PERMANENT INTERNET TAX MORATORIUM BILL TO FACE CHALLENGE THURS.

For the first time in Senate history a bill will be challenged today (Thurs.) under a point-of-order as an unfunded mandate. The bill would make permanent the moratorium on discriminatory Internet taxes, including access taxes. Sen. Allen (R-Va.) expressed confidence in a press conference Wed. that S-150 would clear the Senate -- a similar bill, HR-49 by House Select Homeland Security Chmn. Cox (R-Cal.) already cleared the House -- but Sen. Alexander has vowed to challenge the bill under the rarely invoked Unfunded Mandates Reform Act of 1995. The bill, opposed by many state and local groups concerned about loss of telecom tax revenue, is able to come to a floor vote because Alexander agreed to lift his hold on the legislation last week.

Alexander said 63 current senators were in Congress and voted in favor of the 1995 Act (the National Governors’ Assn. listed 65), but those senators now are suffering “a strange case of amnesia” in moving to permanently ban states from collecting tax revenue from Internet services. Tenn. is one of 10 states (as well as D.C.) with Internet access taxes, and their grandfathering under the current moratorium would be eliminated by S-150. He plans to put forward the first- ever Senate point-of-order on a bill as an unfunded mandate (the House has seen several such challenges over the last decade). If unable to muster the 51 votes necessary to stop Allen from overriding his objection, Alexander said he would introduce an amendment that would require the federal govt. to annually reimburse states the tax revenue lost due to the permanent moratorium.

The last 2 weeks have seen a dramatic increase in the rancor on both sides of the debate, which coincided with the current moratorium’s expiration Nov. 1. S-150 supporters such as Allen and the original authors of the 1998 and 2001 moratoria, Sen. Wyden (D-Ore.) and Cox, have suggested that opponents are focused on preserving illegitimate taxes and are raising red herrings about new language threatening traditional telecom levies. Wyden took the floor recently to charge that S-150 opponents want to tax every e-mail and every Internet browser use.

Opponents, which include groups of governors, county and city officials, insist they're not looking to expand taxes on the Internet, merely preserve ones that states currently rely on for revenue, including traditional telecom tariffs. “Contrary to claims we hear repeatedly,” a coalition of local govts. called TeleCommUnity said, “local governments do not want to tax e-mail or tax ’surfing’ the Internet.” TeleCommUnity Chmn. Marilyn Praisner, a Montgomery County, Md., council member, said “[w]e simply want to preserve our existing rights to collect fair rent for the public’s rights- of-way” and support first responders and schools with tax revenue.

Authorities taxing telecom services could suffer as services migrate to the Internet, S-150 opponents argued. The National Assn. of Counties (NACo) said that in “the long term, we are concerned that the moratorium may in fact apply to all telecommunications if the technology evolves so that all telecommunications services are eventually delivered over the Internet -- which appears to be increasingly likely.” Alexander said “I am not suggesting this ban on Internet taxation would eliminate all of the $18 billion of state and local taxation on telecommunications, but virtually everyone agrees that it would eliminate some.” He said that reduction in taxes likely explained why “we have begun to see the halls filled with lobbyists from the telecommunications industry.”

S-150 supporters Wed. held a press conference insisting the bill didn’t threaten telecom levies, and Allen again cited his manager’s amendment for the bill, which would provide legislative language clarifying that the moratorium didn’t address traditional telecom services. Such language could prove useful to tax authorities if their levies were challenged in court after the moratorium became law. House Judiciary Commercial & Administrative Law Subcommittee Chmn. Cannon (R-Utah), who aggressively pushed HR-49 through his subcommittee earlier this year, praised both bills (which are nearly identical in language) for including the provision on broadband when bundled with telecom. He called that provision “technology-neutral” and ensured that some broadband services such as cable or wireless service wouldn’t be exempt from taxation while DSL over copper would be.

S-150 opponents argued that the bill isn’t technology- neutral, however, in that it favors Internet over traditional telecom. NACo said “existing taxes should apply regardless of whether telecommunications services are delivered over a telephone line or the Internet.” The group said “we are concerned that S-150 may provide an unfair tax break for local and long-distance telephone service that is provided over the Internet.”

