Copyright 2000 eMediaMillWorks, Inc.
(f/k/a Federal
Document Clearing House, Inc.)
Federal Document Clearing House
Congressional Testimony
May 16, 2000, Tuesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 2854 words
HEADLINE:
TESTIMONY May 16, 2000 ERICK GUSTAFSON DIRECTOR CITIZENS FOR A SOUND ECONOMY
FOUNDATION HOUSE WAYS AND MEANS OVERSIGHT INTERNET TAXES
BODY:
May 16,2000 TESTIMONY OF ERICK GUSTAFSON
DIRECTOR OF TECHNOLOGY AND COMMUNICATIONS POLICY CITIZENS FOR A SOUND ECONOMY
FOUNDATION BEFORE THE WAYS AND MEANS, SUBCOMMITTEE ON OVERSIGHT. Mr. Chairman,
and members of the Committee, thank you for the opportunity to share my views on
the work of the Advisory Commission on Electronic Commerce (ACEC), Internet and
communications taxes, and the effect they have on the digital
divide. My name is Erick Gustafson, and I present these views on behalf of the
members of Citizens for a Sound Economy Foundation (CSE Foundation), a consumer
education organization that promotes free market solutions to public policy
problems. At CSE Foundation, I am the director for technology and communications
policy. 1 More than a quarter-million strong, CSE Foundation's members are in
every congressional district of America. Our members distinguish themselves as
policy activists. They constantly remind us that decisions made in Washington,
D.C., are felt in places far away from here; and that is where CSE Foundation is
found. We at CSE Foundation believe that individual liberty and the freedom to
compete expands consumer choice and provides individuals with the greatest
control over what they own and earn. The topic of today's hearing has long been
an interest for CSE Foundation. Our activists were a force pressing for passage
of the Internet Tax Freedom Act and CSE Foundation staff and
members have either attended or participated in every meeting of the Advisory
Commission over the past year. We were both pleased by the substance of the
Commission's full report and frustrated by those Commissioners whose abstention
from several key votes limited the report's formal recommendations.2Despite
differing with the Commission on a few key points, we believe that Governor
Gilmore and his colleagues have 1 CSE Foundation does not receive any funds from
the U.S. Government. 2More than seven members of the Advisory Commission on
Electronic Commerce abstained on 10 key votes during the Dallas Meeting on March
20-21, 2000. provided Congress with a valuable prescription for addressing a
number of issues confronting consumers and our nation's growing technology
sector. In part, Congress has already acted on the substance of the Commission's
report by passing The Internet Nondiscrimination Act (H.R. 3709). This
legislation would extend the current moratorium for five years and terminate a
communications service tax currently being charged to some
consumers for Internet access. When we at CSE Foundation examine the topic of
Internet, communications taxes, and the digital divide, we
begin with two tenets that are central to our mission: -Governments already
collect far too much money, and individuals are taxed far too much; and,
-Excessive government taxation and regulation of communication services is the
greatest impediment to access of technology and further compounds the digital
divide. Consider the following facts: Every state in America began the year with
a budget surplus, the collective total of which exceeded $35 billion. State
tax revenues have doubled in the last I 0 years. Last year
alone, state taxes increased by 11 percent. State government
spending in 1999 was up 8 percent.3 At a time like this, the
tax debate should be focused on cutting tax
rates for consumers and small businesses, not adding new taxes
on the Internet. Rather than exploring new ways to tax the
engine of our economic growth, government should be looking for ways to end
outdated taxes and open the doors of the Internet to everyone.
Following the Commission's advice would be a solid step in that direction. In
fact, adopting just three of the suggestions in the Commission's report will
save American consumers billions of dollars. Repeal the 3-percent federal
excise tax on telecommunications services. The
3- percent federal excise tax on
telecommunications services was introduced to fund the
Spanish-American War. This tax costs Americans nearly $6
billion each year simply for the "luxury" of keeping a phone in the house.4 The
fact that this tax is still on our monthly phone bills 102
years after the Spanish- American War ended demonstrates just how difficult it
is to remove a tax. Regrettably, this is just one of the many
taxes and outdated regulations that make it more expensive for
Americans to go online. We won the Spanish-American War more than 1 00 years
ago; yet, the wartime levy still exists - it is time we win the war against
taxes that expand the so-called digital divide. Extend the
current moratorium on multiple and discriminatory taxation of electronic
commerce for a minimum of five years. When the Internet Tax
Freedom Act was passed, the Internet itself was in its infancy and e-commerce
was virtually non-existent. Today the specter of bit taxes on
emails, right-of-way taxes on the transfer of information,
3Background for these tax statistics available upon request.
