[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]



 
             THE SCHOOLS AND LIBRARIES INTERNET ACCESS ACT

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

                                HEARING

                               before the

                  SUBCOMMITTEE ON TELECOMMUNICATIONS,
                     TRADE, AND CONSUMER PROTECTION

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                                   on

                               H.R. 1746

                               __________

                           SEPTEMBER 30, 1999

                               __________

                           Serial No. 106-81

                               __________

            Printed for the use of the Committee on Commerce

                    ------------------------------  



                     U.S. GOVERNMENT PRINTING OFFICE
59-995 CC                    WASHINGTON : 1999



                         COMMITTEE ON COMMERCE

                     TOM BLILEY, Virginia, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio               HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                    RALPH M. HALL, Texas
FRED UPTON, Michigan                 RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio                FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania     BART GORDON, Tennessee
CHRISTOPHER COX, California          PETER DEUTSCH, Florida
NATHAN DEAL, Georgia                 BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma              ANNA G. ESHOO, California
RICHARD BURR, North Carolina         RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California         BART STUPAK, Michigan
ED WHITFIELD, Kentucky               ELIOT L. ENGEL, New York
GREG GANSKE, Iowa                    THOMAS C. SAWYER, Ohio
CHARLIE NORWOOD, Georgia             ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma              GENE GREEN, Texas
RICK LAZIO, New York                 KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming               TED STRICKLAND, Ohio
JAMES E. ROGAN, California           DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois               THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico           BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona             LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING, 
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland

                   James E. Derderian, Chief of Staff

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

   Subcommittee on Telecommunications, Trade, and Consumer Protection

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL G. OXLEY, Ohio,              EDWARD J. MARKEY, Massachusetts
  Vice Chairman                      RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               BART GORDON, Tennessee
PAUL E. GILLMOR, Ohio                BOBBY L. RUSH, Illinois
CHRISTOPHER COX, California          ANNA G. ESHOO, California
NATHAN DEAL, Georgia                 ELIOT L. ENGEL, New York
STEVE LARGENT, Oklahoma              ALBERT R. WYNN, Maryland
BARBARA CUBIN, Wyoming               BILL LUTHER, Minnesota
JAMES E. ROGAN, California           RON KLINK, Pennsylvania
JOHN SHIMKUS, Illinois               THOMAS C. SAWYER, Ohio
HEATHER WILSON, New Mexico           GENE GREEN, Texas
CHARLES W. ``CHIP'' PICKERING,       KAREN McCARTHY, Missouri
Mississippi                          JOHN D. DINGELL, Michigan,
VITO FOSSELLA, New York                (Ex Officio)
ROY BLUNT, Missouri
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
  (Ex Officio)

                                  (ii)


                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Gerber, Lois M., Chairman of the Board, National Independent 
      Private Schools Association................................    38
    Lassman, Kent, Deputy Director, Technology and 
      Communications, Citizens for a Sound Economy...............    47
    Levy, Kelly Klegar, Acting Associate Administrator, Office of 
      Policy Analysis and Development, National 
      Telecommunications and Information Administration, U.S. 
      Department of Commerce.....................................    34
    Parrino, Cheryl, CEO, Universal Service Administrative 
      Company....................................................    40
    Tancredo, Hon. Thomas G., a Representative in Congress from 
      the State of Colorado......................................    12
    Weller, Hon. Jerry, a Representative in Congress from the 
      State of Illinois..........................................     9
    Wright, Christopher J., General Counsel, Federal 
      Communications Commission..................................    30

                                 (iii)

  


