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Federal Document Clearing House
Congressional Testimony
March 9, 2000, Thursday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 5334 words
HEADLINE:
TESTIMONY March 09, 2000 JEFF EISENACH PRESIDENT PROGRESS AND FREEDOM FOUNDATION
HOUSE COMMERCE telecommunications, trade and consumer
protection ITEMIZED PHONE BILLS
BODY:
Prepared
Statement of Mr. Jeff Eisenach President Progress and Freedom Foundation March
9, 2000 Mr. Chairman and Members of the Subcommittee, it is an honor to appear
before you today to discuss H.R. 3011, the Truth in Billing Act of 1999 and H.R.
3022, the Rest of the Truth in Billing Act of 1999. Before continuing, I should
note that while I serve as President of The Progress & Freedom Foundation, a
non-partisan research and educational institution,(1) and also on the faculty of
the George Mason University Law School, the views I express are my own and do
not necessarily represent those of the Foundation, its board or other staff; nor
those of George Mason University. However, my testimony is based in large part
on research now underway at The Progress & Freedom Foundation to examine the
nature, extent and consequences of taxes on telecommunications
services. H.R. 3011 and H.R. 3022 represent efforts to make it easier for
consumers to understand what they are paying for telecommunications services.
Both of the bills correctly identify the main source of complexity in
telecommunications billing, and hence of confusion among consumers, as the
extremely complex array of taxes, fees and cross-subsidies
imposed on telecommunications services by government. My testimony this morning
focuses on the nature of these taxes, fees and cross-
subsidies. Telecommunications Taxes in the U.S.
Telecommunications services in the United States are subject to an almost
incomprehensible array of taxes at the local, state and Federal
levels. Indeed, there are so many taxing entities levying so many
taxes, fees and other charges that there literally is no
comprehensive data source from which a complete listing can be obtained.
Nevertheless, it is possible to paint a fairly accurate picture of the overall
level of telecommunications taxes.(2) Federal
Taxes: The Federal taxes on telecommunications
are of three main types. First, the Federal government levies a three- percent
excise tax on all telecommunications services. Second, it
imposes fees on telecommunications carriers that are used to subsidize the
provision of telecommunications services, wiring and computer-related equipment
at schools, libraries and rural health care centers. Third, it oversees a
complex universal service system designed to lower the costs of
telecommunications services below costs for some consumers while raising them
above costs for others. The Federal telecommunications excise
tax (FET) adds three percent to the cost of every telecommunications
bill. It covers both long distance and local telephone service
for both residential and business customers. Revenues from the
tax are treated as general revenues. The FET is projected to
raise about $6 billion in FY 2000. As shown below, this makes it the third
largest general revenue excise tax in the U.S. budget, just
behind alcohol and tobacco. Table One: General Fund Excise
Taxes(3) Product Revenue (FY 1998, millions) Share of On-Budget Federal
Revenue Alcohol $7,215 0.53% Tobacco $5,657 0.44% Telecommunications $4,910
0.38% Source: Office of Management and Budget The second major
tax on telecommunications services is the tax
levied on telecommunications carriers to support the Federal Communications
Commission's e-rate program. In May 1999, the FCC voted to raise the annual
amount of this tax by approximately $1 billion to $2.25 billion
annually.(4) These taxes are passed through by
telecommunications carriers as part of their universal service charges to
individual customers.(5) Under the FCC's so- called truth in billing rule, of
course, phone companies are prohibited from identifying the e-rate fee as a
tax. The third major category of Federal taxes
levied on telecommunications services resides in the system of charges and fees
access charges associated with universal service. While a comprehensive analysis
of this system is beyond the scope of this testimony, it includes both explicit
cross-subsidies, typically identified as universal service charges, and implicit
cross-subsidies that are incorporated in the access fees local service companies
charge long-distance companies for use of the local loop. Finally, the Federal
government oversees the pricing rules that require telephone
companies to charge subscriber line charges (a different amount for the second
line than for the first) and number portability charges. These items are
essentially discrete components of the price of local telephone
service, distinguished from the remainder of the bill by regulatory fiat. State
and Local Taxes: While Federal taxes on
telecommunications services are both high and complex, state and local
taxes are both much larger and far more complex. As shown in
Table Two below, there are approximately 37 different types of
taxes levied on telecommunications services by state and local
governments in the United States. These include excise taxes,
franchise fees, right of way charges, gross receipts taxes,
license fees, 911 fees, public utility taxes and even special
levies for programs such as poison control centers. In some cases these
taxes apply to local telephone services only;