4Mark Zuckerman, "From 'Remember the Maine' to 'No New Taxes':
A History of the Telecommunications Excise Tax" Citizens for a
Sound Economy Foundation, July 29, 1999. and other onerous tax
schemes are little more than a figment of overactive imaginations. Had any of
these plans been allowed to take hold or had the Internet been treated
differently from other types of remote sales it is extremely unlikely that we
would have the economy we know today. The Senate should, without delay, follow
the lead of the House and act to extend the current moratorium so that
discriminatory taxes do not threaten electronic commerce. To
preserve our rapidly expanding economy we must continue to allow consumers,
small businesses, and students to browse, shop, and learn online without facing
unique and harmful taxes. Make permanent the current moratorium
on Internet access taxes. Taxes at the on-ramp to the
Information super highway raise the cost of going online and keep too many
Americans offline every year. Consumers pay between 20 percent and 30 percent in
taxes on communications services - tax rates
similar to those on "sin" taxes.5 By imposing regressive rates
of taxation while simultaneously proclaiming the need to rapidly expand
technology to all regions and income levels, government officials only ensure
that taxes will hit hardest those who can least afford it.
Policyrnakers must understand, as they look for ways to bridge the digital
divide, the best way to give consumers the full benefits of high technology is
by removing the high taxes and obsolete government regulations
that are barriers to competition and innovation. CSE Foundation has long
asserted, and a study by the Stanford Institute for the Quantitative Study of
Society (SIQSS) has found, that eliminating taxes and
regulations is the best approach the government can take to bridge the digital
divide. The Stanford study found that demographics only account for 20 percent
of the digital divide. Unfortunately, government efforts at bridging the digital
divide have traditionally been designed to target specific demographic groups.
This study indicates that these types of programs will not solve the problem. If
government truly wants to get more people online the best solution is to lower
the cost of going online. There are numerous free Internet Service Providers
(ISPs), but Internet access fees and highly taxed phone lines are barriers to
these ISPs. By eliminating discriminatory taxes on
communications, the government could lower the cost of going online and take a
huge leap forward in eliminating the digital divide. Now is the time for
Congress to act and ensure that taxes will not keep Americans
offline. Each recommendation is a step in the right direction, but undoubtedly
someone will tell you that America cannot move forward. You may hear that states
and cities will lose too much revenue, that small Mom-and-Pop retailers are
unable to take on a global electronic market, or that no retailer can compete
against an Internet tax advantage. Know that those who tell you
such things either seek to increase tax revenue or to protect
existing business models from competition. In the fourth quarter of 1999, the
most recent holiday season, total retail sales exceeded $526 billion. Of that
total, online retail sales constituted just $5.3 billion or 0.64 percent.6To
claim that states and cities will not be able to fund schools or law enforcement
because of revenue lost to Internet sales is an outright lie. The fact is, in
spite of all the media attention lavished on e-commerce, an overwhelming number
of retail sales still take place at bricks and mortar retailers. Moreover,
Internet sales are subject to sales taxes in many instances -
the same as catalogue sales have been for decades. Researchers at the University
of Chicago and Harvard University recently calculated the impact of Internet
transactions on sales tax revenue. They found that online
transactions reduce state and local revenues by only $430 million annually -
less than one- quarter of I percent of total sales tax
revenues. Industry watchers expect online sales to grow by 70 percent per year
over the next few years, but even then, the revenue lost will represent less
than 2 percent of sales tax revenue in 2003. Small businesses
have embraced the Internet in droves despite facing unfamiliar technologies and
unproven ways of reaching customers. A newly released survey shows that small
businesses outspent consumers by more than $5 billion last year as they made
travel reservations and purchased office and computer equipment in record
numbers. 8 Those small businesses that do venture online find that, far from
being a threat, the Internet actually adds to their profitability. The Internet
economy accounts for nearly one-third of our nation's economic growth. It is
estimated that if taxes were applied to online sales, growth in
the technology sector would be slowed by 24 percent. Intervention in the
high-tech marketplace creates fear and uncertainty among investors and threatens
to destroy our economy. The government must be stopped from taxing to death the
goose that laid the golden egg. At the start of the 2 1 " century we have the
opportunity and the ability to give consumers the full benefits of high
technology without harming Main Street or state governments. The Advisory
Commission on Electronic Commerce has pointed us in that direction, I urge
Congress to heed their advice and send a strong message that the Internet will
remain free from the heavy hand of government taxation.
LOAD-DATE: May 22, 2000, Monday
