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Hearing of the Senate Commerce, Science, and Transportation Committee - Voice-Over-Internet-Protocol (VOIP)

Location: Washington, DC

Federal News Service















SEN. LAMAR ALEXANDER (R-TN): Mr. Chairman and members of the committee, Chairman Powell, thank you for the opportunity to join your hearing as you take a first look at how we may begin to make most of our telephone calls over the Internet.

I imagine that Chairman Powell will tell you what he told me a few weeks ago: that suddenly more and more Americans are making their phone calls over the Internet and it's coming down the track like a speeding freight train. I am here today to help make sure that our state and local governments aren't tied to the tracks ahead of the train. I'm here to urge that in the excitement about the promise of this new technology we don't forget about one of the most important principles that unite us as Americans, and that is the principle of federalism. Historically, state and local governments have shared the responsibility for regulating the telecommunications industry.

The chairman has indicated, and many of you have said, that regulation of telephone calls over the Internet or other information services might have minimal regulation. I've no quarrel with that conclusion. But there is another area that state and local and federal governments have shared in terms of responsibility affecting telecommunications, and that is taxation. The federal 3 percent tax on telephone service collected nearly $6 billion last year. State and local governments collected more than $20 billion last year on telephone services and service providers. Six billion is barely a drop in the federal bucket. Twenty billion is a lot in state and local buckets.

In Tennessee, for example, we collected $361 million on telephone service and providers. That's about 5 percent of the state collected tax dollars in Tennessee. Texas and Florida each collected about $1 billion on telephone services. As Senator Feinstein said on the Senate floor, that telephone tax collections were 5 to 15 percent of the budgets of many California cities and towns. Congress has respected the importance of these telephone revenues to the stability of state and local governments. In 1996 the Telecommunications Act specifically said nothing in the act should modify, impair, supercede any state law pertaining to taxation.

This committee and the FCC are just beginning to consider how to approach issues of regulation and taxation as traditional telephone services migrate to the Internet. I salute you for that. But it's not too early to wave the red flag of federalism. Earlier this year the House passed a bill that could put at risk the entire $20 billion state and local governments collect annually on telephone services and providers.

The House did this in the name of making permanent something else: the federal moratorium on state and local Internet taxes that began in '98. The House bill sounds innocent enough, but if the FCC should decide, as it has indicated it might, to designate VOIP as an information service, then the language of the moratorium legislation bill would likely ban states from collecting taxes on telephone calls made over the Internet. The current Senate version of the bill, S. 150, is something less of a threat. But according to the Congressional Budget Office, it still could cost state and local governments up to $10 billion a year in annual taxes collected on the sale of telephone services. Those are taxes state and local governments are collecting today.

There is no justification whatever, Mr. Chairman, for Congress deciding to give telecommunications companies such a bonanza, and then turn around and send the bill to governors and to mayors. It's the worst kind of unfunded federal mandate: a cost on state and local governments imposed by Congress without reimbursing. The Republican majority came to power in 1995 promising to end such unfunded mandates. Banning a tax is just as much an unfunded mandate as requiring a service, unless you reimburse.

SEN. McCAIN: Would you repeat that, please?

SEN. ALEXANDER: Banning a tax is just as much an unfunded mandate --

SEN. McCAIN: Eliminating a tax?

SEN. ALEXANDER: Eliminating a tax now being collected is just as much an unfunded mandate as requiring a service without paying the bill. That's what common sense suggests, that's what the 1995 unfunded mandate law says explicitly, and that's what the Congressional Budget Office reported to Congress was its reading of the law which was passed by this Congress and for which 62 senators, who still are here, voted.

If Congress really wants to pick and choose among American business enterprises and decide that high speed Internet business is one we all want to subsidize, then Congress ought to pay the bill and not send it to the states. I'm not at all convinced Congress should adopt such an industrial policy. More than 24 million Americans are already paying for high speed Internet access, more than in any other country. According to the Department of Commerce, high speed Internet access is growing today more rapidly than color TV, cell phones or VCR at similar stages in their development. It's no surprise, therefore, that the Congressional Budget Office reported to us last year that a government subsidy for high speed Internet access is unnecessary. The free market will do just fine, I believe.

But if Congress should insist on a subsidy for high speed Internet access, there's a much less expensive and more efficient way to do it than by giving a $20 billion a year tax break to the telecommunications industry. The model comes from Texas. When George W. Bush was governor, Governor Bush signed into legislation a law that gave every Texas citizen a sales tax exemption for the first $25 per month that that citizen paid for high speed Internet access.

If there's to be a national subsidy for high speed Internet access, I propose we adopt the George W. Bush Texas plan. Let every state and local government give a $25 exemption from sales taxes to consumers who buy high speed Internet access. If there were, for example, 100 million subscribers, the national bill would be about $2 billion. In order to avoid unfunded federal mandates, Congress should pay that bill and reimburse states and cities each year for their costs. To help pay the $2 billion drain on the federal Treasury, Congress should raise the federal excise tax on telephones from 3 percent to 4 percent.

