And we just are opposed to this piece -- well, I consider it to be a piecemeal approach. To answer your question, ethically --
REP. DELAHUNT: I mean, yes, answer my question. Where would you tax? Let's say this bill goes and we'll never be able to tax wireless ever again.
MR. STAPLEY: Okay.
REP. DELAHUNT: Okay. What are you going to do?
MR. STAPLEY: We are going to continue to tax at the same three- legged stool that we have in the past that we just talked about, and we are going to have to learn to live within our means. That's the answer to your question.
REP. DELAHUNT: I'm even giving you the premise that we are going to live in our means. You get the bare-bones budget out in Maricopa County. I mean, you know, you are paying teachers $7,000 a year, okay? And you are really crunching them down. But how are you going to pay for it?
REP. COHEN: Thank you.
Mr. Watt, distinguished member, head of the state's rights caucus and Mr. Congeniality.
REP. MELVIN WATT (D-NC): Thank you, Mr. Chairman. Let me first applaud the testimony of Ms. Hovis who didn't deal with the tax issue here, but dealt with whether this is really going to have any impact on the provision of phone or broadband service. I definitely agree with you.
And we need to figure out a way to extend broadband deployment into rural areas. Tax is not driving that one way or another. In my urban community, I don't have any problem at all finding a network to do this, whether they tax it or don't tax it, it's not driving that.
But when I retreat on the weekends, up the mountains of North Carolina, no service of any kind there and whether this gets taxed or doesn't get taxed is not going to solve that problem one way or another. I am not an advocate of discriminatory taxes.
Even though I'm cast as the state's rights advocate here, I have the same questions that Mr. Delahunt has asked about that. But I don't know that I think that's the issue either. My question is how you define discriminatory here? And I just need a little more information because I think the definition of discriminatory that's in this bill is way, way too broad.
The taxation of mobile service property is one thing, I think; we should not be discriminating between fixed people and mobile people. But the service -- I'm not sure how the taxation is being done; maybe Ms. Reardon and Mr. Stapley can help me with this.
Is there a discrimination now between a fixed landline tax on mobile -- on service, phone service, broadband service and mobile service, because that's really the comparison that, I think, we ought to be trying to make here. If we are trying to eliminate discriminatory taxation, it's not between all other people who are not in the business of providing telecommunication services. Is that going on now?
REP. REARDON: I believe it varies from state to state. In Indiana, for example, we pay the local, state, and federal taxes, fees, surcharges. However, on top of that, we also pay our utility receipts tax.
REP. WATT: On landlines --
REP. REARDON: On --
REP. WATT: -- and mobile lines?
REP. REARDON: Yes.
REP. WATT: Or on just mobile lines?
REP. REARDON: On both.
REP. WATT: Okay, so how is that discriminatory?
REP. REARDON: Well, because there is --
REP. WATT: Yet it would be under this bill. If it gets charged to landline carriers, and it gets charged to mobile carriers, how is that discriminatory? That's what I'm trying to figure out. Yet it would be under this bill.
REP. REARDON: Right. And we touched on that. I think Congressman Issa touched on that earlier about the right-of-way fees that are charged for cellular use as opposed to landlines.
REP. WATT: I'm not looking at the source of what the state or the local community has provided. Historically, all of that stuff is kind of going out. The landlines are owned by private industry now. They are not owned by the state anymore. They are not run by the state anymore.
So if we are going to make a comparison, it seems to me we ought to be making a comparison between how we treat landline phone and broadband service versus how we treat mobile phone and broadband service. And if those two things are being taxed the same way, that's how -- that's -- I mean, that's my definition of discriminatory.
I'm perhaps asking the wrong person. This, maybe I should be asking Ms. Lofgren this when we get to a markup, but it's her bill. But it seems to me that the definition of discriminatory in this bill is way broader than I'm comfortable with.
REP. LOFGREN: Would the gentleman yield?
REP. WATT: Let me go to Mr. Stapley, and then maybe, I can get to Ms. Lofgren to explain this.
MR. STAPLEY: Yeah. I would just offer a brief opinion and that is that irrespective of the bill, it's -- it could be considered discriminatory either way, whether the bill is in place or not. I mean, there is a difference. A good example --
REP. WATT: My question is local community taxing land telecommunication --
MR. STAPLEY: Right.
