[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]



 
                  FUNDING MECHANISMS OF THE ``E-RATE''


                                PROGRAM

=======================================================================

                                HEARING

                               before the

                       SUBCOMMITTEE ON OVERSIGHT

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                             SECOND SESSION

                               __________

                             AUGUST 4, 1998

                               __________

                           Serial No. 105-108

                               __________

         Printed for the use of the Committee on Ways and Means





                    U.S. GOVERNMENT PRINTING OFFICE
63-683                      WASHINGTON : 2000




                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman
PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        BARBARA B. KENNELLY, Connecticut
JIM BUNNING, Kentucky                WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
WES WATKINS, Oklahoma
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
                     A.L. Singleton, Chief of Staff
                  Janice Mays, Minority Chief Counsel
                                 ------                                

                       Subcommittee on Oversight

                NANCY L. JOHNSON, Connecticut, Chairman
ROB PORTMAN, Ohio                    WILLIAM J. COYNE, Pennsylvania
JIM RAMSTAD, Minnesota               GERALD D. KLECZKA, Wisconsin
JENNIFER DUNN, Washington            MICHAEL R. McNULTY, New York
PHILIP S. ENGLISH, Pennsylvania      JOHN S. TANNER, Tennessee
WES WATKINS, Oklahoma                KAREN L. THURMAN, Florida
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
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further refined.




                            C O N T E N T S

                              ----------                              
                                                                   Page
Advisory of July 24, 1998, announcing the hearing................     2

                               WITNESSES

Federal Communications Commission:
    Hon. Harold Furchtgott-Roth, Commissioner....................    48
    Christopher J. Wright, General Counsel.......................    65
Blumenauer, Hon. Earl, a Representative in Congress from the 
  State of Oregon................................................    14
Tauzin, Hon, W.J. (Billy), a Representative in Congress from the 
  State of Louisiana.............................................    10
Weller, Hon. Jerry, a Representative in Congress from the State 
  of Illinois....................................................     8

                       SUBMISSION FOR THE RECORD

American Association of Educational Service Agencies; American 
  Association of School Administrators; American Federation of 
  Teachers; American Library Association; American Vocational 
  Association; Consortium for School Networking; Council of Chief 
  State School Officers; International Society for Technology in 
  Education; National Association of Elementary School 
  Principals; National Education Association; National Education 
  Knowledge Industry Association; National Grange; National Rural 
  Education Association; and National School Boards Association, 
  joint letter...................................................    84


                FUNDING MECHANISMS OF THE E-RATE PROGRAM

                              ----------                              


                        TUESDAY, AUGUST 4, 1998

                  House of Representatives,
                       Committee on Ways and Means,
                                 Subcommittee on Oversight,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:10 a.m., in 
room 1100, Longworth House Office Building, Hon. Nancy Johnson 
(Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]


    [GRAPHIC] [TIFF OMITTED] T3683A.001
    
    [GRAPHIC] [TIFF OMITTED] T3683A.002
    
    [GRAPHIC] [TIFF OMITTED] T3683A.003

    
    Chairman Johnson of Connecticut. Good morning, and welcome.
    Today, the United States is the most technologically 
advanced country in the world, and it's our responsibility to 
assure that continued technological strength. Since our 
children are our future, we must ensure that they are given 
every opportunity to thrive in the technology-driven global 
economy.
    As Congress has acknowledged, the best chance to teach the 
most children the needed technical skills is to reach them in 
primary and secondary schools. Congress recognized this when we 
passed a provision in the Telecommunications Act of 1996 which 
provides advanced telecommunications services, at discount, to 
schools and libraries so that they can bring the most current 
technology to their communities, at affordable prices. This 
provision is now known as the e-rate program. Every school, in 
rich districts and in poor, in cities and in remote rural 
areas, should have access to the Internet and to the other 
services that will increase the technical skills of its 
students. I support the goals of the e-rate program, and I 
believe that everyone on the subcommittee supports that 
program's goals.
    We are not here today to discuss the e-rate program's 
purpose or goals. Rather, we are here to discuss how the e-rate 
program is funded. We are focusing on this narrow issue because 
it, separate and independent from the e-rate program, has very 
significant implications for us as policymakers, as members of 
Congress that have struggled hard to balance the budget, and as 
many members who oppose tax increases.
    When the drafters of the Constitution established the three 
branches of government, they carefully delineated the duties 
and powers of each branch. Congress, and Congress alone, was 
entrusted with the power to levy taxes. Congress should not and 
cannot delegate the authority to levy taxes.
    That being established, we are here to determine whether 
the e-rate program, as implemented by the FCC, is a fee or a 
tax, because if it is, indeed, a tax, it has not been levied by 
Congress, but by an executive branch agency; and, therefore, is 
illegal.
    A fee is a voluntary payment, or benefit conferred, on the 
payor. And the amount of the fee paid correlates with the 
benefit received. For example, campers often pay a fee to enter 
national parks like Yellowstone National Park. If they do not 
want to pay a fee, they can chose to camp elsewhere. If they do 
chose to camp there, the fees are designed to approximate the 
costs of running the park. A tax, on the other hand, is a 
mandatory charge imposed on the payor for general or specified 
governmental purposes. I am sure that we all too aware of 
examples of taxes.
    At first blush, I must admit that the charges that the FCC 
has imposed on telecommunications carriers appear to be taxes. 
They are mandatory. All telecommunications providers must 
contribute to the e-rate program, whether they receive benefit 
from the program or not. You may have seen these charges on 
your phone bill last month. Also both the Congressional Budget 
Office and the Office of Management and Budget agree that 
contributions to the program are general revenues and that 
disbursements for the program will be general outlays. This 
sounds like a tax--mandatory contributions, which go directly 
into the government's coffers.
    But I do not want to jump to conclusions. Rather, I want to 
hear from witnesses so that they can help us understand whether 
this program is, in fact, a hidden tax.
    This determination is important. We, as the representatives 
of the people, are accountable for the taxes that they pay. 
Raising taxes is serious business. And as we struggle to 
balance burden and society's goals, we cannot have the 
bureaucracy making a mockery of tax cuts by imposing fees that 
are, in fact, hidden taxes that end up being paid by every one 
of us.
    The goals of the e-rate program are laudable. Finding the 
funding for the program must be a priority. But we must follow 
the constitutionally prescribed process.
    In 1665, Colbert said, I quote, ``the art of taxation 
consists in so plucking the goose as to obtain the largest 
amount of feathers with the least possible amount of hissing.'' 
We have to set our sights a little higher than simply 
minimizing the hissing. The Constitution speaks very clearly: 
tax law is made by Congress. And money bills originate in the 
House, in the Committee on Ways and Means.
    I look forward to hearing from our witnesses today, and I'm 
pleased to yield to our Ranking Democrat, Mr. Coyne.
    Mr. Coyne. Thank you Madam Chairman.
    We are here today to conduct an oversight hearing on an 
issue that is very important to our children's educational 
future. The issue we are focusing on today is the e-rate 
program, which is designed to provide our schools and libraries 
with state-of-the-art telecommunications services.
    This program was created in the Telecommunications Act of 
1996 as part of the Universal Service Program, which provides 
low-income consumers and households in rural and high-cost 
areas with telephone services at affordable prices.
    The United States has been able to ensure access to 
telephone services for all Americans regardless of their 
location and wealth through this Universal Service Program. The 
Universal Service Program has been in existence for decades and 
was codified and expanded in the 1996 Telecommunications Act. 
The Universal Service Program is a cross-subsidy system by 
which telecommunications companies contribute to the Universal 
Service Fund and then draw from the fund as reimbursement for 
discounts and other subsidies that they have provided to 
consumers.
    The contributions from the telecommunications companies go 
into a revolving fund which pays back the industry amounts 
reflecting their Universal Coverage subsidies. The principal 
expansion of the Universal Service Program in the 1996 
Telecommunications Act was the provision to provide public and 
non-profit elementary and secondary schools, public libraries, 
and rural health providers with advanced telecommunications 
services such as the Internet.
    Since 1996, over 100,000 schools have applied for the 
program, which the FCC has announced it will fund at about $2 
billion. I am well aware of how important this program is, 
because many schools and libraries in the district that I 
represent have applied for the program, and all of them are 
very pleased about the new educational opportunities they can 
now offer their students. Soon, if all goes as planned, 
Internet access for schools and libraries will be a reality.
    The stated purpose of today's hearing is number one, to 
review funding mechanisms for the e-rate program; and number 
two, to determine whether it is a tax. If the Ways and Means 
Committee's jurisdiction has been bypassed, this is a 
legitimate matter for us to consider here today.
    However, I am also aware that there has been a great deal 
of political rhetoric surrounding the issue. For example, some 
have called the e-rate program a tax, and named it after our 
Vice President. I hope we all will focus on the substantive 
issues and not engage in partisan rhetoric here today. First, 
the 1996 Telecommunications Act passed by the House by a vote 
of 414 to 16, a clear bipartisan endorsement. Further, it is my 
understanding that in May of 1995, when the schools and 
libraries provision was added to the Senate version of the 
bill, the House parliamentarian was consulted to determine 
whether the provision was a tax, for purposes of the House blue 
slipping it as a revenue measure not originating in the House 
of Representatives. The Senate bill was not blue slipped by any 
member of the House at that time. Further, the Senate provision 
was included in the final conference agreement approved by the 
House and the Senate.
    To the extent the e-rate program constitutes a tax, we 
should assert jurisdiction on a possible amendment to the 
Commerce Department's appropriation bill that is currently 
before the House of Representatives, which would block funding 
for the program.
    On the other hand, it is the responsibility of the courts 
to evaluate whether a new law is constitutional and 
appropriately delegates authority to the executive branch. The 
very issue we are discussing today is pending before the 5th 
circuit court of appeals. The answer will be provided by the 
court in the very near future.
    In the past, the industry has supported this fund and built 
contributions into its cost base. The contributions to the fund 
have never been explicitly passed on to the consumer as a line 
item charge. However, companies are now having to compete for 
customers in the deregulated world created by the 1996 
Telecommunications Act.
    To get those customers, they need to advertise a very low 
cost per minute. They have been aided in this goal by 
reductions the 1996 Act caused in local access charges. 
According to the materials I received from the FCC, this 
reduction is now about one and half cents per minute. This 
reduction should have more than offset the increased costs of 
Universal Service, guaranteeing customers rates that were at 
least a penny a minute less.
    For a customer who makes an hour of long distance calls a 
week, that savings is about $30 per year. Why, then, have phone 
companies chosen to show the increase in Universal Service as a 
separate charge and not part of the rate? It's not because 
their costs have increased. It's because doing that allows them 
to advertise a lower rate than they actually charge, and, as a 
bonus, blame it on the government. For example, itemizing the 
charge allows them to charge the hypothetical customer I was 
just describing about half a cent more per minute than their 
advertised rate, increasing the bill by about $15 a year.
    I believe today's witnesses will help us better understand 
whether the phone bills our constituents receive are actually 
reflecting their phone company's underlying costs. I hope our 
committee will not be a part to legitimizing any rhetoric which 
prevents consumers from getting the full benefit of reductions 
in long distance telephone costs mandated by Congress.
    Thank you, Madam Chairman.
    Chairman Johnson of Connecticut. Thank you, Mr. Coyne. You 
opening statement was very helpful. Those of us who were very 
supportive of the Telecommunications Act and of its funding of 
this function at the time did believe that it would be paid for 
through the savings that that Act allowed the industry to 
realize. And I personally believe that that may be why it was 
never blue slipped. But that is exactly the controversy we are 
here to look into today, because the long-term implications of 
the legislative branch allowing the executive branch to develop 
revenue sources for specific functions is very serious and does 
compromise our ability to control the tax burden on the people 
of the Nation and to manage the relationship between revenues 
and appropriations and the Nation's priorities.
    So this is not a hearing about whether or not we support 
hooking up the libraries and schools. We all clearly do support 
that. It is a very important, though rather technical hearing, 
on the means by which we plan to accomplish those goals.
    I would like to first recognize Mr. Weller for his 
testimony, a valued member of this committee and a member of 
the Oversight Subcommittee.
    Mr. Weller.