in others they extend across state borders and apply to long distance services
as well. Wireless services are often taxed differently from landline services,
and telecommunications services offered by non-traditional carriers such as
competitive local exchange carriers (CLECs) may in practice be taxed differently
from the same services when offered by traditional carriers. Table Two: State
and Local Telecommunications Taxes State Local/Municipal -
Franchise Taxes - Sales & Use Taxes -
Telecommunications Excise Taxes - Gross Receipts
Taxes - License Fees - Utility Taxes, Utility
User Taxes, PUC Fees - Rental/Lease Taxes -
Utility Sales Taxes - Business & Occupation
Taxes - Infrastructure Maintenance Fees - 911 Fees, Emergency
Operation Charges, 911 Database Charges, 911 Equalization Surcharge - Intrastate
Surcharge - High Cost Fund Surcharge - Relay Service, Communications Devices
Surcharges, Universal Access Charges - Access Line Charges - Infrastructure Fund
Reimbursement - Poison Control Surcharge (TX) - Public Utility Commission Fees -
Universal Service Charges, Universal Lifeline Telecommunications Surcharge -
Franchise Taxes - Sales & Use Taxes -
Local 911 Tax - Excise Taxes - Telecommunications
Taxes - Gross Receipts Taxes - License Fees -
Utility Taxes - Access Line Tax - Rental/Lease
Taxes - Telephone Relay Surcharge/Universal Lifeline Surcharge
- Public Service Taxes - Utility Users Tax -
Infrastructure Maintenance Fees - Right-of-Way Charges - 911 Fees - Business
& Occupation Taxes - Teleconnect Fund Source: AT&T, The
Progress & Freedom Foundation A recent study by the Committee on State
Taxation (COST) found that, taking into account all of the various state and
local taxes on telecommunications in the United States, there
are over 300 separate state and local taxes and fees applied to
almost 700 different tax bases. Altogether, the COST study
finds that a telecommunications provider operating throughout the U.S. would
have to file over 55,000 tax returns annually. In just one
state, my home state of Virginia, a statewide telecommunications company files
4,341 tax returns each year. Are Phone Taxes
Too High? While the main focus of my testimony is on the complexity of
telecommunications prices, including taxes, it should be noted
that consumers may well be frustrated not just by the complexity of all of the
various taxes and fees, but also by their level. Not counting
universal service charges, access charges, subscriber line charges or number
portability charges (that is, counting only funds that go to the government to
fund government programs), the average tax rate on residential
telecommunications services in the U.S. is over 18 percent. Federal
taxes account for roughly four percent of this total, while
local and state taxes account for 14 percent. In some
localities, taxes account for over one third of a typical
telephone bill. (See Attachment One.) The research now underway
at The Progress & Freedom Foundation suggests that these levels of taxation
are excessive when judged by generally agreed upon standards of
tax analysis.(6) Is Truth in Billing an Achievable Goal? Given
the complexity of the system described above, it is worth considering whether
truth in billing is an obtainable goal - that is, whether it is possible in any
global sense to provide consumers with sufficient information for them to fully
understand what is on their phone bills. The unfortunate but obvious answer is
that it is not. This does not mean, however, that we should not try to create as
much transparency as possible. As I understand it, H.R. 3011 would represent a
step in the right direction. H.R. 3022, while its objectives are laudable, would
appear to be a step too far. Before commenting further on the two bills, let me
discuss briefly why global transparency does not seem to me to be an achievable
goal. Simply put, while the transition to a competitive environment initiated by
the Telecommunications Act of 1996 is well underway, the telecommunications
business remains very heavily regulated - more regulated, arguably, than in 1996
when the Act was passed. From the subscriber line charge (higher for second
lines than for first lines) to the geographically averaged rates mandated by
state regulatory commissions, from access charges (levied on traditional long
distance service but not IP service) to life-line services for low-income
consumers, from the Federal universal service fund (subsidizing rural and high
cost areas) to the TELRIC pricing scheme (intended by the FCC as a subsidy for
new entrants), telecommunications prices are essentially nothing but a patchwork
of cross subsidies mandated by government regulation. Taxes
only complicate the picture further. As the National Governors' Association
points out in a report released last month, Taxes imposed on
telecommunications are a remnant of the days when the industry was a regulated
monopoly. (7) Indeed, tax policy has not kept up with either
the move towards competition nor with technological change. For example,
broadband services offered by cable companies appear generally to be subject to
cable franchise fees levied by local governments. Similar services offered
through the telephone company infrastructure are, of course,
not subject to cable franchise fees, but may or may not be subject to
telecommunications taxes, depending on who is offering the
service and what other services (e.g. Internet access) are bundled with it. Such
inconsistencies represent discrimination in favor of some companies (and their