REP. WATT: -- in a different way than they are taxing mobile telecommunication. And that seems to me to be the underlying question that I'm asking.
REP. LOFGREN: If I may.
REP. WATT: Yes, I'll yield to the gentlewoman --
REP. LOFGREN: I think the answer is --
REP. WATT: My time has long expired.
REP. LOFGREN: The answer to that is, yes, because the Congress has passed an Internet tax moratorium. And we did so because we want to nurture the development of the Internet.
REP. WATT: I wasn't all that happy about that either. But --
REP. LOFGREN: But the answer to the question is if you got a DSL line, you can't engage in discriminatory taxes on the DSL line, because that is broadband that we want to nurture. You can't do so on your 3G line which is another reason why the bill is introduced. I thank the gentleman for yielding.
REP. WATT: Okay, well, maybe I just don't have enough education and understanding about how taxes are being imposed.
But it seems to me that the definition of discriminatory in this bill goes well beyond differences in treatment of telecommunications' companies and says you can't discriminate between telecommunication -- mobile telecommunication companies and any company, and that I'm troubled by.
But I'll get -- when we get closer to the markup, maybe we should have a hearing about that, rather than whether it's a good idea to discriminate. It's never a good idea to discriminate. But it's always difficult to define discrimination and what is really discriminatory. So I'm through, but Mr. Gibbons wants to respond to my question. So --
REP. GIBBONS: Thank you for the question. To me, it's discriminatory when, in Florida we tax all the goods and services at 6 percent, but we tax these services at 20 percent.
REP. WATT: No, it's discriminatory if you tax land services, telecommunication services one way, and mobile telecommunication services another way.
REP. GIBBONS: Right.
REP. WATT: It is discriminatory if you tax their property, the property of a non-telecommunications company one way and the property of a mobile company another way. That's discriminatory.
But if you -- the service that is being provided here, the telecommunication services, if you are treating land providers and mobile providers the same way, that doesn't seem to me to be discriminatory. And that's what I'm asking the question about, and I don't know the answer to that. Maybe --
MR. ATKINSON: Could I respond to that quickly?
REP. WATT: If you know the answer to that question.
MR. ATKINSON: I was going to answer that question.
REP. WATT: Okay, all right.
MR. ATKINSON: I think there's two kinds of discrimination that we are talking about. There is inter-industry and intra-industry, and what you are talking about is discrimination within voice. And clearly the idea would be no discrimination.
But we do have different rates right now. For example, as Congresswoman Lofgren alluded to, if I get on a use of voice service with a VoIP, voice over the Internet on broadband, the broadband tax moratorium makes that a little bit -- makes it less taxed than wireless. So that's discrimination.
The point, I think, that's more important though is that it's not so much inter-industry, it's intra-industry. The fact that this overall set of services more than other.
REP. WATT: See, I don't even want to go there. I mean, I'm -- that's not the discrimination that, I think, we ought to be dealing with in this bill. That's just my own opinion. Maybe I'm just out for lunch. I yield back, Mr. Chairman. I've taken much more time.
REP. COHEN: Thank you for yielding back the remainder of your time. And now --
REP. WATT: I didn't yield back any time, I just yielded back.
REP. COHEN: I will yield to the gentle lady from California, Mr. Sherman having joined the competition for Mr. Congeniality.
REP. LOFGREN: Thank you very much and thank you, Mr. Sherman, for allowing me to ask my brief question. This time I have to chair a committee hearing over in the Capitol in seven minutes. So I'll be brief.
Dr. Atkinson, there's been some suggestion that the taxation has no real impact on -- a meaningful impact on how this technology will be deployed. And I'm wondering if you have a comment on that, number one.
And number two, you are a technology observer, and I'm wondering if you have a view, you know, right now we've got 3G, it's expensive. We are about to get a 4G mobile out. In the next several years unimpeded, what do you foresee will be developed in the wireless arena that really is at stake here, the related questions?