    STATEMENT OF THE HON. JERRY WELLER, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF ILLINOIS

    Mr. Weller. Well, thank you, madam Chair. And thank you, 
Mr. Coyne, and members of the Oversight Subcommittee for the 
opportunity to testify today. And I also want to commend Chair 
Johnson for her leadership on today's issue. I'm particularly 
glad to join my colleague, Mr. Tauzin, also my colleague and 
friend, Mr. Blumenauer today to testify before the Oversight 
Subcommittee on what I think we all agree on, and that is on an 
effort to achieve the goal that we all share, which is giving 
every child access to the Internet through our local schools 
and libraries, to better prepare them for the economy and job 
market of the 21st century.
    Two years ago, when we passed the Telecommunications Act, 
in 1996, it included a simple directive: that any 
telecommunications carrier serving a particular geographic area 
must make any of its services under the Universal Service Fund 
available at reduced rates to schools and libraries. 
Unfortunately, the FCC misinterpreted the Telecommunications 
Act and now jeopardizes this goal that we all share, which is 
providing Internet access for all of America's children.
    Like you, Madam Chair, I want to work in a bipartisan way 
to fix this problem.
    First, if we look historically, the FCC determined that as 
much as two and quarter billion dollars per year should be made 
available to support Universal Service for schools and 
libraries.
    Second, the FCC expanded the scope of what was available 
for schools and libraries from just discounted rates on the 
telecommunications services and decided to include Internet 
access costs and Internet connections, such as wiring.
    Third, the FCC created a whole new bureaucracy known as the 
School and Libraries Corporation to administer the e-rate 
program without any authorization from Congress to do so.
    Finally, with probably the most questionable of all the 
provisions, the FCC determined that the funds supporting the e-
rate for schools and libraries should come from an assessment 
or tax on all telecommunication service providers. This 
controversial assessment, which is currently facing legal 
challenges, and as Mr. Coyne pointed out, has commonly become 
known as the Gore tax.
    Here are the problems that we now face.
    The FCC has taken unauthorized to create a new, ineffective 
bureaucracy that has yet to provide any funding to 1,800 
schools in Illinois that have applied for help in connecting 
their students to the Internet.
    And two, the FCC has taken the unconstitutional action of 
imposing an unauthorized tax on telephone usage in order to 
cover the expenses of this enterprise.
    The FCC is incorrect in its contention that the so-called 
Gore tax is a fee. A fee is a voluntary charge for a service 
rendered. However, telephone customers are not receiving a 
service. Thus, if a charge is levied and no direct service is 
provided, then it is characterized as a tax regardless of 
whether it shows up on your 1040 Form or your telephone bill. 
And only Congress can impose a tax under our Constitution. The 
FCC's actions are now being contest in court.
    The result is that many schools across the country that 
were depending on the e-rate have been left in the cold. Some 
examples in the district I represent, in the 11th District of 
Illinois, include Bradley-Bourbonais Community High School, 
which has applied to get 38 computers connected; Steger High 
School, in south Cook County, which applied to get 156 
classrooms wired; Wilmington School District, which applied to 
get 123 computers connected and 50 classrooms wired; Joliet's 
Public Library District, which applied to get 20 computers 
connected; and La Salle Catholic, which is a grade school, 
which applied to get 36 computers connected and 14 classrooms 
wired.
    This is only a smattering of examples where the FCC and the 
SLC have left the hopes and dreams of schools and students 
hanging in the winds. We cannot let this continue. That's why 
I'm glad to join with my colleague and friend, Mr. Tauzin, in 
sponsoring the School and Libraries Internet Access Act of 
1998, H.R. 4324.
    The School and Library Internet Access Act would save the 
technology assistance program for over 1,800 schools in 
Illinois alone by slashing the World War I three percent 
telephone excise tax, which currently goes to the general 
revenue fund, to one percent, and earmarking the remaining 
revenue to fund the important school and library Internet 
access programs that through block grants to our States. In 
addition to slashing the current tax, the School and Library 
Internet Access Act repeals the so-called three percent Gore 
Tax on telephone customers. Our legislation will save consumers 
and estimated $5 billion, while providing $1.7 billion in the 
first year to equip our schools and libraries with Internet 
access.
    This legislation effectively kills two birds with one 
stone. First, the legislation preserves and expands funding for 
this important Internet access assistance program for our 
schools and libraries and places it appropriately under the 
jurisdiction of the National Telecommunications and Information 
Administration. Second, the legislation abolishes the FCC's 
unconstitutional, what some call the ``Gore Tax'' funding 
mechanism and reduces an antiquated World War I tax, which 
disproportionately impacts the poor and senior citizens.
    Let's do it right this time. The FCC and its illegal ``Gore 
Tax'' created the problem. However, I support the bipartisan 
goal of giving every child in school access to the Internet and 
believe we need to solve this problem by enacting the School 
and Library Internet Access Act. It is important to the 
children of Illinois and the 1,800 schools which are pleading 
for help. It is the right thing to do. Let's work in a 
bipartisan fashion to get this job done.
    Of course, Madam Chair, I ask my colleagues to give the 
School and Libraries Internet Access Act, which helps solve 
this problem, favorable consideration in this committee.
    Again, thank you, Madam Chair and Mr. Coyne.
    Chairman Johnson of Connecticut. Thank you, Mr. Weller.
    Mr. Tauzin, the cosponsor of H.R. 4324.

STATEMENT OF THE HON. W.J. TAUZIN, A REPRESENTATIVE IN CONGRESS 
                  FROM THE STATE OF LOUISIANA

    Mr. Tauzin. Thank you, Chairman Johnson.
    Let me I suppose go right to the heart of this issue. The 
issue is not whether or not we ought to fund a decent schools 
and libraries fund or whether we ought to carry out the 
purposes of the e-rate program thoroughly, completely in 
America. I think we all agree that it is a good public, 
national goal to make sure that all the children of America 
have access to Internet services and, in fact, have access to 
what will become extraordinary new opportunities in long 
distance learning. And it's also--the same is true for our 
libraries and certainly true for rural hospitals in America. 
That's not the question.
    The question, as you correctly pose it, Madam Chairman, is 
whether or not the e-rate tax itself is a tax or a fee. Is it 
the fee that the parliamentarian said it was going to be? Or 
has it become a tax?
    To the quick: the 5th circuit is going to decide this. But 
I think we can decide it rather quickly, too. The courts have 
pretty well determined what is a fee and what is a tax. Now you 
have great expertise in taxation. We've seen fees at the 
Commerce Committee. A fee is simply a collection of a charge 
for which there is a nexus in service. Someone pays and gets a 
benefit for it directly.
    A tax is something where you don't have a direct benefit. 
You generally are putting in money for the good of other people 
in our society.
    This qualifies. This e-rate quickly qualifies as a tax, and 
the question is how do we get from here to there? The answer is 
that the Commerce Committee and other committees who worked on 
the Telecommunications bill, and your committee included, 
intended, I think, very quickly to make sure that the FCC 
administered a properly discounted service plan to make sure 
that the monthly charges to the schools and libraries of 
America were discounted charges, that is, charges that could be 
afforded by the schools and libraries and rural hospitals in 
the same sense that we intended in the Universal Service fee 
collection system that charges on a monthly basis to rural 
individuals or poor individuals in our society would be 
discounted. That is, the rest of us would subsidize the 
connection of telephone service to those individuals so that 
our telephone would be more valuable to us. Everybody would be 
on the same system; and, therefore, poor and rural people would 
not be left out of service on a monthly basis for telephone 
service.
    What the FCC did in interpreting that provision to include 
a capacity to levy a tax on telephone users for the purpose of 
construction grants to schools and libraries goes way beyond 
the intent of Congress. And as you pointed out, Madam 
Chairwoman, I think it calls into question the powers of the 
executive side of our government. It is the power of Congress 
to levy a tax for the purpose of providing a construction grant 
program. And it is the purview of Congress to decide the level 
of that tax and then also to oversee the spending of that 
program.
    Here's what the FCC did. It levied its tax, and it set up 
corporations to administer the spending of the money after it 
collected the tax, and decided then that these corporations 
would decide, in fact, administer a grant program to schools 
and libraries in America--corporations that are not subject to 
congressional oversight. So, in effect, it avoided the 
constitutional separation of powers. It avoided the oversight 
of Congress through its Ways and Means Committee, and its 
appropriation process in working this program through.
    The bill that Jerry and I and others have filed does 
several things at one time.
    One, it legitimizes the program. It takes out of question, 
the question of whether or not we ought to properly fund this 
program with a properly funded tax. It funds it properly with a 
tax we are already collecting since 1914, a tax that was 
imposed--three percent on telephones--that was imposed in 1914 
to fund World War I. If my history serves me right, that war is 
over. We can find a new purpose for that tax.
    Our bill repeals that tax over time, but leaves in place 
one-third of it, the one cent, that will properly fund the 
schools and libraries program. And then secondly, we repeal 
clearly any authority the FCC thinks it has to levy a so-called 
e-rate tax on telephone users. It repeals two taxes at the same 
time, sunsets the balance of the 1914 tax, leaving enough in 
place, $1.7 billion a year--in fact, escalating to $2.1 billion 
in this last year, enough in place over five years for us to 
carry out the program properly under congressional supervision 
with a tax that's clearly authorized without corporations that 
have been called into legal question by our own GAO.
    I submit to you that this is a plan that's a win-win for 
all of us. It gives great tax relief to Americans, repeals the 
e-rate tax, repeals two-thirds of an old tax, provides a 
funding mechanism for schools and libraries that is legally and 
properly funded, and subjects it all to the proper legislative 
oversight of this committee and the Appropriations Committee, 
and other education committees of Congress, as well as the 
Commerce Committee in its oversight of the NTIA. I suggest to 
you this is a good approach. It solves a lot of problems at one 
time, and gets rid of any legal questions about the sanctity of 
this program.
    [The prepared statement follows:]
    [GRAPHIC] [TIFF OMITTED] T3683A.004
    
    Chairman Johnson of Connecticut. Thank you, Mr. Tauzin.
    Mr. Blumenauer.
    Mr. Coyne. Madam Chairman----
    Chairman Johnson of Connecticut. Welcome to have you. 
Sorry.
    Mr. Coyne. I wonder if I could make an observation relative 
to what's been said here. To continue to refer to this tax as 
the Gore Tax I think is misinterpreting what the purpose of 
this hearing here today is. As the Chairwoman pointed out, the 
purpose here today is find out whether or not it is a tax, or 
it isn't a tax. But to refer to this as a Gore Tax I think just 
brings some partisan rhetoric into this hearing that is not 
becoming of the process here today.
    We could just as easily be calling this the Weller Tax in 
as much as Representative Weller voted, as I did, for this 
legislation, and maybe we ought to refer to it as the Weller 
tax instead of naming it after the Vice President.
    Chairman Johnson of Connecticut. Mr. Blumenauer, it's a 
pleasure to have you before our committee.

