March 30,2000

Roth Introduces Bill to Repeal Telephone Excise Tax

WASHINGTON -- Senate Finance Committee Chairman William V. Roth, Jr. (R-DE) and Senator John Breaux (D-LA) along with Senator Don Nickles (R-OK), Frank Murkowski (R-AK), Connie Mack (R-FL), and Chuck Robb (D-VA) today introduced legislation to repeal the 3% telephone excise tax. Roth submitted the following statement to the Congressional Record:

"Mr. President, I rise today -- along with Senator Breaux -- to introduce a bill to repeal the telephone excise tax. It is a tax that is outdated, unfair, and complex for both consumers to understand and for the collectors to administer. It cannot be justified on any tax policy grounds.

"Mr. President, the federal government has had the American consumer on 'hold' for too long when it comes to this tax. The telephone excise tax has been around for over 102 years. In fact, it was first imposed in 1898 - just 22 years after the telephone itself was invented. So quickly was it imposed that it almost seems that Uncle Sam was there to collect it before Alexander Graham Bell could put down the receiver from the first call. In fact, the tax is so old that Bell himself would have paid it!

"This tax on talking - as it is known - currently stands at 3%. Today, about 94% of all American families have telephone service. That means that virtually every family in the United States must tack an additional 3% on to their monthly phone bill. The federal tax applies to local phone service; it applies to long distance service; and it even applies in some cases to the extra amounts paid for state and local taxes. It is estimated that this tax costs the American public more than $5 billion per year.

"The telephone excise tax is a classic story of a tax that has been severed from its original justifications, but lives on solely to collect money.

"In truth, the federal phone tax has had more legislative lives than a cat. When the tax was originally imposed, Teddy Roosevelt was leading the Rough Riders up San Juan Hill. At that time, it was billed as a luxury tax, as only a small portion of the American public even had telephones. The tax was repealed in the early 20th century but then was reinstated at the beginning of World War I. It was repealed and reinstated a few more times until 1941, when it was made permanent to raise money for World War II. In the mid-60s, Congress scheduled the elimination of the phone tax, which had reached levels of 10 and 25 percent. But once again, the demands of war intervened, as the elimination of the tax was delayed to help pay for Vietnam. In 1973, the phone tax began to phase-out, but one year before it was about to be eliminated, it rose up yet again -- this time justified by the rationale of deficit reduction -- and has remained with us ever since.

"This tax is a pure money grab by the federal government - it does not pass any of the traditional criteria used for evaluating tax policy. First, this phone tax is outmoded. Once upon a time, it could have been argued that telephone service was a luxury item and that only the rich would be affected. As we all know, there is nothing further from the truth today.

"Second, the federal phone tax is unfair. Because this tax is a flat 3%, it applies disproportionately to low and middle income people. For example, studies show that an American family making less than $50,000 per year spends at least 2% of its income on telephone service. A family earning less than $10,000 per year spends over 9% of its income on telephone service. Imposing a tax on those families for a service that is a necessity in a modern society is simply not fair.

"Third, the federal phone tax is complex. Once upon a time, phone service was simple - there was one company who provided it. It was an easy tax to administer. Now, however, phone service is intertwined with data services and Internet access, and it brings about a whole new set of complexities. For instance, a common way to provide high speed Internet access is through a digital subscriber line. This DSL line allows a user to have simultaneous access to the Internet and to telephone communications. How should it be taxed? Should the tax be apportioned? Should the whole line be tax free? And what will we do when cable, wireless, and satellite companies provide voice and data communications over the same system? The burdensome complexity of today will only become more difficult tomorrow.

"As these questions are answered, we run the risk of distorting the market by favoring certain technologies. There are already numerous exceptions and carve-outs to the phone tax. For instance, private communications services are exempt from the tax. That allows large, sophisticated companies to establish communications networks and avoid paying any federal phone tax. It goes without saying that American families do not have that same option.

"With new technology, we also may exacerbate the inequities of the tax and contribute to the digital divide. For example, consider two families that decide it's time to connect their homes to the Internet. The first family installs another phone line for regular Internet access. The second family decides to buy a more expensive, dedicated high speed line for Internet access. The first family definitely gets hit with the phone tax, while the second family may end up paying no tax at all on their connection. I can't see any policy rationale for that result.

"Speaking of complexity, let me ask if anyone has taken a look at their most recent phone bill. It is a labyrinth of taxes and fees piled one on top of another. We may not be able to figure out what all the fees are for; but we do know that they add a big chunk to our phone bill. According to a recent study, the mean tax rate across the country on telecommunications is slightly over 18%. That is about a 6% rise in the last 10 years. In my little state of Delaware, the average tax rate on telecommunications now stands at 12%. I can't control the state and local taxes that have been imposed, but I can do my part with respect to the federal taxes. I seek to remove this burden from the citizens of my state -- and all Americans across the country.

"The technological changes in America have increased productivity and revolutionized our economy. As members of Congress, we need to make sure that our tax policies do not stifle that economic expansion. We should not adhere to policies that are a relic from a different time. In 1987, even before the deregulation of the telecommunications market, the Treasury Department concluded that there were "no strong arguments in favor of the communications excise tax."

"In today's economy, the arguments for repeal are even stronger. Earlier this year, the National Governors Association issued a report concluding that 'policymakers need to create a telecommunications tax structure that more accurately reflects the new economic realities of the market and to ensure that current state tax policy does not inhibit growth in the telecommunications industry.' Moreover, the Advisory Commission on Electronic Commerce, which Congress established to study the issue of Internet taxation, appears to have reached near unanimous agreement that the phone excise tax should be repealed.

"Mr. President, it is time to end the federal phone tax. For too long while America has been listening to a dial tone, Washington has been hearing a dollar tone. This tax is outmoded. It has been here since Alexander Graham Bell himself was alive. It is unfair. We are today taxing a poor family with a tax that was originally meant for luxury items. And it is complex. Only a communications engineer can today understand the myriad of taxes levied on a common phone bill and only the federal government has the wherewithal to keep track of who and what will be taxed. Mr. President, it is time we hung up the phone tax once and for all. I urge my colleagues to join me in supporting its repeal."