MR. ATKINSON: Well, the first question is on impact. And I think it's important to understand that the impact here is what economists would call, at the margin. So if you have a tax or don't have a tax, it's not going to affect wireless deployment in the middle of nowhere. Doesn't matter what the tax is, and it won't effect wireless deployment in Silicon Valley.
Where it will affect deployment, there are places at the margin where the costs are slightly higher than what you can make a return on. And that's clearly what Austan Goolsbee showed in his study.
And same thing happens on adoption. And I think it's important to recognize on adoption not everybody had a cell phone who uses wireless services as a traditional user.
For example, we recently bought a cell phone for my father-in-law who passed away recently. But before he passed away, he had Alzheimer's, and he would walk around and he didn't know where he was sometimes. And his wife, my mother-in-law, did not know how to get hold of him.
And we got him a cell phone from Verizon, and we had with, you know, everybody's permission a tracking thing you can put on it so that she could go on the Internet and find out exactly where he was. And this was very, very useful to us, and it allowed him to sort of have mobility and be out in the community longer than he would otherwise.
But that was a discretionary purchase. Now, it wasn't being refined with making it, but there are lots of other people where that having an 18 percent tax on that might keep them from doing it. So I do think that there is clearly economic evidence that this is discretionary.
In terms of where we are going, I think we are really only at, if you will, well Internet, sort of Wireless 1.0, and Wireless 2.0 is going to be an amazing series of things where we will be being able to do medical data transfer. We'll have 4G wireless, be able to have broadband to the home, a fourth pipe, third pipe.
There'll be a whole array of new innovative services that on the iPhone it is really just only touching on. So I think that's the context we have to think about that. Do we really want, as a nation, to be taxing this whole array of new services? I would argue it makes sense to have a five year moratorium on doing that?
REP. LOFGREN: Now, can you give us an international perspective on wireless development? Where is the United States relative to other countries, and where might we be relative to other companies in say, 5, or 10, or 15 years from now?
MR. ATKINSON: Well, in some areas we are ahead. We seem to be ahead, for example, on mobile services, wireless voice services. But in other areas, we are behind. So for example, the ability to use your cell phone -- I was just reading today, the new iPhone announcement, you can use your cell phone to go and get into your Zipcar.
So if you get a Zipcar, you download the code, just waive your cell phone, and it opens the door of the Zipcar, kind of cool device. But we are so far behind on those. You take a country like Japan or Korea where you can use your cell phone to get download movie tickets, walk into the movie theater, waive your cell phone, get into the theater.
In Japan, the ability -- you have traffic information on your cell phone. You can look on your cell phone and know in real time what the road conditions are like. Those are the areas that we are farther behind on, and I think unless we try to innovate more, we are going to continue to be behind there.
REP. LOFGREN: I would just note, and before I yield back. I won't take additional time. Thank you again, Mr. Chairman, for this hearing. I do think, although not everyone agreed, that when we -- the House and Senate acted, and the president signed the bill to do a moratorium on Internet access, it was really a mistake.
This should have been included, and it was not.
And I think, you know, that was -- it was a pretty bright broad consensus, not every person agreed. But the country is now in a position where we are saying, we are going to nurture Internet development. And without including wireless, we are going to fall short.
And in fact, I think that wireless is going to leapfrog some of what we've already done in my -- that's just my personal opinion, not only in the United States but certainly in the developing world. If you take a look at parts of the Africa that, I mean, they are just going to leapfrog if with the wireless that's been technology that's being developed provided that we take the right steps to nurture innovation, both through our research efforts as well as our tax policy.
So I thank you all of the witnesses, and I apologize for letting off to chair my other committee. Thank you very much, Mr. Chairman.
REP. COHEN: You're welcome and thank you.
And now, Mr. Sherman is recognized.
REP. BRAD SHERMAN (D-CA): Thank you, Mr. Chairman. I should explain my uncharacteristic politeness in letting Ms. Lofgren go first. It's actually a clever tactic, so that she would be outside the room before she heard me, in anyway, criticize her bill. I don't want anybody to think that congeniality is something they should expect from me, except in extraordinary circumstances, no, not at all.
Mr. Chairman, I would hope that we, in the federal government, would make sure that our federal tax laws were entirely devoid of unfairness and unreasonable distinctions. Before we then go tell the states how to make sure that their laws are fair.