  STATEMENT OF THE HON. EARL BLUMENAUER, A REPRESENTATIVE IN 
               CONGRESS FROM THE STATE OF OREGON

    Mr. Blumenauer. Thank you, Madam Chair.
    And I appreciate your courtesy in allowing me to join with 
you. And the exchange that's been going on I think underscores 
the importance of why you should have this oversight series of 
hearings and testimony. I identify with the 1,800 schools in 
Illinois. I have schools who have applied for the e-rate in my 
district. You have them in yours. They are a part of the 
100,000 schools and libraries that Mr. Coyne referenced who've 
made application and who should, by rights, be receiving 
benefit for it. And the longer that we continue to dilly dally 
here in the Federal Government, we hold our children and their 
future hostage. And I think it's inappropriate.
    I want to state from the outset that I am a strong 
supporter of the e-rate. I believe Congress, in 1996, made that 
commitment, and it was with the clear expectation that the e-
rate was going to be funded out of the savings that were going 
to accrue to the telecommunication industry. In section 254, 
there was a notion that it would be part of the Universal 
Service Program, which been in place administratively for over 
60 years. Universal service provides services to high-cost and 
rural areas, and it is something that has, in fact, been 
litigated. The Federal Court District Court for the District of 
Columbia did already settle earlier in the game that the 
Universal Service program was not a tax. It was a fee because 
it was used to ensure affordable rates for specified services 
not designated primarily as a means of raising revenue. The 
addition of a support mechanism for schools and libraries does 
not change the fundamental nature of the Universal Service 
Program. And as was referenced by Mr. Tauzin, when this issue 
was under debate in the House, it was called before the 
parliamentarian and a ruling was made in the House that it was 
not a tax, it was a fee. And I think it is important for us to 
keep that in perspective as we move forward.
    Now we have these pesky little extra items that are being 
added to phone bills. You referenced, I believe, the one that 
AT&T has. There's a 93 cent surcharge for Universal Service 
activities. However, only 19 cents of that is attributable to 
the e-rate cost. The majority is for the Universal Service that 
they have, in fact, been collecting for over 60 years.
    It seems to me that it is important to allow the litigation 
to go forward as been referenced. But I think the evidence is 
clear from the legislative history, from what's happened with 
the Universal Service in the past, that it's very likely that 
it will be, in fact, determined to be a fee. It is important I 
think for this committee, however, to look at proposals that 
have been proposed by my colleagues to my left, because it may 
well be at some point in the game that we do want to have an 
alternative mechanism available, either because there are 
politics that intervene, as they have intervened to this point, 
or because there are better ways of going about it.
    I remain open to alternatives frankly at some point if 
they're necessary. But at this point, they aren't necessary. I 
have grave reservations about starting over again. The FCC has 
addressed what I think were legitimate complaints about the 
administration and structure. They have implemented the 
recommendations from the GAO report. They're ready to go, 
albeit at a scaled down level. If we somehow get lost in the 
rhetoric, the politics, try and score points, the children and 
the commitment will be lost in the dust.
    And I think that would be a mistake, because there are 
these 100,000 schools and libraries that have made application 
for e-rate discounts, as was envisioned earlier. They are ready 
to go. We have the ability as a Congress to move forward in 
cooperation with the administration and the FCC and do so. And 
I hope that in the course of your deliberations, it will be 
clear that that is the course that we should follow.
    I do have a great deal of information that I'm not going to 
bore you with that I would like to be made a part of the record 
if I could submit it.
    And I stand willing to answer any questions or engage in a 
conversation as you see fit.
    Chairman Johnson of Connecticut. So ordered. We will submit 
your material for the record.
    [The prepared statement and attachments follow. An 
additional attachment is being retained in the Committee 
files.]
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    Chairman Johnson of Connecticut. I think it is important to 
acknowledge that historically the Universal Service Charge has 
been dedicated to goals that have benefitted everyone. At 
times, it was used for the war effort. That certainly 
benefitted everyone. Deficit reduction--has the same impact on 
everyone. Universal connectivity of all the telephone lines 
benefits everyone. It means that anyone can call into any 
little rural remote area.
    The way the FCC interpreted their responsibility under this 
law has, I think, raised very fundamental questions. You point 
out that there was the expectation and I think particularly 
Congressman Tauzin on the Commerce Committee, it is my 
understanding that, and it was my understanding as a legislator 
voting for that bill, that our expectation was that this 
responsibility would be funded from the savings that we were in 
a sense giving to the industry. Is that not correct?
    Mr. Tauzin. It's important to understand that there are 
three things happening here, though.
    The first is the collection--the administration, rather, of 
a Universal Service Fee and helps us all have telephones.
    The second thing we intended in the bill was the 
administration of a second discount service, specifically 
designed for schools and libraries, to come out of the 
Universal Fee, to be funded by the savings. That's correct.
    Nowhere did we intend that the FCC would add a third thing, 
amounting to this grant program for construction inside the 
school.
    If I can maybe draw an analogy that helps us understand it.
    When America decided on a Universal Service Fee system to 
make telephones more affordable for rural people and poor 
people, nowhere in that system did we provide a tax collecting 
to go out and wire up the insides of houses, to put 
communication centers, to put a telephone in every room of 
every rural house, in the barn and in the tractor. This is such 
a separate concept of actually providing construction grants to 
go out and do the inside wiring and to put communication 
centers in all the buildings and offices of a farm.
    What the FCC did was to make that extension, that leap, if 
you will, of interpretation. What they said was not only are we 
going to provide discounted service for the monthly charges 
that a school or library would be assessed for access to the 
Internet, we're going to actually add another charge, a tax, 
which we will collect and administer through a corporation to 
grant money to the schools and libraries to do what?--to do 
construction programs inside the schools, to build 
communications centers, to put wiring into every class, to put 
wiring in the offices of the administrators. There are even 
applications to put them inside buses.
    Now, here's my point. That's a separate concept from 
Universal Service discounted rate that Congress never intended. 
And no one in an administrative agency ought to assume they 
have the power to tax and spend like that.
    Now, I'm not quarreling with the goal. I think it's a good 
goal. But it's our responsibility under the Constitution to 
both levy that tax, and we have in 1914, and to spend it 
properly, with congressional oversight and approval.
    One final thought, Madam Johnson. I think this is critical. 
For all of you who want to see schools and libraries wired up, 
understand what happened in the last several months. The FCC 
has now scaled back its program. It's trying now to decide 
which schools and libraries are going to get this money as 
opposed to which are not, in a scaled back program. The problem 
with that is that when we wrote our bill, in 1996, we created 
an entitlement. We did so on purpose. We didn't want politics 
played with this program. So we said that any school that filed 
a bona fide request for this discounted service had to get it. 
The FCC couldn't deny it. Now, they've interpreted that section 
to mean a grant of construction funds. Does that mean that any 
school, the richest in the America, that applies for this money 
has an entitled right to get that money if its a bona fide 
request. Maybe so. Do you get where I'm going?
    By interpreting it this one step further, the FCC may have 
created not only a legal mess over whether they can tax, but a 
legal mess over who's entitled to this money. Under the bill 
that Jerry and I filed, Congress would oversight the spending 
of this money. We could target it to the schools and the 
libraries around America that most need it, under a five-year 
program that would be administered properly through the State 
education authorities of our country. And I suggest that's a 
much sounder approach.
    Chairman Johnson of Connecticut. And, Mr. Tauzin and Mr. 
Weller, would your bill provide sufficient funding to meet the 
entitlement nature of the original vision of this program?
    Mr. Weller. Well, if you look at the projected funding 
that's provided, Madam Chair. In the first year with the 
funding mechanism, which is a legal funding mechanism that's 
already established in the statutes. In fact, you know, that 
telephone tax that was created in 1914, the one penny out of 
every dollar that we earmark for the school and library 
Internet access program, it's projected it would generate $1.7 
billion in the first year.
    Now, in the FCC's current program, as they suggest, they 
would provide about $1.2 billion, so we actually provide more 
money if you're looking at it from the standpoint of what way 
can we provide more money. And as we pointed out earlier, we 
solved the problem. There's the question about 
constitutionality of this tax that the FCC has levied that was 
not authorized by Congress, which we solve the problem by 
providing a legal funding stream.
    I have some figures here Mr. Tauzin just shared with me, 
but its budget estimates are in 1999, the legal funding stream, 
one penny out of every dollar in your phone--telephone use, 
would generate $1.7 billion in 1999. In the year 2000, $1.7 
billion. In the year 2001, $1.8 billion. In the year 2002, 
$2.--excuse me--$2 billion. 2003, $2.1 billion. Of course, now 
we--our legislation does sunset it five years from today. But 
if Congress were to determine, as you know, as Congress should 
have the right to do in our oversight, that we should extend 
it, we certainly could. For that five years, we provide more 
money than the current FCC tax.
    Chairman Johnson of Connecticut. And what exactly does your 
legislation allow the money to be used for?
    Mr. Tauzin. Specifically, for all the purposes that the e-
rate fund as devised by the FCC envisions for the construction 
grants to schools and libraries and rural hospitals so that 
they can, in fact, have communication centers wired up to all 
the classrooms or all the specific reading rooms or what have 
you in the library or the hospital.
    Chairman Johnson of Connecticut. Does your legislation 
retain the responsibility of the FCC to develop a discounted 
rate for libraries and schools?
    Mr. Tauzin. Yes. Yes, ma'am.
    Chairman Johnson of Connecticut. So the original purpose of 
the FCC as a rate setter, to develop a discounted rate for 
schools and libraries is retained under your proposal. What you 
are doing is creating a clear tax to fund a clear public 
purpose?
    Mr. Tauzin. Yes, ma'am. In it, the fee that's charged for 
all of us to have telephones. The telecommunications services 
is about $690 million. That's retained within the FCC 
authority. They still have the additional Internet access 
authority. It's about $88 million to make sure that schools and 
libraries can get cheaper rates for Internet service. All we do 
is remove this tax and spend authority with the construction 
grants and put that back under Congress where it belongs.
    Chairman Johnson of Connecticut. Thank you very much. I 
do--will just sort of conclude my initial statement about the 
use of the former Universal Service revenues being for 
universal goals, and point out that it does seem to be a 
problem; that the FCC levied a fee that everyone pays, butnot 
everyone benefits from.
    Mr. Tauzin. Madam Chairman?
    Chairman Johnson of Connecticut. Yes.
    Mr. Tauzin. Could I add one thing? I want to correct the 
record. The statement was that the charges that Americans are 
feeling for this e-rate--they're only 19 cents on the AT&T 93 
cent surcharge. According to the FCC's order, which I have a 
copy of, 36 percent of the total is for this e-rate. Thirty-six 
percent of the 93 cents is a 33 cent charge on Americans on 
AT&T. On MCI, it's 5 percent of the fee. When you multiply that 
out, a $1.80 is being charged under this e-rate. It's a 
significant tax on American telephone users, and as Jerry 
pointed out. I want to make this point as we conclude perhaps. 
This is the most regressive tax in America. The poorest of the 
poor use their telephones. And they're being taxed at these 
high rates, again, by an agency I don't think has the authority 
to do so.
    Chairman Johnson of Connecticut. Thank you. I think that is 
a very significant point.
    Mr. Coyne.
    Mr. Coyne. Thank you, Madam Chairman. I wonder if the two 
authors would tell us how you intend to fund the bill?
    Mr. Weller. Well, Mr. Coyne, as I stated in the testimony, 
our legislation, as when it relates to revenue, in 1914, there 
was a three percent tax that was levied on telephones. And at 
that time, of course, very few Americans had telephones in 
1914, so it was considered a luxury tax and the intention was 
to use that as a revenue source to finance the World War I 
effort. And like most taxes, the war is over with but the 
revenue is still coming in. And it goes into the general 
revenues. Then you also have the FCC tax that they levied on 
telecommunication services. Our legislation eliminates the 
FCC's tax and also reduces the World War I tax from three 
percent to one percent. The remaining one percent we earmark so 
we have a legal, already established revenue stream, which, as 
projected, would generate $1.7 billion to go towards the school 
and library Internet access program.
    Mr. Coyne. CBO, I am told, says that the legislation would 
reduce budget receipts in 1999 by $4.3 billion; and over a 
five-year period, $23.9 billion. Is that correct?
    Mr. Tauzin. Yes, Mr. Coyne, that's correct. In fact the 
industry had estimated $28 billion. OMB came back with the 
$23.9 billion. And that's the total offset required if you want 
to do this. If you want to repeal both two-thirds of that old 
1914 tax and also repeal this e-rate tax. It takes $23.9 
billion of offsets over five years--a little less than $5 
billion a year. And what we've suggested to our leadership here 
is that if we're going to do a tax bill that benefits specific 
groups of Americans included in that tax relief bill ought to 
be this general tax relief against the most regressive taxes in 
America, this tax on talking in our country, that all people 
pay, particularly poor people. In some jurisdictions, Mr. 
Coyne, taxes on telephones are higher than the total taxes on 
tobacco. And for a free speech society, that ought to be 
untenable. And what we're suggesting is that in a good tax 
relief package, $23.9 billion over five years ought to go to 
all Americans in the form of general tax relief on their 
telephone bills.
    Mr. Coyne. But you still feel that even with the reduction 
and the revenue coming in as a result of your legislation, we'd 
be able to fund the purpose of the schools and libraries?
    Mr. Tauzin. Absolutely, Mr. Coyne.
    Mr. Weller. If I could interject, Mr. Coyne, as I pointed 
out the one penny per dollar in telephone service, the 1914 
World War I tax, which we reduce from three cents per dollar to 
one cent per dollar, that remaining one cent is earmarked for 
the School and Library Internet Access Program--goes into that 
trust fund. And that is projected to generate $1.7 billion, 
which is a half a billion dollars more than what the FCC 
currently projects to spend this year.
    Mr. Tauzin. It theoretically could go on forever on our 
telephone bills. There is no sunset today. The FCC 
theoretically, if it has this authority, could it continue to 
collect this tax as long as it felt it had a purpose to collect 
it.
    Secondly, if a school came back in five years and demanded 
more money, I mean theoretically, they might be entitled to it 
if they have a bona fide request. They might have to raise the 
amount of this tax over time to fund the request that come.
    Suppose somebody file suit and says, we were denied funding 
and we think we were entitled to funding and they win that 
suit; then this tax has to continually go up. What we'd do is 
we'd provide what we think is sufficient amount of monies over 
five years trust funded. Then, as Jerry said, if this Congress 
feels like it wants to go further, it always has that right 
over that five year period to extend that program. But that's a 
legislative authority, not an agency authority.
    Mr. Coyne. Mr. Blumenauer.
    Mr. Blumenauer. It just seems to me that my colleagues are 
sort of arguing against themselves on this.
    First of all, over the course of five years, if you compare 
their proposal with what the FCC would do if allowed, there is 
a much larger portion that would accrue under the FCC that 
would meet the projected needs. The proposal that is being 
suggested by my friends is considerably less than what is 
needed--and they're criticizing the FCC for not doing enough. 
In fact, the only reason the FCC scaled it down was because of 
the firestorm of political controversy. But they have scaled it 
down and they would set the money out on a priority basis to 
get funds to those most in need first. But over five years, 
they would do more than that which is proposed by 
Representative Tauzin, who also proposes sunsetting the 
program. Furthermore, if you block grant to the States, there's 
no guarantee that you will get this same scope as we are 
talking about under the FCC proposal.
    Finally, if the suggestion is that you shouldn't include 
wiring to the classrooms, well, then you in your wisdom can go 
ahead and cut back. But I would submit for the record some 
report language that specifically references getting services 