             THE SCHOOLS AND LIBRARIES INTERNET ACCESS ACT

                              ----------                              


                      THURSDAY, SEPTEMBER 30, 1999

              House of Representatives,    
                         Committee on Commerce,    
                    Subcommittee on Telecommunications,    
                            Trade, and Consumer Protection,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:17 a.m., in 
room 2322, Rayburn House Office Building, Hon. W.J. ``Billy'' 
Tauzin (chairman) presiding.
    Members present: Representatives Tauzin, Cox, Rogan, 
Shimkus, Wilson, Ehrlich, Markey, Rush, Wynn, and Sawyer.
    Staff present: Linda Bloss-Baum, majority counsel; Justin 
Lilley, majority counsel; Mike O'Reilly, professional staff; 
Cliff Riccio, legislative clerk; and Andy Levin, minority 
counsel.
    Mr. Tauzin. Good morning, my apologies. Among my many 
duties around here is the deanship of the Louisiana delegation. 
We had one of those rare delegation meetings this morning.
    When Congress passed the Telecommunications Act in 1996, 
they included the idea of a program for the discount of 
advanced telecommuncations services for organizations that 
would most need assistance acquiring the technology of the 
Internet; namely, schools, libraries, and rural health care 
centers. The FCC broadly interpreted the statute to require 
subsidies not only for basic telephone service for schools but 
also for Internet access, content based information services, 
and equipment for internal connections.
    They have even created now a new bureaucracy to take over 
the administration of the program, the Schools and Libraries 
Division of the Universal Service Administration Company. 
Furthermore, the FCC took it upon themselves to create a $2.5 
billion fund to be developed by excise taxes on every 
consumer's phone bill. This type of what I consider to be 
illegal taxation was certainly not the intention of Congress.
    After some urging from Chairman Bliley and myself last May, 
the FCC scaled back their original $2.5 billion program to $1.3 
billion. The fact is, I believe that neither the FCC nor the 
FCC-created USAC has the authority to levy taxes. Only 
Congress, unfortunately, can do that. Unfortunately, we have to 
take on that duty once in a while, which is why I introduced 
the Schools and Libraries Internet Access Act, H.R. 1746.
    With this bill, we reassert control over Congress' original 
idea that the Schools and Libraries Internet Access Act would 
cut taxes, not increase them. The bill cuts the existing 
regressive 3 percent telephone excise tax, passed in 1913, by 
fully two-thirds over 5 years. That tax was passed in 1913 to 
fund World War I, which if history serves me right I think is 
over, but the tax is not.
    After the fifth year under our bill, when all the schools 
have been connected to the information superhighway, the bill 
completely repeals the rest of the tax. The bill removes the 
program from the FCC and puts it into the hands of State 
educational officials and the National Telecommunications 
Information Administration of the Department of Commerce.
    The bill would meet our goal of bringing advanced 
telecommunications services and the Internet to our neediest 
schools and libraries and will eliminate the need for improper 
new taxes imposed by the FCC, which many have, unfortunately 
for Mr. Gore, dubbed it the Gore tax.
    I am proud to welcome my friends and fellow sponsors of the 
bill, Representatives Tancredo and Weller, to testify before 
the committee this morning. I am also pleased to welcome our 
second panel of witnesses who will be composed of Mr. 
Christopher Wright, the General Counsel of the FCC; Kelly Levy, 
Acting Associate Administrator, Office of Policy Analysis and 
Development of the NTIA; and Lois Gerber, Chairman of the Board 
of the National Independent Private Schools Association; and 
Cheryl Parrino, I am trying to get the names right, CEO of 
Universal Service Administration Company; and Kent Lassman, 
Deputy Director of Technology and Communications for Citizens 
for a Sound Economy.
    Again, let me thank my colleagues for coming. I am going in 
a second welcome my friend and colleague from Massachusetts, 
ranking member of our subcommittee, Mr. Markey for an opening 
statement, but we do deeply appreciate when colleagues of ours 
take time out to come and talk to us about issues before our 
committee, and we welcome you two gentlemen in particular. Mr. 
Markey is recognized.
    Mr. Markey. This is such an incredibly important subject 
for us to be discussing, and it is one of the things that I am 
proudest of in terms of telecommunications policy. We included 
this language in the 1993, 1994 Telecommunications Act that 
passed the House 423 to 4. Unfortunately, that bill then died 
in the Senate and we had to come back and go through it again 
in 1995 and 96.
    The key, of course, is for us to recognize that the world 
has just fundamentally changed since 1900. In 1900, only 7 
percent of 17-year-olds had high school diplomas, and yet the 
people who were in leadership in our country at that time 
decided to build a vast network of primary and secondary 
schools with the intention of educating every person in our 
country.
    Just think about that. From all the way from the Garden of 
Eden to 1900, five millennia, we were up to 7 percent of the 
population with a high school diploma. And yet this bold 
generation said for Irish, Italian, Poles, Jews, regardless, we 
have to build a school system for them.
    Mr. Tauzin. Cajuns.
    Mr. Markey. Cajuns. Everyone. And what happens today is 
that 60 to 70 percent of the children in the United States 
graduating from high school this year are going on to college. 
Not high school now, not 7 percent high school, but 60 to 70 
percent college. What a transformation. What a commitment to 
public education.
    But the jobs in 1900 were industrial. Jobs for the 21st 
century will be informational. They will, in fact, relate to a 
skill set that is not available right now, unfortunately, to 
the lowest income groups.
    In fact, NTIA in doing a study on this subject found that 
there not only is a digital divide but there is a racial ravine 
for on-line access, the rates for whites are nearly three times 
as high for blacks--for whites as they are for blacks and 
Hispanics.
    Now, the interesting thing is that by the year 2030, 50 
percent of all the children in the United States will be 
minorities. So if we want to have an economy, an Information 
Age economy, a new economy, it is going to be largely populated 
by workers who are minorities. And so the key for us to make 
sure that Medicare and Social Security do have proper funding 
for the white baby boomers, for all baby boomers 20 and 30 
years from now is if we give a good Information Age education 
right now to every minority. And we cannot allow this gap to 
open up because otherwise the jobs will go overseas. That is 
the core thought behind the E-Rate.
    And for those of us who are Democrats that voted for GATT 
and NAFTA, as I did, and there are only five of us above the 
Mason-Dixon Line, we have a deal. Yes, we are going to have 
more trade but at the same time we have to give a skill set now 
to those who are in the lowest income groups to make sure that 
they have a skill set that comports with the jobs that we are 
going to target in this new information-based economy.
    Now the good news is that the Fifth Circuit, the Federal 
circuit has now upheld key components of the FCC's 
implementation of the E-Rate provisions, in particular 
rejecting arguments that universal service contributions 
constituted a tax. So we have already got the Federal circuit 
court decision on this issue. It is not a tax. It has been 
resolved.
    So that is really great news for the millions and millions 
of children who come from the poorest communities in America 
because now they can have these hookups in their classrooms and 
can gain access. The communities can decide yes, we will now 
spend money on computers, yes, we will spend the money on 
teacher training, and of course that is another responsibility 
for us, to make sure that the money is there for teacher 
training so that they can integrate the traditional disciplines 
of education with these new technologies, so that the children 
in that bottom percentile are given that skill set.
    I think it paints a wonderful picture for our country. It 
shows that we understand that we need to have global trade and 
at the same time give this skill set to the poorest in our 
society. And then everyone is a winner, including our 
generation, that will ensure that our Social Security and 
Medicare trust fund will be filled by the high-skilled 
employment of this generation that is hooked now in by the E-
Rate to this Information Age.
    So I thank you, Mr. Chairman, for holding this hearing. 
This is about as good a set of discussions as we are going to 
have this year. It really talks about the key issue of our 
generation. Thank you.
    Mr. Tauzin. I thank my friend. Is there additional opening 
statements? Anyone? Mr. Shimkus?
    Mr. Shimkus. Mr. Chairman, just to briefly make sure that I 
welcome my fellow Illinoian Congressman Weller. We have been 
fighting on this issue for a long time. And also just to say 
historically in the 1900's, there was a great move to public 
education. That move was led by local and State governments. 
The Federal Government really had no role at that time, to keep 
things in historical perspective.
    The power to tax is a power to destroy. We have heard that. 
If we allow our government to allow agencies to tax, subverting 
the will of the elected representatives of this country, where 
does it stop and how often does it happen?
    So I think the chairman's bill, which I am a cosponsor of, 
is a great compromise to do a couple of things that we want to 
do, decrease the burden of taxation on the American public 