consumers) and against others. As Mr. Bliley accurately pointed out in his
remarks last October upon introducing H.R. 3011, rather than make the case for
more government spending directly to the people, governments instead levy the
tax on telecommunications service providers. . . . R egulators
then pressure the service provider to bury the tax in its
rates. (8) The result of this process is the extraordinarily complex set of
local and state taxes discussed above. Again, changing
technology is exacerbating the problem: Last week, for example, CTIA President
Tom Wheeler testified on legislation in the Senate that would provide for
uniform sourcing on taxes applied to cellular
telecommunications services by state and local government. In his testimony, he
pointed out that, during the course of a trip from Baltimore, MD to
Philadelphia, PA, a cell phone user passes through 12 different taxing
jurisdictions, each with its own rates and rules - rates and rules which are not
only complex but may well be inconsistent. With all this in mind, imagine trying
to provide today's telecommunications consumers with a global understanding of
their phone bills. It brings to mind what Supreme Court Justice Learned Hand
once said of the Income Tax: In my own case, the words of such
an act as the Income Tax, for example, merely dance before my
eyes in a meaningless procession; cross-reference to cross-reference, exception
upon exception - couched in abstract terms that offer no handle to seize hold of
- leave in my mind only a confused sense of some vitally important, but
successfully concealed, purport, which it is my duty to extract, but which is
within my power, if at all, only after the most inordinate expenditure of
time.(9) In short, we have created a system which is complex beyond the ability
of even the experts to understand. Only by reducing the complexity of the system
can we hope to achieve the ultimate objective of more comprehensible
telecommunications prices. We can begin this process by adopting incremental
reforms that reduce complexity. At the Federal level, some proposals now under
consideration would represent important moves in the direction of greater
simplicity: - implementing the so-called CALLS proposal, which would simplify
access fees, the Subscriber Line Charge, and the universal service system, -
adopting the uniform sourcing legislation mentioned earlier, - repealing the
Federal Excise Tax on telecommunications services. States
should also be looking at incremental reforms, including simplifying their own
universal service programs and following the recommendations of the National
Governors' Association report referenced above to consider tax
reduction and simplification. Ultimately, however, complexity is an unavoidable
consequence of a regulatory system designed for the very purpose of driving
prices away from the levels that would be set in the marketplace. Thus,
simplification of telecommunications pricing will come only with thoroughgoing
deregulation of the telecommunications marketplace. Truth In Billing: What Can
Be Done In the meantime, as I indicated earlier, public policy can and should
pursue a more limited goal. Specifically, it should attempt to provide consumers
with as much information as is practicable about the nature and level of
telecommunications taxes and fees. Insofar as it requires
telecommunications providers to identify and accurately describe specific
assessments levied under Sec. 254 of the Telecommunications Act, H.R. 3011 would
appear to achieve this goal. To the extent the bill goes beyond Sec. 254, to
include any other governmental mechanism, fund, tax or program,
I would hope the Subcommittee would take into account some of the discussion
above with respect to whether such a requirement would be workable in practice.
H.R. 3022 goes still further than H.R. 3011, essentially requiring receiving
carriers to identify not just the payments side of the equation, but also any
offsetting subsidies. While the idea may seem - as the name of the bill implies
- to simply require the telling of the rest of the story, in fact the two sides
of the story are fundamentally different. As a general matter,
taxes are levied for the purpose of providing public goods,
which is to say goods that would be underprovided by the marketplace because of
economic externalities or insufficiently defined property rights. In the case of
universal service programs, for example, it is generally agreed that there are
network externalities associated with universal access to
telephone services. With respect to the schools and libraries
program, an argument can be made that there is a strong public goods element to
having a well educated population, and that access to the Internet is an
important aspect of achieving that goal. In both cases, the benefits associated
with these programs accrue to the public at large, as well as to individual
citizens. By their very nature, these benefits are impossible to measure and
difficult to estimate. Furthermore, any estimates would be subject to the same
type of controversy that typically accompanies benefits estimates for other
government programs - e.g., environmental programs - and there would be
considerable debate, and certainly no ultimate consensus, over the correct
numbers to put on individual bills. The costs, by contrast, are both known and
easily assigned. We can observe directly the precise amount of
tax collections and the persons from whom they are collected.
LOAD-DATE: March 15, 2000, Wednesday