to the classroom. I think it was a reasonable interpretation 
the gentlemen included in their legislation, and that's what 
America schools and libraries are expecting. I am confident in 
the final analysis this in what Congress and the Administration 
will do.
    Mr. Coyne. Thank you.
    Chairman Johnson of Connecticut. Mr. Blumenauer, just to 
that point, doesn't it concern you that if the FCC, the way 
they have constructed this fee, and the way they are planning 
to implement it, will put them in the position of reimbursing 
systems where they are building a new school and would have 
naturally have wired the classroom billing us for that wiring? 
I mean, if you do it with a block grant, States can make some 
judgments about whether some of the, frankly, more affluent 
communities that were already building a school where they 
would normally would have done this really needs that help or 
not. I can tell you, in the old innercity schools, which we are 
not going to absolutely replace in the near future, the 
construction costs of wiring to the classrooms are very great. 
But there are other suburban areas where, frankly, they are 
building new schools with a lot of state aid, where we do not 
need to use Federal resources to complement that construction 
grant.
    So one of the problems with the FCC program is that, since 
they are not accustomed to administering an appropriated 
program, they aren't equipped to make those decisions. If we 
either do that at the State level, I think we need to deal with 
that.
    One of the problems with the FCC extending its authority--
and it is, after all, a rate regulatory agency--and the things 
it does through rates, it does for everybody and everybody is 
to benefit. This is a situation of which benefits are 
differentiated across the scope, but everybody pays the fee. 
This is a very dramatic expansion of the FCC authority. I'm 
glad to know that some members have done some thinking about 
it, so that we can clearly ascribe a source of funding for what 
is a very important public purpose program.
    I think that one of the things that this committee has to 
be concerned with is how do we honestly raise money through 
taxes, but also it assures that it get to the right place at 
the right time to the people who really need it.
    Mr. Blumenauer. May I respond?
    Chairman Johnson of Connecticut. Yes.
    Mr. Blumenauer. Well, first of all, the innercity school 
that you talked about would get more benefit under the FCC 
because there is a scale from 20 to 90 percent, with the larger 
benefit rolling to those most in need. So a new suburban school 
in the FCC proposal would receive very little compared to the 
innercity school. The interpretation that my colleagues have 
just made would wipe out the wiring to the innercity school. 
They're complaining that that's what the FCC is doing.
    Chairman Johnson of Connecticut. I want to let the other 
members question, so we'll come back to this. I think 0 to 100 
is just about as fair as 10 to 90.
    Let me yield to Congressman Jennifer Dunn.
    Ms. Dunn. Thank you very much, Madam Chairman. I appreciate 
your putting together this hearing today because I, for one, 
have real concerns about the assault on constitutional 
authority that I've seen in the last few years, whether it's 
the American Heritage Rivers Act or it is second amendment 
rights taking those away from the State's jurisdiction. I have 
a real concern and I think it's necessary for us to discuss 
this sort of constitutional jurisdictional issue.
    I like very much the bill being proposed by you, Mr. 
Tauzin, and you, Mr. Weller. I think it gets jurisdiction back 
to where it belongs, which is the Ways and Means Committee 
under section 1 of the Constitution and the Congress. I'm very 
pleased to hear the detail on your bill.
    I think, Mr. Blumenauer, where you described this as a 
user-fee versus a tax, very clearly that has not been declared 
yet by the appeals court and it lies in the 5th circuit court 
of appeals. Right now I think we will have our answer 
eventually, and I tend to believe that the FCC have gone a step 
too far, but will wait to make my decision until I hear about 
that.
    I have concerns generally about taxation and the United 
States Government. The fact that this luxury tax was imposed in 
1914 when few people had telephones, it was definitely a surtax 
or a luxury tax on those people who were able to afford 
telephones. And now, how many decades later it still is in 
place. I think we must continue to do very solid and detailed 
oversight on this sort of taxation.
    The amounts of money vary that we have heard from you. I 
have a concern on Mr. Tauzin and Mr. Weller. I wonder if you 
could please explain for me if we are able to get by this FCC 
Gore Tax and into the proposals that you've included in your 
legislation? How do you make up for those revenues--that 2 
percent of revenue--that has before flowed into the general 
funds and now would be eliminated as you phase out that portion 
of the tax?
    Mr. Tauzin. Well, first of all, let me--if everyone is not 
aware or acknowledged that, and I've cosponsored an earlier 
bill that would completely repeal that 1914 tax--before this e-
rate problem became a problem that we saw an opportunity 
perhaps to correct with it. Let me concur with you that a 1914 
luxury tax on telephones is long overdue for appeals. Our bill 
does that over repeals some immediately, two-thirds 
immediately, one-third at a later date.
    Secondly, repealing a tax that is going to the general fund 
obviously requires an offset. Repealing the e-rate, we found 
out, also requires an offset because the e-rate collections 
were counted in the budget estimates. The total again is about 
$4 billion over five years--by a little less than $5 billion a 
year. That has to come out of budget estimates, budget 
spending, and over in the course of our deliberations between 
now and the end of this session.
    Our plan is obviously to get the leadership, and hopefully 
the chairman of your committee, to accept the notion that in 
any general tax relief bill that this is a good place to give 
Americans tax relief and fund it indeed out of surplus that we 
expect to come to the Government on top of what Social Security 
surpluses are being generated, and would be protected under our 
general plan.
    In a nutshell, we would hope that this is part of the 
general tax relief bill, and that this $5 billion a year is 
funded as a general tax relief for all Americans, in addition 
of whatever special tax relief is provided in that bill, out of 
surplus that we expect to generate over the next five years 
over and above what Social Security trust fund surpluses are 
generated and would be protected.
    Ms. Dunn. Good. I thank the gentleman. Mr. Weller, did you 
want to comment on that?
    Mr. Weller. Well, just actually to build on a comment that 
my friend Billy Tauzin made, but responsed to my friend, Mr. 
Blumenauer's comment. We were talking in response to Mrs. 
Johnson's question regarding urban schools andsuburban schools, 
and I represent part of the City of Chicago, as well as the south 
suburbs and a lot of rural areas. Of course, I think of LaSalle Peru 
High School, a building which I think was designed to withstand a 
nuclear strike--the building is a fortress; it was built over a century 
ago and it'll last a lot longer than most buildings in the District 
that I have the privilege of representing.
    But in talking with the school administrators, and their 
goal of course is to give every child access to the computers 
and the Internet. What I think is wonderful about the 
discussion we've had this morning, we've moved beyond the 
question of whether or not we all work towards the goal of 
giving every child access to computers and the Internet. I 
think we all have agreed, and with the comments this morning. 
The question is how do we solve the problem in getting there. 
And with the FCC's tax, of course we have a constitutional 
question, and of course the legislation that Mr. Tauzin and I 
offer solves the problem by providing the legal source of 
revenue, and accomplishes every goal that the FCC suggest we 
accomplish with their goal.
    Of course, in the case of LaSalle Peru High School, they 
need $1 million really to put in the wire, the fiber, and of 
course the hardware so they can provide computers and Internet 
access for every child. Our program would make that available. 
Of course, we block-granted to the States and then the State of 
Illinois--in our case, the Illinois State Board of Education--
would administer in the application process and distribution of 
those funds. This follow our philosophy which is that those 
that are closest to the communities and the schools and library 
districts being served can best make decisions in allocating 
those funds. That's why we intend to do this, rather than 
having a regulatory agency, which is what the FCC is.
    The FCC was not created as an agency to provide grant money 
to schools and libraries. The FCC was put in place to regulate 
telecommunications. We of course solved the problem of helping 
our schools, and helping our libraries provide access to the 
Internet by providing a legal revenue stream--$1.7 billion in 
the first year--which is more than the FCC indicates that they 
would provide. And, of course, we get that money out to the 
States, through their State Education Authority to allocate 
those funds to local school districts and libraries. It's 
common sense, it's legal, and it would work. it is consistent 
with a lot of other funding programs they already have in place 
for education.
    Ms. Dunn. Thank you very much, Madam Chairman. It is the 
belief of this Congress that we not increase taxes, and 
certainly we would not like to have taxes increased arbitrarily 
by an administrative agency. That's something for this 
committee first to put great thought into. So I appreciate your 
defining what the nut of this problem is for our hearing today.
    Thank you very much.
    Chairwoman Johnson of Connecticut. Thank you. Congresswoman 
Thurman.
    Mrs. Thurman. Thank you, Madam Chairman.
    I'm going to follow up on this. If what I read is that this 
was passed through the telecom bill, how are we saying that 
this was not an authorization for Congress to raise these 
dollars? I understand there might be a law suit on this to make 
that determination, so quite frankly right now, we're assuming 
something without any legal terms for this. I don't understand 
why we are saying that they've done something that we're not 
sure about yet. Maybe you can explain that. I don't know.
    Mr. Tauzin. Ms. Thurman, let me try again. The problem is 
basically in our universal service fund concept, we've always 
thought of universal service as a subsidy system where you and 
I perhaps may be charged a subsidy. But our poor neighbor, our 
rural neighbor, might enjoy the use of a telephone. That 
enhanced our telephone.
    Mrs. Thurman. And we did that, though?
    Mr. Tauzin. Yes, we did that a long time ago?
    Mrs. Thurman. And we did it again and redid it again in 
1996 with the telecommunications?
    Mr. Tauzin. We did it again in terms of Internet services. 
We not only said it's a good idea for everybody to have 
telephones that I telephone and yours is more valuable, all 
Americans are connected. We also said in the 1996 act is look, 
we're entering a new age of communications. Internet services 
are not only good and useful, they're going to be critical to 
educating our children. So we said for heavens sake, let's make 
sure that every school and library has the ability to access 
Internet services at discounted rates. The same way we wanted 
to make sure that every rural person and poor person had access 
to telephone service at discounted rates. That was our intent.
    What the FCC did was to take that very legitimate purpose 
and add another one on to it. By defining that reference access 
to the classroom, they decided well, let's put together a 
program whereby the telephone companies will collect money from 
their customers. We will collect it through a corporation, in 
fact three of them they set up, that will then give grants to 
schools and libraries to do what inside construction. It's a 
little bit like taking the universal service fund that we've 
enjoyed all these years and saying we're going to interpret it 
now to allow the farmer out in rural America, to reconstruct 
his house so that every room in his house has a telephone and 
has all kind of new services--that his barn is equipped with 
telephone services, his tractor now is equipped with telephone 
services.
    We never interpreted universal services to include 
construction grants. That's the problem. The problem for us now 
is how do we take this good purpose and clarify any questions 
about legal funding also preserved for you and I, our 
constitutional function of taxing and spending on the Nation 
for legitimate purposes like this. Hence our bill.
    What we're saying is that whether or not the 5th circuit 
decides it's a fee or a tax. I think it's a tax; I think the 
5th circuit is going to decide that. Why not clarify that? Why 
not get rid of this question about whether these corporations 
are legal or not?
    Mrs. Thurman. But that would only be on the construction 
part of it?
    Mr. Tauzin. Yes, only on the construction part.
    Mrs. Thurman. Okay, so we'll move on beyond that. So now 
what happens then to doing what was intended to do, which was 
to open up the telecommunications for schools and libraries. 
You just totally get away with, even from the 1914 to even what 
was passed in 1996?
    Mr. Tauzin. Yes.
    Mrs. Thurman. Your surplus dollars for the purpose of 
Interneting schools throughout this Country?
    Mr. Tauzin. What we're saying is that the FCC should 
provide discounted rates of service for every classroom 
inAmerica where the kids are going to be connected to the Internet and 
learning on it. So that's true. The FCC should provide discounted rates 
of service, the monthly charges you pay, for Internet access to every 
hospital in America so that we all have the advantage of telemedicine, 
which is going to save us all money and save many lives.
    We said that the same is true for every library in America. 
That no library ought to suffer for the lack of Internet 
services because the rates are too high. There ought to be 
discounted services for them. Yes, the FCC continues to do 
that. It simply doesn't have the power to tax for this 
construction program. You and I would have that power through 
this bill.
    Mrs. Thurman. When you put your bill together and you said 
that you'll take two-thirds of the money or $24 billion 
whatever your amount was. In putting your numbers together, how 
have you made the assessment for the needs for this Country? I 
mean, have you got this down to a formula, do we know--is it 
going to be similar to what schools and libraries have had 
before? 20-80, 90-10, whatever based on their disadvantage? I 
mean, how have you made this assessment?
    Mr. Tauzin. What we did was to, first of all, determine 
that 1 cent out of this 3 percent tax was adequate to provide, 
as Jerry pointed out, 1.7 escalating to 2.1 billion each year 
for five years. We looked at what the FCC originally intended 
in the e-rate proposal and we recognized that this was more 
money than the FCC had originally intended to collect--very 
close to those numbers. We said, here is a fund that can do 
that.
    Secondly, as was pointed out, the FCC is not scaling back 
its program. Under our proposal, you wouldn't have to scale it 
back. You could do full funding.
    The third thing is we wanted to make sure that in this full 
funding that there was not going to be an uncapped, unlimited 
amounted that might be collected; that we would have some 
control over that. So, in essence, as we administer the grant 
program through the States, if the States present to us 
legitimate needs as Jerry pointed out, we can expand it. If the 
States are presenting request that aren't as legitimate for 
rich schools, etc. that don't really need this money, then we 
can literally live with our cap or even limit those spendings.
    Ms. Dunn. So didn't that concern you a little bit if what 
the chairman said earlier was that there was a universal need, 
universal goals for everybody, and then we do get into the 
politics, a little bit of divvying these dollars up State by 
State. I mean, you're making mention that well if they really 
need it or if they don't need it or whatever. I mean, I'm a 
little concerned the way you phrased that. Maybe that's not 
exactly what you mean, but I don't want to get into the 
politics. This is about children; this is about our libraries; 
this is about access.
    Mr. Tauzin. Good point. That's why we wrote the language in 
1996 as an entitlement. Let me say it again. That is why we 
carefully said that no school, rich or poor, who filed a bona 
fide request for discounted rate of service would be denied. We 
wrote it as an entitlement so there wouldn't be any politics. 
There wouldn't be any calling of names on this proposal or 
anything else. This would be a simple, straight forward. The 
school provides a bona fide request for discounted service for 
cheaper rates per month for service to the Internet. They were 
going to get it from the FCC. The FCC could not tell one school 
or another you don't get it. That's why we wrote it that way.
    But now we're talking about something different. We're 
talking about a construction grant program, and what we're 
saying there is, and the FCC has finally come to that 
conclusion too, that when you come to construction grant 
programs, you could have unlimited request for dollar. But you 
have to have some kind of assessment of need. The FCC is trying 
to work their way through that. What we're saying if we 
properly fund this program, properly administer it through the 
NTIA which is our technology, telecommunications technology 
grant agency, and then let the State and their State 
authorities design their programs for their own need, that 
we're more likely to achieve that result without an open-ended 
program like the FCC has potentially created out of 
misinterpreting the act.
    Chairman Johnson of Connecticut. Congressman Hulshof.
    Mr. Hulshof. Thank you, Madam Chair. I was flipping through 
an old Farmers Almanac the other day and saw this quote that 
said, ``If Patrick Henry thought that taxation without 
representation was bad, he ought to see taxation with 
representation.'' [Laughter.]
    And yet, I echoed the comments that my colleague from 
Washington State made that ultimately the power of taxation 
should rest with those of us who are here.
    Mr. Blumenauer, I wasn't here in 1996 to vote for or 