while making sure that we address the need to make sure our 
schools have access to high speed Internet connections, and 
that is why I am a proud sponsor of the bill. I appreciate the 
work that the chairman has done. I welcome my colleagues, both 
colleagues, Tom Tancredo and Jerry Weller, and I look forward 
to their testimony.
    Mr. Tauzin. Will the gentleman yield? I think it is 
important to point out that very much of what the gentleman 
from Massachusetts has said I agree with. There will be 
witnesses who disagree with both of us that the government has 
no business spending the money connecting the schools. I happen 
to agree with the gentleman and with the gentleman from 
Massachusetts. We do have some business doing that. How we do 
it, who raises the tax and how it is spent is what is at issue 
here.
    And what we have done collectively is to offer a better 
administrative solution and a better legal structure under 
which taxation of phone bills can occur to support this kind of 
a process. And the gentleman is absolutely correct about our 
concern about Federal agencies like the FCC and the very 
strained interpretations like the Fifth Circuit saying that a 
tax is not a tax when everybody who got their phone bill--my 
wife particularly last week said what is this new tax on the 
bill? And I had to explain that the FCC and the Fifth Circuit 
in New Orleans said it was okay. And she said you didn't 
actually vote on the tax increase? And I said no, we didn't. 
The FCC had some mysterious language that they interpreted to 
give them that right.
    Mr. Markey. Will the gentleman yield?
    Mr. Shimkus. I think my time is up, but I am happy to 
yield.
    Mr. Markey. The Fifth Circuit ruled that it is not a tax. 
You have to call it the Gore universal service contribution. It 
is not the term----
    Mr. Shimkus. I can use that. I can run with that.
    Mr. Markey. That is the accurate description.
    Mr. Tauzin. But like Gore, that is such a boring 
description.
    The gentleman is recognized.
    Mr. Sawyer. Thank you, Mr. Chairman. I really appreciate 
very much the comments of all three of the members who have 
spoken prior to me. Let me just mention, though, that we talk 
about where we will be in 2030. The truth of the matter is that 
while we often think of the baby boom generation as the largest 
population bulge ever to move through this Nation, the truth is 
that the current enrollment in school has for the last 1\1/2\ 
years beaten the record that was set by the baby boom at their 
height for school enrollment and will continue to beat that 
record for the next 12 to 15 years at minimum.
    And as a result, we have a window of opportunity here in 
which to deal with exactly the kinds of concerns that the 
chairman and the ranking member have been talking about with 
regard to elevating the skill level of an entire Nation.
    It is rare that you have the opportunity to move the 
aggregate skill level of, well, I guess it depends on how we 
count, but 265 to 275 million people in the country at once. 
The last time we did this actually was at the turn of the 
century and the 35 years before that where, in fact, there was 
a Federal role in education when a Republican from Vermont by 
the name of Justin Morrill, first in the House and then in the 
Senate, put together an arrangement whereby the territory that 
was ceded to the railroads to expand the Nation and to grow a 
new kind of country where a portion of those lands that were 
given to the railroads to increase commerce across this 
continent was set aside for the creation of a new kind of 
higher education institution. And from that grew the land-grant 
colleges. And instead of having simply 40 or so institutions 
largely for the sons of the well-to-do in this country of 
classical education, schools that taught business and industry 
and science and the practical skills of nation building grew in 
this Nation and it changed the face of America. I would submit 
that it is arguable that the 20th century in America was a 
product of Justin Morrill's vision.
    This is a very similar kind of undertaking. It is very 
similar. It involves almost exactly the same set of principles 
and our job and what this bill is all about is trying to make 
those principles work right. It is not whether or not we should 
be involved in doing this. This gives all the control that a 
local community needs. It sends the dollars where they most 
need to go, and I think that is important. We can talk about 
this as it goes on, but I appreciate the comments of the 
gentleman and I just hope that we can keep them into some kind 
of perspective.
    I appreciate this effort to provide a more stable funding 
platform for that undertaking. I am concerned about what 
happens to the dollars that we have been counting on for 
scoring purposes and how we offset those once those dollars go 
away. I hope we can talk about that.
    I am appreciative of the effort that the FCC and the 
Department of Education have made to work together to make sure 
that these dollars do go where they most need to go. And I hope 
that we can ensure that the NTIA will have a similar kind of 
sound substantive relationship with education policy, although 
it is clear that they would have to control the flow of the 
funds.
    And finally, Mr. Chairman, if I could, let me mention one 
element that I never hear talked about. In the struggle that we 
had over school safety in recent years, at no time more 
intensely than this year, it seems to me that there is one 
opportunity that we have overlooked when we talk about school 
guards and metal detectors and all the other kinds of changes 
that can be brought to schools. It seems to me that one of the 
most fundamental kinds of security investments that we can make 
is to make sure that every classroom is no longer isolated from 
every other classroom as they are in American schools. The use 
of the wiring that goes into schools to connect hardware, not 
only with an electrical outlet but with the world of 
information, could also be used to connect classrooms with the 
school office via telephone.
    Mr. Tauzin. Will the gentleman yield?
    Mr. Sawyer. I would, but let me just say this, it is a 
terribly important element in assuring the security of 
individual classrooms. And while we know that there have been 
decisions about the kinds of equipment that can be bought, 
including modems and all that sort of thing, it seems to me if 
we might make a specific reference to that in the course of 
this bill it could go a long way toward allowing investments of 
the kind that for a song, a fraction of the cost of metal 
detectors could go a long way toward improving classroom 
security.
    Mr. Tauzin. First, we ought to give some real credit to the 
Cellular Telephone Industry Association, which has a program 
like Cable in the Classroom designed to provide mobile 
equipment exactly for that purpose to teachers in the school 
buildings and in the schoolyards of America. And I think they 
deserve a lot of credit for their voluntary efforts in that 
regard.
    But also I want to point out to the gentleman wireless 
technology, not wired technology but wireless technology, and 
in particular some of the new technology. Yesterday Larry 
Forlsom was in town, the guy who was the inventor of this new 
ultrabroadband technology, which has a big technology summit on 
in Washington today, may offer even greater security than 
spending all of this money to rewire the insides of school 
buildings.
    One of the concerns we have in our bill is this effort to 
focus on a single form of technology when there may be other 
less expensive, much more competent technologies to accomplish 
those purposes, but the gentleman is exactly right. 
Communications inside the school can vastly increase school 
safety and it is one thing we need to focus on.
    Mr. Sawyer. I agree with everything you said. Thank you, 
Mr. Chairman.
    Mr. Tauzin. Further opening statements?
    [Additional statements submitted for the record follow:]
   Prepared Statement of Hon. Michael G. Oxley, a Representative in 
                    Congress from the State of Ohio
    Thank you, Mr. Chairman, and welcome to our witnesses.
    As we all know by now, the FCC's program to wire all of the 
nation's two million classrooms and 16,000 libraries directly to the 
Internet has led to a new tax on consumers.
    Allegedly based on provisions of the Telecommunications Act of 1996 
calling for discounted telephone line rates for schools and libraries, 
the concept of service discounts has been expanded beyond recognition 
into a multi-BILLION dollar grant program.
    While I support efforts by local school districts to wire 
classrooms for Internet access if they so desire, and I have no 
objection to the concept of discounted telecommunications rates for 
educational institutions, I object strenuously to the FCC's perversion 
of congressional intent and self-anointed role as tax collector for 
this electronic white elephant sale. Upwards of 80 percent of schools 
are already connected to the Internet, thanks to school board and 
private-sector initiatives. The Gore Tax is unnecessary. The only 
purposes it serves are political.
    Under pressure from consumers and Congress, including this Member, 
the FCC initially voted to cut the program approximately in half and 
agreed to reform some of the more objectionable aspects of its 
implementation. However, the Commission later reversed course and 
ordered ``full'' funding of the Gore Tax program to the tune of $2.25 
billion. I am of the firm opinion that this backdoor tax increase 
imposed by unelected bureaucrats cannot be allowed to stand.
    I support the legislation before us as the minimum we should do to 
reign in an agency run amok. I also believe this case study confirms 
the need to reform the FCC and impose some discipline and more 
attention to congressional intent.
    Thank you, Mr. Chairman. I yield back.
                                 ______
                                 