In my state, we tax scotch more than we tax beer. I've always thought that was unfair. And I don't know why we aren't dealing with that issue or hundreds of other issues where we could say that we have some unfairness at the state level.
The argument is that this is somehow preventing the deployment of the national network. Well, since 2000, the subscribership in wireless has grown by a 158 percent; revenue has grown a 124 percent. And if I have to ask people in my state what are the big problems; insufficient access to wireless communication is not one of them.
The fact that summer school has been cancelled in Los Angeles for insufficient revenue, that's likely to be on the list. Now Mr. Atkinson urges that we tax property, income, or sales, but in my state we can't do that without a two-thirds vote. And we are not going to get one.
Ms. Reardon, are you an advocate for taxing property income and sales to replace the missing revenue?
REP. REARDON: Well, this bill does not actually impact revenue; the revenue that's already there will remain there. It's not -- it's a moratorium on increasing sales tax, in increasing --
REP. SHERMAN: Well, my -- yeah.
REP. REARDON: -- sales taxes. It wouldn't inhibit the revenue already collected. And it certainly --
REP. SHERMAN: Well, my state has got a $42 billion deficit. We're looking for new sources of revenue. Clearly, we are going to need some more revenue. Would you say we should get it from property, income, or sales taxes?
REP. REARDON: Yes.
REP. SHERMAN: Okay. Have you advocated increases in any of those taxes in your own state?
REP. REARDON: We have a surplus in our state currently. Yeah.
REP. SHERMAN: Congratulations. Could you share some of them?
Yes, exactly in the spirit of foreign aid. California is sometimes regarded as foreign.
I would hope, Mr. Chairman, that since we're having hearings today that would undercut state revenue that we would also have hearings on a bill, maybe Delahunt's bill, to reverse the Quill case, and allow the proper collection of sales taxes that are already a matter of law.
And there -- I mean, if we are able to pass such a bill, I think states could afford to see the passage of Ms. Lofgren's bill. I yield to the gentleman from Massachusetts.
REP. DELAHUNT: Yeah, I thank the gentleman. And let me just say, because sales tax revenue, clearly for most states, is a significant part of their revenue source. And I, in the past, have suggested that the stakeholders come together.
I would advocate to nurture various industries, and moratoriums, et cetera, that you know, potentially support if in fact, we can resolve exactly the problem as described by my colleague from California. But I can't support anything that will continue to erode the revenue base, the state, and local sources.
I'm finished doing that, because until we address the major problem confronting states in terms of revenue sources, which is the sales tax, then everything else that comes in front of this committee, I say, has to be deferred. And I thank the gentleman.
REP. SHERMAN: Just to explain the issue for those in the room that haven't followed it, every -- a large number of states impose the sales tax. Every state then imposes the sales tax also imposed a use tax, so that if you are able to buy something through a catalog, or phone, or Internet, and escape the sales tax, because it's shipped to you, then you are supposed to pay taxes on that as a use tax.
The problem is retailers outside your jurisdiction fail to collect the use tax or report the use tax liability. And so as a practical matter, billions and billions of dollars of sales/use tax revenue is never collected.
If we were able, and perhaps some of the people at this table could become advocates for a bill to require retailers around the country to report when they ship something in the Massachusetts, or California, or better yet to collect the sales and use tax and remit it to state tax authorities.
If you want to put Zoe Lofgren's bill on that bill, I vote for final passage. And you'll have at least two votes that you might otherwise not get. With that I yield back.
REP. COHEN: I thank the gentleman from California. And Mr. Jordon does not seek to ask any questions. And with that I believe we have concluded our questions.
I want to thank each of the witnesses for their testimony and appearing before us. And I hope that if there are questions submitted to you, which there may be by members; that you will respond to them. You have five legislative days to respond to those questions which might be submitted by members of the committee.
Without objection, the record will remain open for those five days for the submission of any other additional materials from members. And I thank everyone for their time and patience, and for the -- Mr. Tubessing (ph) will have to learn better about the five- minute rule.
This hearing of the Subcommittee on Commercial and Administrative Law is adjourned. (Sounds gavel.)