against the Telecommunications Act, and regardless of what the 
parliamentarian's decision was at the time, whether it was a 
user-fee or an excise tax, in the Hulshof household, one of my 
responsibilities is to pay the bills. This past weekend, I 
wrote the check for our family to GTE and I looked at the bill, 
knowing this hearing was coming up, and GTE tells me that I'm 
paying an excise tax. Do you disagree?
    Mr. Blumenauer. No, you're paying an exise tax. That's been 
on the bill and it's been a separate line item. What we're 
talking about is the e-rate which is separate and distinct from 
that. You've been paying your monthly bills with universal 
service for as long as you've been writing checks. And 
appropriately so because it is contributed to the entire 
universe and it's made, as Mr. Tauzin said, the entire system 
more valuable. This system of telecommunications will be made 
more valuable by having all of our children have access to it. 
That doesn't make it a tax.
    Mr. Hulshof. Well I think that everyone here that's been 
discussing that question and those of you responding, we share 
the same goal. It use to be when I was in school doing a school 
project, you went to the local library and paged through books 
and now with the click of a mouse you have a wealth of 
information that wasn't there before. I think the intent and 
the goal of everyone is the same.
    I want to give you a chance to respond because Billy was 
making a point earlier, and I've noticed that you were not in 
agreement through your nonverbal reaction. Congressman Tauzin 
makes the point that the e-rate Program is now being 
administered beyond the scope of universal service; it's being 
administered through an improper FCC agent--I'm paraphrasing 
his words of course. It's being funded well above its 
demonstrated needs. And fourthly, that it is open-ended. Now, 
what disagreement do you have with any or all of those 
premises?
    Mr. Blumenauer. I just finished explaining why I think this 
application of the universal service fee extensiondoesn't 
transmit it into a tax. Let me just reference the last two points that 
you made.
    First of all, with all due respect, the information I have 
is distinctly different from my two colleagues. The 
demonstrated need for what's in the pipeline now is far above 
the $1.9 billion that the FCC has earmarked. They've scaled it 
down as a result of all the controversy that's been going on. 
They had originally identified $2.25 billion for the year, it 
would be something like $3.35 billion through June of 1999. 
They've scaled it back to $1.9 billion. The gentleman's 
proposal would be $1.7 billion, and then go on over time. So 
the demonstrated need for what's in the pipeline, the estimate 
is higher than what the FCC is doing; and the $1.9 billion the 
FCC is proposing is higher than the $1.7 billion that the 
gentleman had suggested. That was the point that I was trying 
to make.
    You've suggested that somehow that it's the rich districts 
that are going to be accruing the benefit under this, and we 
need to be concerned about the innercity. That's precisely what 
the FCC has been attempting to do, by giving a larger payment 
subsidy to the innercity school to the rural poor schools that 
have a much lower connection. And as the chair mentioned, some 
of these innercity schools have to have wiring or else it is 
illusory to assume they have Internet access because you'll 
continue to have it as it is today, the 73 percent that have 
Internet access have access mostly to the principal's office. 
It's only 27 percent of the classrooms. You need a proposal 
like this that gets it to the classrooms.
    Mr. Hulshof. Let me reclaim because I see my time is about 
to expire. No that's okay. Mr. Tauzin, did you want to quickly 
respond?
    Mr. Tauzin. Quickly, let me, first of all, thank you for 
being an original cosponsor.
    Mr. Hulshof. Proud to be on the bill.
    Mr. Tauzin. Secondly, the answer is that the so-called 
demonstrated need figure includes all these rich school 
request. The FCC is now admitting they're going to fund at a 
much lower percentage rate of grant. That number they cited to 
you is an unrealistic number. It includes requests that are 
extraordinary to even wire up and connect to the Internet 
school buses in some districts. So keep in mind, the number we 
provide, nearly $2 billion a year over a five year period is 
quite adequate to the real needs expressed already by 
applications to the FCC.
    Mr. Hulshof. I appreciate that. As a concluding comment, 
Madam Chair, and conversations with a young man, a 27 year old 
man who's an Internet provider back home in Hannibal, MO, who 
for other reasons because of the telecom bill is now $11,000 a 
year in fees/taxes who came to me an said, ``Look, I would 
prefer much better that at least you consider, and either vote 
up or down these increases, these taxes, so that I can at least 
express my opinion at the ballot box every two years because 
that's why we send people to Washington to represent us.''
    I appreciate each of you being here. Thank you, Madam 
Chair.
    Chairman Johnson of Connecticut. I think, Mr. Blumenauer 
that your previous response demonstrates that what the FCC has 
done is unprecedented in terms of the scope of the exercise of 
its authority. For it to exercise its authority to provide a 
discounted rate is harmonious its statutory authority and with 
its traditions. For it to get itself in the position of 
administering what is in effect an appropriated program 
supported by a tax is to not only extend their scope of 
authority beyond their law it seems to me, but also face them 
with administrative responsibilities that they have never had 
before. And whether this should go through the Commerce 
Department and in the block grounds, or whether it should go to 
the Education Department and down through one of their 
mechanisms.
    We do have in the Federal Government already established 
bureaucracies who have long experience in thinking through how 
do we best allocate these and whether it's $1.8 billion or $2.2 
billion. So it is disturbing that the FCC should be trying to 
make this determination in an area which we actually have a 
whole department established to deal with the educational needs 
of our schools throughout America and have a much greater body 
of experience in how you would distribute and administrate 
these dollars.
    I think part of what we're dealing with here is that when 
you, in a sense, levy a tax for a major public purpose, and 
this is a major public purpose I don't think anybody would deny 
that hooking up all of our schools, libraries, and hospitals is 
not a major public purpose. That with that comes a lot of 
complicated decisions and a lot of investment in a bureaucratic 
delivery system. So it's important for us to really engage in 
this issue as a fee to support a discounted service. Or is this 
a tax to support a program to implement construction grant. 
These are very different entities with different sources of 
legal authority, and they do have enormous implications for the 
overall bigger picture of Congresses obligation to tax the 
people of America to fund programs that fulfill our public 
purposes. And to be accountable for where we raise the tax and 
where they go.
    A fee upon a discounted service in the context of 
regulation is a very different animal both legislatively and 
constitutionally from a tax purpose. I think this discussion 
has been very helpful to show the scope of this program and the 
difficulties that scope represents. I think we are all in 
agreement that we would want to have money enough to do the 
job. I personally would like to see us be able to do it as an 
entitlement because you don't want schools to wait two years to 
do something that they need to do now. So there is a lot more 
that has to be delved into in another realm.
    The focus of this hearing is important. Is this is a tax or 
a fee because it helps us deal with it. Is this going to be an 
appropriated program of which we're going to deliver through 
the appropriate bureaucratic mechanism and oversee its 
accomplishment of its goal. Or is this rate regulation and 
discount subsidies over endless periods of time, which it is. I 
mean, the rate regulation, the discount rates will be forever. 
They are not for five year.
    Mr. Coyne.
    Mr. Coyne. If you would allow me at this point, I think at 
this point a clarification here would be helpful relative to 
the issue of fee versus taxation.
    In AT&T, the way they are billing their customers, what 
they are putting into the bills currently as of July 1998, and 
I quote from their bill that says, ``The universal connectivity 
charge that appears on your bill is being assessed at a monthly 
fee of 93 cents per account, instead of the previously 
announced 5 percent monthly charge. This fee--and they refer to 
it as a fee--supports the extended universal service fund which 
now not only helps provide affordable telephone service, but 
also gives schools andlibraries access to the Internet. The FCC 
has also reduced the fees AT&T pays local phone companies to connect 
toll calls. That's one reason our prices for long distance service have 
continued to come down over the last decade.'' Then they give a phone 
number for information if you want to call, an 1-800 number.
    Chairman Johnson of Connecticut. Great, and I appreciate 
that and I have a copy of their bill here. The issue remains as 
its appropriately described as a fee and are the purposes for 
which it is used are traditional purposes that fees are used 
for. Is the delivery mechanism a traditional fee-delivery 
mechanism? And more importantly on the issue of fee versus 
taxes, does everyone who pays the fee benefit from paying the 
fee, or do only selected groups benefit from pay the fee? And 
does everyone who benefits pay the fee? Because in this case 
not necessarily everyone who benefits pays the fee.
    I appreciate your recognition of the way this is worded, 
but I think the problem is really profound and not one we 
should protect ourselves from.
    Because we have other people waiting to testify, let me 
move on to Mr. Neal.
    Mr. Neal. Thank you, Mrs. Johnson, thank you very much. Not 
being a member of the subcommittee, I appreciate you granting 
me some time.
    I think that the panelist have all indicated that the goal 
of the e-rule program was desirable. I could just maybe direct 
my question to Mr. Tauzin. Could you recreate quickly where 
this provision was inserted and at what time it was inserted?
    Mr. Tauzin. Are you talking about in legislative history?
    Mr. Neal. Yes.
    Mr. Tauzin. I would probably make a mistake in doing that 
without reference to the documents right now. I can only tell 
you that through the creation of the act, the 1996 Act, it 
culminated over about four or five attempts. We passed the bill 
several times in succession. The final act in 1996 signed into 
law did contain clearly the instruction of the FCC for 
discounted service. Without reference to the documents, I 
couldn't tell you whether it happened in the subcommittee, the 
full committee or in the conference committee. But I'll be 
happy to supply that information to the committee.
    Mr. Neal. I think it might have happened at conference. Do 
you think that----
    Mr. Tauzin. I think that the final language agreed to in 
conference----
    Chairwoman Johnson of Connecticut. If the gentlemen would 
yield, we did have earlier testimony on this and the committee 
can clarify this for you.
    Mr. Tauzin. But I'll be happy to submit the chronology. I 
would also like if it would help you to submit for the record a 
copy of the letter from Chairman Bliley to the FCC bitterly 
complaining about the FCC's attempt to force the carriers to 
hide this fee in their rates without showing the customers that 
it was being collected.
    Mr. Neal. The only point I'm trying to raise is that we've 
agreed that the goal is desirable and it's interesting that Mr. 
Weller made reference to the Gore Tax, when you could also 
suggest that Senator Snow from Maine was a full participant. So 
maybe we could appropriately call it the Snow Tax, if that's 
the rhetoric we're going to apply in hearings like this when 
there should be a better attempt to crystallize the issue so 
that we can intelligently focus on the issue for the American 
people and we can help them help us make a determination.
    There are unintended consequences of the Telecommunications 
Act, including cable TV rates which none of us thought would 
increase at such a fast pace. My point is simply this, that in 
forums like this, there is an opportunity to elevate the public 
debate. We don't elevate the public debate by suggesting things 
like the Gore Tax when there are Republican members who were 
fully aware of what was going to take place. In fact, an amicus 
brief filed in the 5th Circuit by Senator Snow, as well as 
Senator Rockefeller.
    I don't know what purposes are achieved when we come into a 
forum like this and suggest that it's the Gore Tax. Maybe you 
could clarify that for me in your testimony.
    Chairman Johnson of Connecticut. Mr. Neal, if we may. We 
are terribly behind and I really would like to go onto to the 
next----
    Mr. Neal. Mrs. Johnson, I appreciate that.
    Chairman Johnson of Connecticut. We've been through that 
before. Neither the chairman nor the ranking member are 
characterizing this discussion as anything other than a very 
importing discussion about where taxing authority lies in the 
constitution and in this body. And how we hold ourselves 
accountable for the raising of revenues and the expenditure of 
those revenues. And while I appreciate your point, and I regret 
that people characterize the tax one way or another, we have 
been through this several time in this hearing. We've been at 
this an hour and a half and we have yet to call the 
commissioner.
    Mr. Neal. I understand the suggestion that you made, Mrs. 
Johnson, and do appreciate the point on how this issue should 
be characterized and the suggestion is fully accepted. Thank 
you.
    Chairman Johnson of Connecticut. I'd like to move on now. I 
thank the panel very much for your input.
    Excuse me. Stop one minute. Sorry, I forgot that Mr. 
English arrived, and I will recognize him before we dismiss the 
panel, if the three of you could remain for a moment.
    My apologies, Mr. English.
    Mr. English. And I thank the chair for the opportunity. 
I'll keep my questions relatively brief. Having examined this 
issue, it seems to me that the e-rate is a tax and I would like 
to get some comments on that in a moment, but I want to first 
raise a couple of questions with my colleague, Mr. Tauzin, who 
has been pushing for a national consumption tax very 
eloquently. Obviously it had not occurred to him that we had 
given the FCC the power to impose one unilaterally.
    I wonder in you view, is the e-rate funding mechanism 
essentially an open-ended tax and is your tax proposal open-
ended?
    Mr. Tauzin. First of all, to highlight your comment, you 
know that I'm pushing for a general tax, not a special luxury 
tax. In fact we repeal most excise tax.
    I think the idea of special excise taxes is damaging to the 
success of programs like telephone service for all Americans. 
It's the most regressive way to treat this issue. So I think 
it's consistent with our approach.
    Secondly, our plan is not open-ended. Our plan is a five 
year plan. Congress would have to extend it after five years if 
they wanted to. Our plan says that for five years we would 
retain the revenues from one-third of the 1914 luxury excise 
tax that was placed on telephones. And for that five year 
period that one-third of those revenues, about 1.7 billion a 
year escalated to 2.1 billion we estimate, would go into a 
trust fund for the administration of this construction grant 
program for schools and libraries. At the end of five years, 
that one-third of taxing authority in the trust fund would 
terminate unless extended by Congress. So that our plan 
terminates completely two-thirds of that old 1914 tax, it 
terminates completely the e-rate tax imposed by the FCC. So 
Americans would see immediately the benefit of $5 billion of 
tax relief per year. But it retains one-third of that old 1914 
tax, but only for a period of five years, sunsetting at that 
point unless extended by Congress.
    Mr. English. And I approve of the gentleman's approach 
because you are getting at one of the things that bothers me, 
and that is the huge accretion of excise taxes that the Federal 
Government has imposed over the years and has not reassessed in 
a long period of time.
    In your view, and examining your proposal, why do you feel 
we need to create a trust fund in this case?
    Mr. Tauzin. Well, for two reasons. Number one, I think it's 
very clear that because of the FCC's action to create the e-
rate, there has been a very large outpouring of expectations 
from the American education community and from rural hospitals 
and libraries of America for this assistance.
    Number two, I think it makes sense. I think we ought to 
help if we are going to take full advantage in the 1996 act of 
the educational opportunities that are offered us in long-
distance learning through the Internet, if we are going to have 
telemedicine really save us money in our Medicare, Medicaid 
programs, and save money for all Americans in their insurance 
bills, we ought to make sure that no hospital, no library, no 
school is not properly equipped to take advantage of all these 
efficiencies that the Internet is rapidly bringing to us in 
these critical areas.
    So, for the reason that I think it is a legitimate purpose; 
and number two, that the expectations have been developed, I 
think we ought to make sure that as we repeal one, we are 
leaving no doubt that we are establishing a trust fund to carry 
out the purposes that were intended by the e-rate program.
    Mr. English. Thank you. Madame Chair, I have a number of 
other questions, but this panel has been here a long time. I 
appreciate their testimony and I appreciate the opportunity to 
engage a little bit on this debate. Again, I believe that the 
e-rate program clearly is tied in to a tax, rather than a fee, 
and I believe should have come under the jurisdiction of this 
committee.
    I appreciate your efforts to reassert our role in this 
process, and I thank the panel.
    Mr. Tauzin. Thank you, Mr. English.
    Chairman Johnson of Connecticut. I thank the panel very 
much.
    I would like to call forth Commissioner Harold Furchtgott-
Roth of the Federal Communications Commission, and Christopher 
Wright, the General Counsel of the Federal Communications 
Commission.
    Mr. Furchtgott-Roth, if you would proceed, please.

