Case Overview, Elimination of the 3% Excise Tax on Phone Bills

This document provides background information and summarizes the debate over the elimination of the 3% excise tax on telephone bills. The links to the left will lead you to public documents that we have found.

          During the Spanish-American War an excise tax was placed on telephone bills. An excise tax is a tax on luxury items and at the time telephones were only found in the homes of the upper class. The tax was intended to help fund the war effort but after the Spanish-American War ended, it was kept on the books since there was little controversy over the tax and it was a growing source of revenue that could be used to fund necessary programs.

          A century later telephone companies made a major effort to convince the Congress to eliminate the tax. In the past, Congress had been reluctant to get rid of the telephone excise tax for the same reason that the tax was not repealed after its initial justification became moot. It produced $5 billion a year in revenue - $5 billion that would have to found elsewhere if the cut was made. What gave impetus to advocates of the tax repeal was the booming national economy during the 1990s. As one lobbyist noted in an interview, "We'd been pushing it for years. I think this year a political consideration was what made it something that we should focus on [as] being one of our main priorities legislatively. We have a budget surplus."

          Spearheading the lobbying effort were telephone companies like AT&T and Bell Atlantic, and the United State Telecom Association, a trade group for telephone companies. Also supporting the tax repeal were conservative citizen groups like Americans for Tax Reform and the National Taxpayers Union. The emphasis in their meetings with legislators was that what was originally a luxury tax on the rich was now a regressive tax on low-income Americans. "It hits senior citizens and low-income Americans," said one lobbyist. The lobbying plan, he noted, was to "put a consumer face on this." In this respect the telephone companies stressed that they would receive no direct financial gain from the proposed change since all they did was to collect the tax and then pass it on to the federal government. The phone companies assumed, however, that the lower tax would mean that consumers would spend the money saved (and maybe more) on more phone calls because they would perceive phone service to be less expensive.

          The initial focus was on the House of Representatives and, in particular, the House Ways and Means Committee and the Republican House leadership. The Democrats in the House were not opposed to the change and the Clinton White House made no real effort to protect the tax in the House. As part of a larger bill, the telephone excise tax repeal passed the House easily in May of 2000, with only three representatives voting against it. The Senate was more problematic. The average savings per phone is only about $30 a year and some Republicans saw other tax issues as more pressing or potentially more rewarding. In the end the Senate leadership never scheduled action on the telephone excise tax and the session ended without a vote on it. In the subsequent 107th Congress, the different economic situation doomed the issue and the repeal did not make it out of the House Ways and Means Committee.