Prepared Statement of Hon. Barbara Cubin, a Representative in Congress 
                       from the State of Wyoming
    Thank you, Mr. Chairman, for holding this very important 
legislative hearing on the bill H.R. 1746, the Schools and Libraries 
Internet Access Act.
    As a recent cosponsor of your legislation, I would like to commend 
you on your thoughtfulness in putting together this bipartisan, well 
crafted, and responsible bill.
    For the past two years I have continually gotten comments from 
angry constituents who are enraged about the federal charges on their 
phone bills.
    Today phone bills look more like tax statements than they do 
utility bills.
    H.R. 1746 would address this two-fold. First it would repeal one of 
the federal charges by replacing the FCC's existing schools and 
libraries program. Second, it would repeal altogether the three percent 
excise tax on October 1, 2004.
    Until the 2004 sunset of the excise tax, one percent of the tax 
would go toward funding the telecommunication services to qualified 
schools, libraries and rural health care providers.
    One of the most attractive things to me about H.R. 1746 is that it 
allows the funds to be allocated to all 50 states and used according to 
the states' plans.
    This effectively gets the federal government--namely the FCC--out 
of dictating how these monies should be spent and alleviates the 
uncertainty that the FCC could adjust, modify or eliminate altogether 
the funding mechanism.
    Let me be clear about one thing: schools, libraries and rural 
health care providers deserve to have the best advanced services 
available.
    H.R. 1746 would provide a tremendous amount of resources to enhance 
schools' and libraries' access to advanced telecommunications and 
information services.
    Mr. Chairman, I once again applaud your work on putting together 
this very important piece of legislation. I look forward to hearing 
from today's witnesses and look forward to one day seeing this bill 
become law. I yield back the balance of my time.
                                 ______
                                 
 Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
    Thank you Mr. Chairman. I am anxious to hear the views of our 
esteemed panel this morning on the Federal program that provides 
telecommunications services to schools, libraries and rural health care 
providers. I particularly would like to welcome my colleagues, 
Representatives Tancredo and Weller, to the Commerce Committee this 
morning to share their views on this important issue.
    Mr. Chairman, I think it is safe to say that no one on this panel, 
or around this entire country is opposed to having schools provide the 
best education and information possible to children. As we move at 
rapid speed into a digital arena, we should offer the most up to date 
service and technology to as many U.S. citizens as possible. That said, 
I do think rational minds disagree as to the best way to achieve this 
worthy goal.
    The program to provide these telecommunications services, sometimes 
called the E-RATE program, and sometimes also referred to as the ``Gore 
Tax'' is out of control. Currently there are over 2.45 billion dollars 
worth of requests from eligible schools, libraries and organizations. 
In order to meet this high level of demand, the FCC unilaterally 
increased the cap for this program this past summer. By doing so, the 
FCC not only raised the federal telephone E-Rate tax, but it also took 
bold steps to prevent phone companies from identifying the tax on their 
customers' phone bills. Whether one agrees or disagrees with the 
specifics of the program, we all should agree that folks should at 
least know when they're being taxed, and for what purpose.
    I question why the FCC assumes that they have the authority to take 
such action. The 1996 Telecommunications Act does not allow the FCC to 
increase such a tax without Congressional approval.
    In the Commonwealth of Virginia, even before the FCC doubled the 
tax earlier this summer, Virginians paid 50.2 million dollars during 
the first cycle of the Gore Tax, but in return, got back only 24.9 
million dollars from the FCC. By contrast, Puerto Rico paid only 13.3 
million dollars in the first cycle, but received a whopping 47.6 
million dollars in subsidies! The Gore Phone Tax is fundamentally 
illegal and unfair. It's unfair to all consumers, and it's certainly 
unfair to three-quarters of the States.
    I commend Chairman Tauzin for taking his initiative to address this 
problem with his bill, H.R. 1746, the Schools and Libraries Internet 
Access Act. This bill offers one possible solution which would address 
some of the concerns about the FCC's implementation of the program.
    I look forward to hearing more about this legislation, as well as 
other possible solutions from our two panels of witnesses this morning.
                                 ______
                                 