  STATEMENT OF HAROLD FURCHTGOTT-ROTH, COMMISSIONER, FEDERAL 
                   COMMUNICATIONS COMMISSION

    Mr. Furchtgott-Roth. Madam Chair, distinguished members of 
the House Ways and Means Committee, it is a great honor for me 
to appear before Congress and to appear before this Committee 
in particular. I have a prepared statement that I would like to 
have entered into the record.
    Even the most casual observer of Congress knows of the 
importance of the Ways and Means Committee. It is not just that 
most Members want to be on this Committee. It is not just that 
it has jurisdiction over important issues ranging from taxes to 
social security. And, it is not just that it has a beautiful 
committee room.
    This Committee is important because it is rooted in the 
Constitution. Its jurisdiction is squarely in Article I, and 
its singular importance within Congress and within the House of 
Representatives is guaranteed by the Origination Clause. ``All 
bills for raising revenue shall originate in the House of 
Representatives.''
    Why was this sentence, of all sentences, included in a 
Constitution remarkable for its brevity? The answer lies in a 
theme that influenced both the founding of our Nation and our 
history ever since. Americans should be taxed only, only by 
elected representatives. There should be no taxation without 
representation, and the House was originally the only popularly 
elected body.
    Taxation and overregulation of commerce characterize the 
intolerable acts that the British Parliament, without American 
representation, placed upon the American colonies that 
precipitated the Revolutionary War. Disputes over taxation and 
duties have scarred much of American history since.
    This Committee has a solemn duty under the Constitution. 
First, it alone must originate legislation that results in 
taxes and revenue. Second, as a corollary, it alone must ensure 
that other elements of the Federal Government, whether in 
Congress or elsewhere, do not create taxes or raise revenues 
without specific and direct authority from legislation 
originating in this Committee.
    It is with respect and admiration, reverence and humility 
that I come before this Committee. I have been asked to comment 
on whether the e-rate program, as implemented by the FCC, is a 
tax or a fee. Let me note that my views on this topic are my 
own. They do not represent a majority of the FCC. I have 
articulated these and related views in a series of statements 
and dissents over the past several months.
    But my views are not outside the mainstream. The Republican 
and Democratic leadership of both the House and Senate Commerce 
Committees have written to the FCC expressing their dismay at 
the entire implementation of universal service and suggesting 
bluntly that the Commission start over.
    The underlying statute, the Telecommunications Act of 1996, 
does not, in any way, establish authority for taxes. During the 
legislative process, the underlying bill was vetted by the 
Parliamentarian to ensure that there was no language that was 
properly under the jurisdiction of this Committee. The Act can 
and should be implemented in such a manner that no revenues are 
raised and no fees are promulgated that are, in fact, taxes.
    The issue before this Committee is not whether its 
jurisdiction has been usurped by another Committee of Congress. 
The answer to that question is an unambiguous ``No.'' The issue 
is whether the jurisdiction of this Committee has been usurped 
by an independent agency.
    Let me be clear: the issue before this Committee is not one 
of policy. The issue is not whether spending Federal money on 
computer equipment and services for schools and libraries is a 
good idea. Everyone likes education. Many, perhaps most, 
Americans would like the Federal Government to spend more money 
on education. As the father of six children, I would only 
welcome more Federal money to subsidize my children's 
education.
    But my responsibility as a Commissioner of the Federal 
Communications Commission, however, is not to set tax policy or 
to set Federal education policy, or frankly, even to make 
telecommunications policy. Congress, not the FCC, sets Federal 
policy in all areas, whether education or telecommunications. 
The responsibility of the Federal Communications Commission is 
simply to follow the Communications Act and other laws 
governing the FCC.
    Perhaps collecting more money for telecommunications 
carriers and customers to support additional spending on 
infrastructure for schools and libraries is a good idea. The 
authority for that good idea, however, should be based in law 
and should originate in this Committee. To the best of my 
knowledge, it has not.
    In my prepared statement, I explain why the FCC's 
implementation of schools and libraries program resulted in the 
creation of a tax. Fees for schools and libraries are assessed 
at a fixed percentage of both the interstate and intrastate 
revenues of telecommunications carriers, but the receipts are 
disbursed primarily to nontelecommunications carriers to 
provide ``internal connections'' for schools and libraries.
    Please understand what this means. Every telephone company 
in your district is paying a tax on every customer's telephone 
bill. The receipts from this assessment are not used to benefit 
the consumer directly by expanding the number of low-income or 
high-cost consumers who remain on the telecommunications 
network only as a result of the fee. There are other universal 
service programs for this purpose, and those programs are 
clearly based on fees, not taxes.
    The receipts from this fee do not defray the costs for the 
carrier to provide telecommunications service and thus, 
ultimately benefit the telecommunications consumer. There are 
Federal and State programs for that purpose, which are not 
taxes.
    Some of the schools and libraries' fees do go for 
telecommunications services under section 254(h)(1). Support 
for these services, while reasonable people may differ on 
priorities, are clearly based on fees, as they defray the cost 
of service to carriers.
    But the vast majority of funds from the schools and 
libraries corporation could not be supported under section 
254(h)(1) alone. They require an expansive, and I believe, 
unlawful interpretation of section 254(h)(2) to provide 
subsidies for internal connections of schools.
    And let's be sure the discussion is not just about wire and 
fiber. It is about sophisticated computer equipment, about 
servers, about routers that cost tens of thousands of dollars 
each, and that the computer industry of America comes to the 
FCC and lobbies for with their hands out. Of the requests for 
1998, $1.3 billion of the total of $2 billion was for this 
hardware.
    The telecommunications customer does not benefit from this 
transfer to the computer industry, nor does the 
telecommunications carrier. It is unambiguously a transfer to 
schools, libraries, and computer companies without any benefit 
to those paying the fee. It is, in short, a tax.
    What authority does the FCC claim to establish this tax? 
The usual citation is section 254(h)(2). This section 
authorizes the FCC to establish rules to enhance access to 
advanced telecommunications and information services. Based on 
this language, the Commission established rules that have led 
to requests for Federal subsidies of more than $1 billion for 
computer equipment.
    This sentence does not require any Federal funds. It does 
not require any discounts. It does not require taxes. It does 
not require anything other than rules to enhance. In short, the 
statutory language does not lead to a tax; only the 
Commission's peculiar interpretation of this language does.
    Who is shortchanged in this process? The American consumer 
who pays the tax, telecommunications carriers who pay the tax, 
and this Committee that did not authorize the tax. I trust that 
this Committee will find an appropriate remedy.
    Madam Chair, members of the Committee, I am available to 
answer questions.
    [The prepared statement follows:]
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    Chairman Johnson of Connecticut. Thank you very much.
    Mr. Wright.