Every state currently collecting tax revenue from Internet levies will suffer, Alexander said. The Congressional Budget Office (CBO) said that in 2007, when S- 150 would eliminate the grandfather protection, the 10 states would lose $80-$120 million annually. But Alexander cited much larger numbers, including estimates from decreased taxes on traditional telecom. Tenn. would lose $358 million annually, he said the state’s Dept. of Revenues estimated. Other estimated annual losses he cited, provided him by state tax agencies, included Ky., $40-$50 million; Ia., $45-$50 million; Me., $35 million; N.J., $600 million; Ohio, $55.7 million; S.D., $34 million; Wash., $33 million. He didn’t offer estimates for D.C., Hawaii and Wis., the other grandfathered states and territories. S-150 could cost state and local govts. “at least $4 billion, and as much as $8.75 billion by 2006, rather than the $500 million estimated under the legislation’s narrow original focus,” Alexander said.

In an Oct. 30 Dear Colleague letter and a Tues. floor speech, Alexander said “a few senators expressed surprise when I have said that a vote for legislation preventing states from taxing Internet access is a vote for an unfunded federal mandate.” But he said it was clear that the tax losses that would come from the bill, even the conservative ones from CBO based purely on removing the grandfathering, exceeded the $50-million threshold of the Unfunded Mandates Reform Act. The National Governors Assn. agreed, suggesting their much larger estimates of tax losses are $2-$4 billion annually, “which is 40 to 80 times the unfunded mandates threshold,” NGA Exec. Dir. Ray Scheppach said. Alexander said he railed against unfunded mandates as a governor, and said Allen did the same when he was governor of Va. Alexander said Allen hosted a Republican Governors retreat late in 1994 in Williamsburg, Va., after the GOP won the House and Senate. At that retreat, Allen and incoming Senate Majority Leader Dole (R-Kan.) crafted the unfunded mandates bill, which was introduced as S-1 in 1995. S-1 passed 91-9, and the NGA said it was calling all of the 65 senators who were in Congress in 1995 and supported the unfunded mandates bill. Among those who supported the bill were Wyden (then in the House) and Senate Commerce Committee Chmn. McCain (R- Ariz.), a strong supporter of a permanent moratorium who shepherded S-150 out of his committee.

Should Alexander’s point-of-order fail, his amendment would pose an interesting challenge to the Office of Management & Budget (OMB) and CBO. Every Nov. 1, the OMB would calculate the lost tax revenue resulting from the permanent moratorium (the 190-word amendment doesn’t explain how OMB would calculate for variables such as migration of telecom services to the Internet or for differences in Internet adoption that could stem from lower rates due to absence of access taxes). Four days later, the CBO would report to Congress OMB’s numbers and any variations it had. Then, the U.S. Treasury would have 15 days to cut checks to each state “in an amount equal to the amount determined for that state and local governments in that state” by OMB. Regarding the moratorium, Alexander said “if we think this is so important, then we should pay the bill.” He said senators should not feel “we are all wise and that the governors and mayors and legislators are not quite as wise and that we, therefore, ought to tell them what to do.”

The Bush administration has been strongly in favor of S- 150, and Wed. Commerce Secy. Don Evans and Treasury Secy. John Snow again urged its passage so President Bush could sign it. “We believe that government should support the widespread availability and use of the Internet, including the use of broadband technology, and not discourage the Internet’s growth through new access taxes,” they said, suggesting “a permanent moratorium means a permanent victory for American consumers and businesses.”

But in response to Alexander’s floor statement, Sen. Santorum (R-Pa.), offered another reason for opposing a permanent moratorium and another take on e-commerce. “[T]here is a lot more depravity that occurs on the Internet than commerce,” he said, arguing the top web sites are pornographic. He said ISPs “and others who are so concerned in coming up here saying, ‘Don’t tax us and don’t hold back the potential of the Internet’ seem to be a heck of a lot less concerned about the impact of culture debasement that is going on as a result of the exposure of pornography and violence.” The harms imposed on youth by “popup ads, through e-mail and spam and through other vehicles that these lecherous members of the international community” peddle on the Internet suggests, Santorum said, that “it is not the kind of commerce I think we want to be supporting.”