Prepared Statement of Hon. Anna G. Eshoo, a Representative in Congress 
                      from the State of California
    Because of a markup in the Health and Environment Subcommittee, I 
cannot attend this hearing on H.R. 1746, the Schools and Libraries 
Internet Access Act this morning.
    I'm troubled by the implications of H.R. 1746. The legislation 
would revamp funding for the e-rate, slashing the 3% federal 
communications excise tax by two-thirds and reallocating the remaining 
revenue to fund the e-rate. This means a significant reduction in funds 
to schools and libraries who need these funds to wire their schools to 
the Internet.
    In addition to funding the wiring of schools and libraries, this 
program offers schools and libraries a discount in the cost of 
accessing the Internet.
    H.R. 1746 would sunset all funding in the year 2004. This means 
that schools and libraries would no longer receive a discount. Our 
nation's schools and libraries are already overburdened by the costs 
associated with educating our children, and this legislation would be 
another burden for them to shoulder.
    This bill kills the e-rate. Republicans supported the e-rate when 
it was included in the 1996 Telecommunications Act and now the same 
Republicans are bashing it.
    The funding mechanism for the E-rate was part of the 
Telecommunications Act of 1996 and was passed in the House on a 
bipartisan vote of 414-16 and 91-5 in the Senate. Not one House 
Republican voted against the Act.
    We should support full funding of the e-rate program and here's 
why:

 The E-rate works. The E-rate program is playing a pivotal role 
        in bringing technology into our children's lives. The program 
        is making computers in the classroom the rule, not the 
        exception. Because of the E-rate we're closer to the day when 
        children, their parents and their teachers will walk into a 
        classroom filled with computers linked to the Internet, and not 
        give it a second thought.
 In just 18 months, the E-rate has connected over 600,000 
        classrooms in over 80,000 schools and libraries across America. 
        If the FCC funds the E-rate at $2.25 billion, the E-rate will 
        connect an additional 528,000 classrooms. For most schools and 
        libraries, the cost of both telephone and Internet access will 
        be cut in half. For some of our poorest schools, access will be 
        almost free.
 The E-rate is helping our country close the digital divide. 
        Because of the E-rate, children in the most isolated inner city 
        or rural town will have access to the same universe of 
        knowledge and technology as a child in the most affluent 
        suburb. The schools hurt most by attempts like H.R. 1746 to 
        slash the E-rate will be schools in rural America.
    The Education Department has found that smaller and economically 
disadvantaged schools are now just as likely to have Internet 
connections as larger, wealthier schools. The survey also found 80 
percent of the poorest schools have Net connections as of 1998, 
compared to 87 percent of the wealthiest schools. But at the classroom 
level, the poorer schools still lag in connectivity, with only 39 
percent online.
    Access to technology doesn't guarantee our children will succeed, 
but lack of technology guarantees our children will fail. For America 
to ensure that our children have a shot at the American dream, we must 
have computers in the classroom. The E-rate makes that goal more 
attainable.
    If our children do not have the technological resources they need 
to compete in an ever-changing global information economy, our nation 
will be poorer for it. The E-rate provides students more access to 
educational technology and empowers them with the tools they need to 
succeed in the Information Age.
    Being literate today means not only being able to read, but 
possessing computer skills. Technological literacy and ongoing access 
to information technology resources is essential, and for many school-
aged children and adults, our schools and libraries may be their only 
opportunity to access and use a networked computer.
    The American Electronic Association recently released a study that 
shows while math and science test score levels have improved since 
1990, fewer and fewer students are receiving degrees in either math or 
science.
    If America is going to keep competing and winning in this global 
economy, more of our children must choose careers in math or science. 
By putting computers in the classroom, the E-rate is helping to produce 
the next generation of scientists and mathematicians.
    I'm disappointed the Commerce Committee schedule prevents me from 
attending this hearing. I'm confident that the testimony will be useful 
in demonstrating how successful this program is and that there is 
absolutely no need to destroy the funding mechanism of a successful 
effort.

    Mr. Tauzin. The Chair is pleased to welcome our guests on 
the first panel. The Honorable Jerry Weller and the Honorable 
Tom Tancredo. Jerry, you can begin. We have a 5-minute rule but 
we are flexible. We appreciate your testimony.