 STATEMENT OF CHRISTOPHER J. WRIGHT, GENERAL COUNSEL, FEDERAL 
                   COMMUNICATIONS COMMISSION

    Mr. Wright. Thank you. It is a pleasure to be here today as 
Chairman Kennard's representative to discuss the FCC's 
universal service program for schools and libraries.
    As Congressman Neal noted earlier, I'd like to emphasize 
that Senators Snowe and Rockefeller, the principal drafters of 
section 254(h), filed an amicus brief in the 5th Circuit fully 
endorsing the Commission's interpretation of the statute.
    I'd like to first read three brief excerpts from section 
254. The first, section 254(d), provides that ``every 
telecommunications carrier that provides interstate 
telecommunications services shall contribute'' to ``mechanisms 
established by the Commission to preserve and advance universal 
service.'' So all telecommunications carriers contribute.
    Section 254(h), which contains a subsection specifically 
addressed to ``educational providers and libraries,'' first 
provides that ``all telecommunications carriers'' must provide 
services to ``elementary schools, secondary schools, and 
libraries'' at a discounted rate that the Commission, 
``determines is appropriate and necessary to ensure affordable 
access to, and use of such services by such entities.'' That is 
section 254(h)(1). It plainly provides that schools get 
discounts for telecommunications services. Internet services 
are not telecommunications services; they are information 
services.
    The third section I'd like to quote is section 254(h)(2), 
which Commissioner Furchtgott-Roth has just mentioned. It 
directs the FCC to ``establish competitively neutral rules to 
enhance, to the extent technically feasible and economically 
reasonable, access to advanced telecommunications and 
information services for all public and nonprofit elementary 
and secondary school classrooms.''
    If there is a source for Internet services, it is in that 
sentence. The Commission has concluded that both Internet 
services and inside wiring, both of which are information 
services, should be funded under this provision.
    The Commission reasonably interpreted the statute to reach 
this result. Internal connections are necessary to provide 
services to classrooms. And as Senators Snowe and Rockefeller 
have emphasized, they wrote ``classrooms'' into section 
254(h)(2) because that is where the students are. It is hard to 
imagine what section 254(h)(2) covers if it does not cover 
internal connections and Internet access.
    The telephone companies that have challenged the 
Commission's interpretation of that provision have not 
suggested what it covers, even though it is a basic rule of 
statutory construction that a statutory provision should not be 
construed to be meaningless.
    In their amicus brief, Senators Snowe and Rockefeller 
specifically endorsed the Commission's decision to provide 
discounts for internal connections and Internet access.
    Let me turn now to the Origination Clause issue. With 
respect to this issue, I understand that this committee would 
like to focus on the schools and libraries program and not the 
aspects of the Commission's order funding support to rural 
areas and low-income Americans.
    However, the issue cannot be severed in that manner. If the 
schools and libraries program is an unconstitutional tax, so 
are the much larger high-cost and low-income programs. 
Fortunately, there is no merit to this Origination Clause 
challenge.
    Prior to the enactment of section 254, when the 
Communications Act did not even contain the words ``universal 
service,'' the D.C. Circuit heard and rejected an Origination 
Clause challenge to the Commission's universal service program 
in the ALC Communications case. The Court held that the 
assessments at issue were not taxes and were not fees, but 
instead were ``transfers from interexchange carriers to high-
cost, local exchange carriers, and low-income telephone 
subscribers that fit comfortably within the range of special 
purpose levies that are consistent with Congressional authority 
to regulate commerce.''
    In the Rural Telephone Coalition case, the D.C. Circuit 
rejected an argument brought by some telephone companies that 
the Commission's universal service program was a tax for 
purposes of the tax clause. The Court said that a regulation is 
a tax only when its primary purpose is raising revenue.
    As Senators Snowe and Rockefeller have emphasized, 
extending universal service support to schools and libraries 
did not transform previously valid transfer payments into 
taxes. To the contrary, because section 254 ``creates a 
particular governmental program rather than raising revenue to 
support government generally''--I am quoting there from the 
Supreme Court's decision in Munoz-Flores, it plainly is not a 
tax under the test enunciated by the Supreme Court.
    In that same case, the Supreme Court squarely rejected the 
notion now being advanced before the 5th circuit that an 
assessment is a tax unless those required to pay the assessment 
receive a direct benefit from it.
    In short, attacks on universal service by 
telecommunications companies are nothing new. In 1988, at a 
time when there was no universal service provision in the 
Communications Act, the D.C. Circuit upheld the Commission's 
efforts to provide affordable telephone service to all 
Americans and rejected the telephone companies' claims that the 
universal service program was a tax not authorized by Congress.
    The analogous claims recently advanced in the 5th Circuit 
have even less force now that Congress has adopted section 254 
and explicitly extended universal service for schools and 
libraries.
    I very much appreciate the opportunity to testify, and I 
will be pleased to answer any questions that you may have. 
Thank you.
    [The prepared statement follows:]
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    Chairman Johnson of Connecticut. I thank the panel.
    Mr. Furchtgott-Roth, would you go through, as explicitly as 
possible, exactly who pays and exactly who gets paid, who 
benefits.
    Mr. Furchtgott-Roth. Madam Chair, would this just be for 
the schools and libraries program or for the other universal 
service programs as well?
    Chairman Johnson of Connecticut. For the school and 
libraries program, although you may, if you wish, contrast it 
with the universal service program.
    Mr. Furchtgott-Roth. Yes, ma'am. Right now, all 
telecommunications carriers pay a tax for the schools and 
libraries program from both their interstate and intrastate 
revenues. It is a fixed percentage that was established first 
by a Commission notice, and subsequently an order in December 
of 1997 that covered the first two quarters of 1998. In May of 
this year, I believe we issued a subsequent notice that covered 
the third and fourth quarters of 1998 and the first two 
quarters of 1999. So this is simply a percentage of 
telecommunications service revenue.
    Who receives funds is very complicated, and there is a very 
complicated mechanism to apply for funds from the Schools and 
Libraries Corporation, an independent corporation established 
by the Commission in 1997. This is, from all I can tell, a 
private corporation, private nonprofit; it is not a government 
entity. It was incorporated in the State of Delaware.
    And as noted in the last panel, more than 30,000 schools 
and libraries have applied for funds from this program. It 
requires a very complicated form. Many schools have invested a 
great many hours in filling out these forms, and when you go 
from doing nothing to trying to disperse more than $1 billion 
to 30,000 applicants, it is a very complicated process. And 
something that, frankly, the FCC has never done before and does 
not have a great deal of expertise.
    Chairman Johnson of Connecticut. In your testimony, you 
mentioned that there were nine telecommunications companies 
that benefited, though all paid. Would you clarify that and 
then the other aspect of that, those who don't pay and do 
benefit.
    Mr. Furchtgott-Roth. Yes. There are two parts of 254(h) 
that are used to establish benefits for schools and libraries. 
The first is under 254(h)(1), which is the traditional discount 
program which clearly says that only telecommunications 
carriers can receive these discounts, no one other than a 
telecommunications carrier.
    In my view, (h)(1) by itself would just be a fee, as the 
Commission has interpreted; (h)(2), however, is where the 
Commission has engaged in some extraordinarily complicated 
legal gymnastics. And not being a lawyer, I am not quite sure 
how they got there. I am not sure if I were a lawyer, I would 
understand how they got there.
    But what they said is that the beneficiaries can be anyone, 
and it doesn't have to be a telecommunications carrier. And it 
is under the advanced services that the internal connections 
enter, and $1.3 billion out of the $2 billion requested for 
1998 are for internal connections.
    I wish I could give you a precise breakdown of how much of 
this is going to telecommunications carriers, eligible 
telecommunications carriers under section 214, or to folks who 
are not telecommunications carriers at all.
    I have requested some of this information from Schools and 
Libraries Corporation and they have not been able to give it to 
me at this point. But it is very clear that many companies that 
are not telecommunications carriers at all have applied for a 
great deal of money from the Schools and Libraries Corporation.
    On the contributions side, right now it is just 
telecommunications carriers that pay in. Other companies that 
may, in fact, receive money or that the Commission has 
designated as eligible to receive money, do not pay in. And 
this would include Internet access providers, construction 
companies that might be providing internal wiring, and perhaps 
most importantly, it does not include the computer companies 
that come in to lobby me and say this is a billion dollar 
business for them and they'd like some of this money.
    Chairman Johnson of Connecticut. Thank you. Then what I 
would interpret your testimony to be is that you are not 
arguing that all of universal service or even all of the e-rate 
program are an illegal tax, but that basically 24(h)(2), a 
limited part of the e-rate program, is an illegal tax.
    Mr. Furchtgott-Roth. Let me be clear, Madam Chair. There 
are two points I would like to leave you with on this. First of 
all, I think that the Commission has completely misinterpreted 
paragraph (h)(2), independent of whether it is a tax or not. I 
just do not see how you get from the plain language of the 
statute to the creation of a multi-billion dollar program. I 
don't see how you get to any Federal dollars. And then above 
and beyond that, I don't see how you get to a tax from it.
    Chairman Johnson of Connecticut. Thank you.
    Mr. Coyne.
    Mr. Coyne. Thank you, Madam Chair. Mr. Wright, how many 
schools and school districts nationwide have applied for 
Internet and related telecommunications assistance?
    Mr. Wright. We have received 30,000 applications.
    Mr. Coyne. How many?
    Mr. Wright. Thirty thousand applications covering more than 
100,000 schools. Some of the applications are multischool 
applications.
    Mr. Coyne. Can you tell us what the total universal service 
subsidy breakout is State by State. In other words, which 
States or areas are subsidized and which pay to subsidize other 
areas or States? Do you have that breakdown?
    Mr. Wright. I don't have that on the tip of my tongue. Not 
surprisingly though, with 30,000 applications and 100,000 
schools, this is spread around the country. Just before this 
hearing started, I was handed this purple document which I was 
told was given to staff of each member of this committee which 
does break it down by each State.
    Mr. Coyne. Okay. There seems to be a perception in the 
general public that Congress and the FCC has increased phone 
costs. In your research and work that you do, can you give any 
indication of why you think that is?
    Mr. Wright. Well, you started off by admonishing all of us 
to avoid political rhetoric, so I will. But let me just stick 
to the facts. The facts are that since the 1996 Act was passed, 
we've reduced access rates by more than $4 billion, and these 
programs, including the explicitly high-cost program, are 
smaller than $4 billion. So there has been a net reduction.
    Mr. Coyne. Thank you.
    Chairman Johnson of Connecticut. On that point, Mr.Wright, 
you say since the 1996 Act was passed, that we've reduced access rates 
by $4 billion.
    Mr. Wright. Yes.
    Chairman Johnson of Connecticut. Then why is it necessary 
for the telephone company to use a billing mechanism that 
clearly includes, by some accounts, 19 cents for this purpose, 
and by other accounts, 36 cents for this purpose. If we've 
reduced their charges that much, why are they including this in 
the billing rate?
    If they include it in the billing rate, then it is an 
identifiable entity, and we have to decide whether that entity 
is a fee or a tax. But if we've saved them $4 billion, why was 
Congress wrong to assume that deregulation would bring them so 
much more profit that they could fund this, which is the 
assumption that we made?
    Mr. Wright. I don't have the all the long-distance 
carriers' billing plans at the tip of my tongue, but some of 
them, like AT&T, didn't offer 10 cents a minute three years 
ago. They offered 15 cents a minute. Now they offer 10 cents a 
minute and they add in a half-penny for schools and libraries.
    Chairman Johnson of Connecticut. Why do you allow them to 
do that? You are the regulators. The bill was to say, we're 
going to give you free open competition and it's going to cut 
your costs. But one of the things you are going to do is make 
sure that we do this and that that gets folded in. And yet, you 
are allowing them to put in their universal rate, either 19 
cents or 36 cents, and that is an identifiable either fee or 
tax.
    Mr. Wright. Madam Chairman, you referred earlier--described 
us as rate regulators. That's not true. Over the past 25 years, 
we have very aggressively deregulated the long-distance market 
and we do not regulate their rates.
    Chairman Johnson of Connecticut. Mr. Weller.
    Mr. Weller. Thank you, Madam Chair. This is an extremely 
helpful hearing. I really want to again commend you for 
conducting today's hearing as we look at a challenge. It is 
clear, I think, from the statements of members on both sides, 
as well as those who have testified this morning, that every 
one of us stands here in support of increasing access to the 
Internet and computers for every school library in our nation.
    Of course, the question is how can we accomplish it, and 
the real question of this hearing is how do we fund, how do we 
finance that goal. And in listening to the testimony of the 
Commissioner, as well as the legal counsel, the chief lawyer 
for the FCC--we have a disagreement here, so we've got both 
sides represented. And the Commissioner indicated--and confirm 
with me--it's my understanding that you agree with the notion 
that many have, that the so-called fee is actually a tax, is 
that correct, Commissioner?
    Mr. Furchtgott-Roth. I believe that that portion that goes 
to nontelecommunications carriers under (h)(2) is a tax, yes.
    Mr. Weller. And then, Mr. Wright, you argue that what he 
believes is a tax is actually a fee.
    Mr. Wright. No, we've never defended this as a fee. The 
language of the statute is ``specific mechanisms.'' The 
language of the relevant cases are things like ``special 
purpose levies.'' But some cases have been cited under 
something called the Independent Offices Administration Act, 
and it is alleged that we've claimed that these are fees under 
that Act; we've never made that claim, so it's setting up a 
straw man to beat that one down.
    Mr. Weller. So then if you don't believe it's a fee, then 
you believe it's a tax.
    Mr. Wright. No, we believe it's what Congress called it, 
and Congress called it a ``specific mechanism.''
    Mr. Weller. A specific mechanism?
    Mr. Wright. What the D.C. Circuit called----
    Mr. Weller. Kind of like a revenue-enhancer and all the 
other terms that politicians have used over the years to label 
a tax something else.
    Mr. Wright. I'm just a lawyer. But the courts have said 
that a regulation is a tax only when its primary purpose is 
raising revenue, and the courts have regularly approved----
    Mr. Weller. Sure. Well, reclaiming my time, Mr. Wright, I 
am not an attorney, so I turn to attorneys at times and ask for 
advice and counsel. And I know that the Commissioners look to 
you for advice and counsel, and they say this is what we want 
to achieve, we are asking you to figure out a way we can 
legally do it. And of course, you are charged with that.
    As has been stated earlier, there are roughly 1,800 schools 
in my State of Illinois that have requested help through the e-
rate program, not only for the reduced rate but also for the 
assistance in putting in the wire and the fiber so they can 
hook up computers. Of course, they use LaSalle-Peru High School 
as the example where it is most expensive. They estimate that 
it is going to cost them roughly $1 million. Ottawa, which is 
10 minutes away, they estimate $100,000. So it varies from 
school district to school district what the costs are to 
achieve this goal.
    One of the concerns I have, because many, including the 
General Accounting Office, and many in the Congress, including 
myself, question the constitutionality of what you label, I 
forgot the term again, but what most of us label a tax. And 
that if the court action in the 5th circuit finds the FCC's 
interpretation of subsection (h)(2) and its subsequent action 
unconstitutional, in the case of my State we have 1,800 schools 
that are left hanging.
    And the question I have for you is if the 5th circuit rules 
against you and declares your funding mechanism, what we call a 
tax, a tax and unconstitutional, because it was not levied by 
Congress, what happens to your program?