Chairman Powell stated at the National Press Club that the goal of the FCC should be to do no harm to the industry. I agree and suggest that the importance of the principle of federalism in American life-that given the importance of the principle of federalism, that the chairman's goal should be at the same time that we do no harm to state and local governments. That's why Senator Carper and I, along with nine senators of both parties, have introduced legislation that would extend for two years the current moratorium on state and local taxation of Internet access, so that Congress may consider its finding in these hearings, may consider deliberations of the FCC, and make the best possible judgment about what sort of regulations --

SEN. McCAIN: Senator Alexander, we usually try to limit to five minutes or so statements, so if you could summarize, I would appreciate it.

SEN. ALEXANDER: I'm sorry, Mr. Chairman.

SEN. McCAIN: We have two panels waiting to testify.

SEN. ALEXANDER: I will summarize at this point about what's-the bottom line, Mr. Chairman, is I hope that as the commission-as the committee considers making telephone calls over the Internet, that it also considers the principle of federalism and avoids the principle of picking and choosing winners in our economic marketplace. Thank you very much for your time.

SEN. McCAIN: I thank you, Senator Alexander, and I thank you for your involvement in this issue and the Internet taxation. I think you've made great contributions to the debate and the education of members on the issue. Senator Alexander, I believe that Senator Wyden would like to ask you a question, if that's agreeable to you?

SEN. ALEXANDER: Of course.

SEN. McCAIN: You don't have to. I know you have a heavy-busy schedule.

SEN. ALEXANDER: No, I'm happy to talk as long as you'd like.

SEN. WYDEN: Thank you, Mr. Chairman. I thank my colleague, who's been a great addition to the Senate.

Phone calls over the Internet, as the senator knows, travel as packets of light through hundreds and literally thousands of tax and regulatory jurisdictions. I'd like to know if the senator believes that state and local governmental authorities should have the authority to tax every VOIP call. There are 7,600 taxing jurisdictions, local and state. It seems to me that's what the senator is saying, and I would just like you to state for the record whether you think state and local taxing authorities should have the jurisdiction to tax, if they choose to, every VOIP call.

SEN. ALEXANDER: I think state and local jurisdictions should have the authority, as they do today, of taxing transactions in their states. Whether they choose to do that is up to the governor and the mayor and the locally elected officials. They don't choose to do that with telephones; they send a monthly bill and tax the service and we all pay a little tax on that. I don't see any difference really in --

SEN. WYDEN: Well, what the senator is calling for is a reversal of the Quill decision, and I think it's important that that ought to be understood. And, to your credit, you've always been honest about that. The Quill decision says you can't tax without physical presence. And what you've just said is that every taxing jurisdiction in America ought to be able to tax without physical presence.

VOIP calls are going to be made, as we've talked about today, through packets of light. So I just want the Senate and the country to understand what's really at issue here is your side wants to throw the Quill decision in the trashcan. I think that would be a great mistake. A huge majority of the Senate has opposed it. I hope we'll continue that as we go forward. And my sense is that what this position is really going to lead to is taxing, you know, virtually everything, e-mail and BlackBerries and the like under VOIP. I think that would be unfortunate.

Fortunately, we are going to have a thorough debate, Mr. Chairman, in the committee. But the senator has been candid here and he'd give state and local authorities taxing and regulatory jurisdiction, nexus as it's called, over every VOIP call and put them in a position to be taxed, and I think that would be a mistake. Can I ask one other question?

SEN. McCAIN: First I'd like for Senator Alexander to be able to respond to that --

SEN. WYDEN: Of course.

SEN. McCAIN: -- if he would like.

SEN. ALEXANDER: Thank you, Mr. Chairman.

I wouldn't have characterized my answer that way, Senator Wyden. My purpose here is to say that if the Congress and the Federal Communications, working together, decide to have minimal regulation of VOIP and information services as they're delivered over the Internet, and that somehow that set of decisions affects the $20 billion a year that state and local governments rely on, that the Congress take that into account in its decision making. I mean, last year we bailed out states with a $20 billion gift. We won't be doing that this year.

I'm not sure I have the solution. I've suggested one today which is a $25 -- to adopt the George W. Bush Texas plan and give everybody a $25 exemption and let Congress pay that bill. Then we wouldn't have any of the issues that you just talked about. People are still going to pick up a telephone and make a call.

SEN. WYDEN: But you have said that all these jurisdictions ought to have authority over a VOIP call. Now, that's what you said in response to my first question. And I guess the only other one that I want to ask: are you troubled at all that this will chill investment in broadband? VOIP and broadband are really two sides of the same coin and it seems to me again that you would allow, with all these taxing jurisdictions, something that would really harm broadband development, a big jobs creator and particularly one in rural states like yours and mine. Are you troubled at all by that?

SEN. ALEXANDER: I am not because there are 24 million high speed Internet access providers in America, more than in any other country. The Department of Commerce says that's growing more rapidly than VCRs, color TVs. But if I were troubled by it and wanted to give the high speed Internet access industry a big subsidy, as Mr. Hunt I believe did when he was at the FCC, I'd be straight forward about it and recommend that we spend $10, $15, $20 billion and just subsidize the industry rather than subsidizing them by sending the bill to state and local governments, who are already struggling. That's my concern. And I think if we have two years to think about it, we might come to a better conclusion.

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