    Mr. Wright. That would be a major problem then. I think 
your bill would be a great thing if the 5th circuit should take 
that action.
    Mr. Weller. Of course, I am one who believes that the 
Fifth--I am not an attorney, but listening to those who are--
that the 5th circuit will rule it unconstitutional, which does 
jeopardize the funding. And that's why I worked with my 
colleagues and Mr. Tauzin and Mr. Hulshof and others to come up 
with a solution to the problem.
    And I was wondering, should they rule against you and the 
solution we've offered, which is earmarking one cent of every 
dollar of an existing revenue source, an excise tax that was 
put in place in 1914 to finance World War I, do you feel that 
that is a legal funding mechanism that would solve the problem 
if the 5th circuit court rules against you?
    Mr. Wright. Oh, it certainly sounds like it would. I don't 
know all the details of the bill. I don't know whether it's 
specific with respect to internal connections and Internet 
access. But in what I would regard the unlikely event the 5th 
circuit rules against us, that would sure be agreat backup.
    If I could just make two brief points. You know, the 
telephone companies did go in and seek a stay. And we opposed 
it and they said this was an unconstitutional tax. The Court 
didn't grant the stay. And we then took the very unusual step, 
because we'd like to get this settled quickly, of moving to 
have the case expedited, which is something the defendant 
rarely does.
    The telephone companies wouldn't join with us in our motion 
to expedite, but we filed it anyway. We are anxious to get this 
sorted out.
    Mr. Weller. Madam Chair, could I just have a brief 
followup? Of course, in Congress we are running out of time, 
we've got roughly 30 days in the legislation session left 
between now and the first week of October, and we can move this 
solution fairly quickly to solve the problem and ensure that 
the funds are available to those 1,800 schools in Illinois like 
LaSalle-Peru, and Ottawa and others in the Gilette library 
district.
    From your standpoint, do you believe that if the Court 
rules against you, that the FCC should continue to administer 
the distribution of these funds or would you be willing to 
accept from the FCC standpoint, allowing as we propose, through 
the chief technology agency within the Commerce Department, to 
use that agency to block-grant the funds back to the States. Do 
you have any problem with shifting the administrative 
responsibility elsewhere for distribution of those funds?
    Mr. Wright. Of course, we abide by decisions of the courts. 
This brown book I am holding is the Communications Act. It is 
our job to administer it and anything Congress writes into it, 
we will administer.
    Mr. Weller. So you'd work with us, then. That's good. Thank 
you, Madam Chair, and thank you.
    Chairman Johnson of Connecticut. Thank you, Mr. Weller. 
Mrs. Thurman.
    Mrs. Thurman. Thank you, Madam Chairman. Staff just brought 
to my attention--and I am curious, since this is my first time 
on Ways and Means--that there evidently is a parliamentary 
procedure that can be used when a revenue issue has not 
originated in the House, called blue-slipping. And it's my 
understanding that the staff of Ways and Means went to the 
parliamentarian to get clarification as to whether or not they 
could blue-slip this so the Ways and Means Committee could take 
it. Their answer was no.
    And even to the point where the Senate had said they would 
go back and clarify any language to make sure that it wasn't 
considered to be a tax. Are you familiar with this procedure 
that took place, or any of the inquiry that took place on this 
issue?
    Mr. Furchtgott-Roth. Mrs. Thurman, I had the privilege of 
being a staff member on the House Commerce Committee when the 
1996 Act was going through the House in conference, and I do 
have a recollection of the Parliamentarian reviewing it. I 
don't have the specific recollection of the Ways and Means 
Committee staff requesting a blue slip, but I would be very 
surprised if the Ways and Means Committee staff did not, in 
fact, review the language.
    Mrs. Thurman. And that process is not open just to the 
chairman or the ranking members? It's open to all members of 
Congress?
    Mr. Furchtgott-Roth. Yes, ma'am.
    Mrs. Thurman. Secondly, Mr. Wright, let me ask you a 
question. I am trying to get to the bottom of this. In your 
beliefs in this dialogue, is the universal issue a tax or a 
fee? Or is it just what we are now looking at in this new 
provision, the tax?
    Mr. Wright. Well, let me make clear that there is only one 
funding provision in the Act. That is 254(d). It covers high-
cost, low-income and schools and libraries, says all 
telecommunications carriers pay. There is only one funding 
provision in the Act, and it applies without distinction to any 
of the them.
    Mrs. Thurman. So then what we are really doing is 
dissecting this issue into, first of all, the school and 
libraries issue, and then into the construction issue. Is 
that----
    Mr. Wright. Right. Let me make clear that in the 5th 
Circuit, the telephone companies claim that all of this is an 
unconstitutional tax.
    Mrs. Thurman. Have they ever done this before?
    Mr. Wright. Yes, twice in the last decade, they went to the 
D.C. Circuit making the same case. Look, I am in the business 
of defending the constitutionality of the acts of Congress. It 
does not come easily to my lips to say that an act is 
unconstitutional or even that there is a grave question. But to 
the extent there was a grave question, it was with respect to 
the high-cost fund before the 1996 Telecommunications Act was 
enacted.
    The high-cost fund, there was nothing in the act saying 
anybody paid anything and the way we put together a program to 
make service affordable to all Americans, we had the inter-
exchange carriers or the long-distance companies pay, they 
didn't get any money. The local exchange carriers, the Bell 
Atlantics and Ameritechs, collected all the money. And we won 
that case. So this case seems easy in comparison.
    Mrs. Thurman. Mr. Roth.
    Mr. Furchtgott-Roth. Mrs. Thurman, I'd just like to make a 
couple points on that. First of all, Mr. Wright is entirely 
correct that 254(d) is the only source of funding. But I would 
note that today the telecommunications carriers pay different 
rates on different bases for different funds. The Commission 
has set up a very complicated structure, so for instance, for 
schools and libraries, they pay a certain percentage on both 
inter and intrastate funds, entirely separable from a different 
rate that is applied only to interstate funds that is used for 
high-cost and low-income programs.
    The other issue which I think is relevant to the question 
of whether or not it is a tax is how the money is spent. And 
for both high-cost and low-income, all of the money consistent 
with section 214(e) and 254(e) only goes to eligible carriers. 
The eligible carriers are all telecommunications carriers, so 
all of the money stays within the telecommunications industry. 
It is a shifting of funds from one telecommunications carrier 
to another.
    Mrs. Thurman. But in the final analysis, once the 
connection or the wiring--I wouldn't call it construction, but 
wiring--they still then are the beneficiary in the final 
analysis by this rewiring, is that correct?
    Mr. Furchtgott-Roth. No, ma'am, I would not----
    Mrs. Thurman. Well, when they broke up and deregulated, a 
lot of what they stopped doing--they have a lot of 
subcontractors out there that do wiring and those kinds of 
things today. But to provide the service, if I am correct,later 
on once when they get the wiring done, then the whole universe gets the 
opportunity to participate.
    Mr. Furchtgott-Roth. Not under 254, not for schools and 
libraries. A lot of that service will not go to 
telecommunications carriers at all.
    Mr. Wright. If I could add just a word, of course if the 
schools are connected and they need the inside wiring to get 
the Internet access, of course, the telephone companies end up 
benefitting. World Com and MCI are the largest owners of the 
Internet backbone in this country. That's one of the problems 
in their pending merger. Of course, if the schools and 
libraries have Internet access, they will use it, and the 
telephone companies that contribute will benefit, it's just 
like high-cost.
    Mr. Furchtgott-Roth. Eighty percent of schools and 
libraries in the United States are connected to the Internet 
without a nickel of money from the FCC. The vast majority of 
these schools and libraries receive today free or discounted 
service to the Internet.
    In fact, of the $2 billion that has been requested for 
1998, less than $100 million of that is for Internet services. 
Most of this money is not going for Internet services. A third 
of the money is going for just regular telephone service 
discounts, and two-thirds of the money is going for what is 
euphemistically being described as internal connections, but 
what is in fact primarily money to pay for extraordinarily 
sophisticated computer equipment.
    Mrs. Thurman. For schools and libraries.
    Mr. Furchtgott-Roth. For schools and libraries.
    Mrs. Thurman. So that universe still stays.
    Mr. Furchtgott-Roth. But those people are not paying into 
the fund.
    Mrs. Thurman. Okay. Thank you.
    Chairman Johnson of Connecticut. Mr. Hulshof.
    Mr. Hulshof. Thank you, Madam Chairman. So, in essence, the 
telecommunications carriers are paying into the e-rate program, 
but then companies that are not telecommunications carriers are 
receiving disbursements under the program. Commissioner, is 
that essentially----
    Mr. Furchtgott-Roth. That is true for only a portion of the 
schools and libraries program, yes. It is not true for the 
other universal service programs.
    Mr. Hulshof. Mr. Wright, following up on what Ms. Johnson 
asked earlier, somewhere in all the information given us, I saw 
some information that reduced access charges have saved long-
distance carriers $2 billion, is the number that comes to mind. 
Is that accurate, more or less?
    Mr. Wright. It's more like $4 billion.
    Mr. Hulshof. Four billion, okay. Is it your testimony or 
statement that reduced access charges to long-distance 
providers should pay for the e-rate program?
    Mr. Wright. The e-rate program is separate, but I think in 
understanding the whole system, it's certainly nice that they 
balance out this way.
    Mr. Hulshof. Well, hasn't the FCC stated that reduced 
access charges should be passed on to the consumers?
    Mr. Wright. Again, we are not in the direct business of 
rate regulation. But it is our understanding that in a 
competitive market, rate reductions should be passed on to the 
consumers. We've declared this a competitive market; that's why 
we've deregulated it.
    Mr. Hulshof. And hasn't the fact been long-distance 
carriers have reduced their rates in excess of the savings from 
the reduced access charges?
    Mr. Wright. Some of them are offering some very good deals 
these days, yes.
    Mr. Hulshof. So I guess my question is how can the savings 
be spent twice? That is a nonlegal way to say it, but 
ultimately, it seems that we are spending the savings more than 
once, are we not?
    Mr. Wright. Again, there is no direct tie. The long-
distance companies set their own rates. You are certainly right 
that the e-rate program costs money; it comes from somewhere.
    If I could give you an example, though, of why it's very 
important that some nontelecommuncations companies get money, I 
think look at this from the point of view of a school district. 
You want to buy Internet service. The telephone companies are 
arguing that only telecommunications companies should provide 
that, so around here you could get Bell Atlantic.
    But, of course, there are lots of Internet service 
providers that are not telecommunications carriers. They are 
not eligible under the telephone companies' argument. Under the 
telephone companies' argument, a school has to choose the high-
cost telephone company and can't choose AOL, can't choose 
Gateway, can't choose Erol's, even if they are lower cost and 
better priced.
    Mr. Hulshof. Let me explore just a bit--and even, Mr. 
Weller, as an attorney, I am not sure that I am conversant, 
certainly not on the scale that you are, Mr. Wright and I 
acknowledge that--but one of the things Mr. Weller talked about 
is there are some questions being raised by the General 
Accounting Office regarding the constitutionality of the 
corporation that has been established to administer the 
program.
    Do you have any quick comment on that?
    Mr. Wright. Well, the quick comment is that we directed the 
universal service group to reorganize itself. They are in the 
process of doing it. We believe that that fullyresponds to 
GAO's complaints.
    Mr. Hulshof. Regarding your comments about the 5th 
circuit--and I am not holding you to this--but the case has 
been argued, or are we simply waiting for the Court's opinion 
at this point?
    Mr. Wright. No, the case hasn't been argued yet.
    Mr. Hulshof. Okay, it has not been argued.
    Mr. Wright. It has been briefed, but not argued.
    Mr. Hulshof. You wanted to put this on an expedited track, 
but the other parties have not. Any anticipation of when? What 
is the normal course as far as when briefs and arguments and 
ultimately an opinion? What's your best guess?
    Mr. Wright. Briefs are in. Unless expedited, the argument 
probably won't be held until the winter.
    Mr. Hulshof. Okay. Let me ask you this question. You state 
that these issues are raised in the 5th circuit litigation. But 
I'm not sure that your brief responds to the argument that the 
e-rate program, as distinct from the entire universal service 
program, raises the separation of powers issue.
    You talk about the Origination Clause issue. Can we be 
confident that the 5th circuit will address the issue of the 
separation of powers, because I am not sure your brief quite 
addresses that point.
    Mr. Wright. The way the issue is teed up in the 5th 
circuit, the tax issue has been separate from whether we 
interpreted 254(h) properly. And we filed about a 200-page 
brief there. You will find a few pages on the tax issue. There 
are about 25 pages somewhere else on whether we've interpreted 
254(h) properly to cover internal connections and Internet 
access.
    Mr. Hulshof. So hopefully, the 5th circuit, although again, 
drawing upon past experience, oftentimes courts will only give 
us a narrow holding. So even though some of the witnesses 
previously say we should wait until the 5th circuit returns its 
opinion, it could very well be that the 5th circuit is only 
going to narrowly address the issue and we still may have this 
discussion at a later time.
    Mr. Wright. Yes. I would say that in the normal course, we 
won't get an opinion from the 5th Circuit until next summer, 
and as already noted, we've got 30,000 applications pending, 
100,000 schools. And we are getting a lot of complaints from 
the schools that we ought to move more quickly.
    Mr. Hulshof. Thank you, Madam Chair.
    Chairman Johnson of Connecticut. I thank the panel for 
testifying. I think the number of applications you received 
attests the importance of this program and the importance of 
resolving the problems around it.
    I would also want to comment on the fact that the bill 
wasn't blue-slipped does indicate that the parliamentarian 
judged that this was not a tax, presumably in consultation with 
either the Joint Tax Staff or with the staff of the Ways and 
Means Committee. The issue really is whether or not it becomes 
a tax by virtue of the way the FCC implemented it. And I think 
this hearing has given us a great deal of insight into that 
issue.
    I personally am very impressed with the fact that two-
thirds of the money is going to wiring and computers. And I 
would just remind both the members and the public that this 
Congress doubled the money for school technology in last year's 
budget to over half a billion dollars, because we do believe it 
is our responsibility to help schools become state-of-the-art 
technologically.
    This Congress also passed just last year in the tax bill 
tax incentives to help schools be able to get state-of-the-art 
technology and to improve the partnership between the business 
community and the schools in terms of the transfer of modern 
technology into the school system for their usage.
    So there are many indications that the Congress feels 
responsible for achieving the goal of assuring state-of-the-art 
technology in our schools and libraries, and certainly, the 
directive to the FCC of a discounted rate is harmonious with 
achieving not only the goal of creating that system, but 
assuring its functioning and assuring it in a way that is 
harmonious with the history of our effort to subsidize those 
who are least able to pay the rates for communications 
services.
    But I do think that the nature of the grant subsidy program 
that the FCC developed raises very significant questions about 
whether a fee has then become a tax by virtue of who pays and 
who benefits, and also whether we can afford to have 
administrative agencies make that kind of interpretation and 
put in place programs that, in many ways, duplicate the 
administrative efforts of the government to achieve the same 
goal in other parts of the bureaucracy.
    So I think we have gained a lot more insight into both the 
constitutional and legal issues that the recent actions of the 
FCC raise, and I think we also have given ourselves a lot more 
information about the variety of ways in which we can go about 
assuring that the goal, on which we all agree, of high 
technology and modern wiring into our schools can be achieved.
    So I thank you for your participation today, and I thank 
the members for their constancy in staying until the end. Thank 
you.
    [Whereupon, at 12:25 p.m., the hearing adjourned subject to 
the call of the Chair.]
    [A submission for the record follows:]
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