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

    Mr. Weller. Thank you, Mr. Chairman, Mr. Markey, and the 
members of the subcommittee. Thank you for the opportunity to 
testify today on an important issue. I come before the 
subcommittee as a strong supporter of our Nation's goal of 
ensuring that every child in America has access to the Internet 
and computers through our local libraries as well as our local 
schools. And the reason is I believe in the 21st century 
knowledge and understanding of the Internet is a basic skill 
not only at home but in the workplace and we should ensure that 
every American child should have this opportunity and I think 
we all could agree on that in a bipartisan way. And that is why 
I appreciate the opportunity to testify today.
    I particularly also want to thank Chairman Tauzin for your 
leadership and the opportunity to work with you on legislation 
which we all believe will bring stability as well as legitimacy 
to an important program providing Internet access to local 
schools and libraries not only through access discounts but the 
installation of the wire, the fiber and the hardware in our 
local schools and libraries. Our work on this bill began as an 
effort to achieve a goal we all share, which is giving every 
American child access to the Internet. And when we passed the 
Telecommunications Act in 1996, it included a simple directive 
that any telecommunications carrier serving a particular 
geographical area must make any of its services under the 
universal service fund, USF, available at reduced rates to 
schools and libraries.
    Unfortunately, the FCC misinterpreted the 
Telecommunications Act and they have jeopardized the goal that 
we all share, which is providing Internet access for all of 
America's children.
    First the FCC determined that as much as $2,250,000 in 
funding should be made available to support universal service 
to schools and libraries. Second, the FCC expanded the scope of 
what was available for schools and libraries from just 
discounted rates on telecommunications services and decided to 
include Internet access costs and Internet connections, which 
essentially is the wire, the fiber, and the hardware.
    Third, the FCC created a whole new bureaucracy known as the 
School and Library Corporation to administer the Internet 
access program without authorization from Congress to do so. 
Finally, probably the mostly questionable of all the 
provisions, the FCC determined that the funds supporting the 
Internet access for school and libraries should come from a tax 
on all long distance telecommunications service providers.
    Here are the problems we are now facing: FCC has taken 
unauthorized action to create a new bureaucracy to administer a 
program whose funding base may not be secure and, second, the 
FCC has taken the act of imposing an unauthorized tax on 
telephone users in order to cover the expense of this 
enterprise.
    The FCC is incorrect in its contention that this 
unauthorized tax is a fee. A fee is a charge for a service 
rendered. However, long distance users 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 under our Constitution can impose a tax.
    As a member of the House Ways and Means Committee which has 
jurisdiction over tax issues, I believe this position taken by 
the FCC is wrong. Today many schools and libraries across this 
country have come to depend and look to the Internet access 
program as a source of funding. And of course this funding 
source, as we recognize it, is not secure, which means neither 
are their technology programs.
    In the district that I represent local school districts 
have received some funding. Lincoln Elementary School in 
Calumet City received over $51,000. Marseilles Elementary 
school received over $22,000. La Salle Bruton High School, 
which is over a century old, a building built like a fort, they 
estimate it is going to cost well over a million dollars for 
that school to put in the wire, the fiber and the hardware to 
guarantee every child access to the Internet.
    These and other schools across the country deserve to know 
that their Internet access funding is secure. The fact of the 
matter is the FCC implemented a program based upon a funding 
source that many Members of Congress believe they did not have 
the right to utilize.
    Congress, not the FCC, is the only body under our 
Constitution authorized to impose a tax. Chairman Tauzin and I 
want to fix this problem by ensuring that a funding source for 
school library Internet access is secure. The Schools and 
Library Internet Access Act would protect the technology 
assistance programs for the over 1,800 schools in Illinois 
alone by slashing the World War I, 3 percent telephone excise 
tax currently sent to the general treasury, to 1 percent and 
earmarking this remaining revenue to fund this important 
schools and library Internet access program through block 
grants to the States. In addition the slash in the current tax, 
the Schools and Libraries Internet Access Act would repeal the 
3 percent unconstitutional tax on long distance customers.
    Our legislation would save consumers $5 billion while 
providing over $1.7 billion in the first year to equip our 
Nation's schools and libraries with Internet access.
    The legislation effectively kills two birds with one stone. 
First, the legislation preserves and expands funding for the 
important Internet access assistance programs to 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 
taxing mechanism and reduces an antiquated World War I tax 
which disproportionately impacts the poor and our Nation's 
senior citizens while guaranteeing a revenue stream of anywhere 
from $1.7 to $2 billion a year for Internet access to our 
schools and libraries.
    We believe we can do it right this time. This legislation 
corrects the problem. The FCC and its tax created the problem. 
However, we all sit here today in support of the bipartisan 
goal of giving every child in America through their schools and 
libraries access to the Internet. And we believe we need to 
solve this problem by enacting the Schools and Libraries 
Internet Access Act. It is the right thing to do. Let's work in 
a bipartisan fashion and get it done. Therefore, I ask my 
colleagues on this subcommittee as well as members of this 
committee and the full House and Senate, to give the Schools 
and Library Internet Access Act favorable consideration.
    I look forward to working with you. Thank you for the 
opportunity to testify.
    [The prepared statement of Hon. Jerry Weller follows:]
 Prepared Statement of Hon. Jerry Weller, a Representative in Congress 
                       from the State of Illinois
    First, let me thank you for the opportunity to work with you on 
this important legislation which will bring stability and legitimacy to 
an important program which provides Internet access to local schools 
and libraries through access discounts. I appreciate the opportunity to 
testify here today.
    Our work on this bill began as an effort to achieve a goal we all 
share . . . giving every child access to the Internet through our local 
schools and libraries.
    When we passed the Telecommunications Act of 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 (USF) available at reduced rates to schools and 
libraries. Unfortunately, the FCC misinterpreted the Telecommunications 
Act and may have jeopardized the goal we all share, which is providing 
Internet access for all of America's children.
    First, the FCC determined that as much as $2.25 billion per year 
should be made available to support universal service for schools and 
libraries. Second, 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 internal connections (wiring). Third, the FCC created a whole 
new bureaucracy, known as the School and Library Corporation to 
administer the e-rate program without authorization from Congress to do 
so. Finally, with probably the most questionable of all of 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 long distance telecommunications service providers.
    Here are the problems that we now face: 1) The FCC has taken 
unauthorized action to create a new bureaucracy to administer a program 
whose funding base may not be secure 2) The FCC has taken the 
unconstitutional action of imposing an unauthorized tax on long 
distance users in order to cover the expense of this enterprise.
    The FCC is incorrect in its contention that this unauthorized tax 
is a fee. A fee is a charge for a service rendered; however, long 
distance users 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 the Constitution. The 
FCC's actions are being contested in court.
    The result is that many schools across the country have come to 
depend and rely on the E-Rate program. Without a secure funding source, 
their technology programs may be in jeopardy. Some examples in the 11th 
District of Illinois which I represent, Lincoln Elementary School in 
Calumet City, Illinois received $51,214 for internal connections and 
Internet access; Marseilles Elementary School received $22,055 for 
internal connections.
    These and other schools across the country deserve to know that 
their E-rate is secure. The fact of the matter is, the FCC implemented 
a program based upon a funding source that is unconstitutional. 
Congress, not the FCC, is the only body able to impose a tax. Chairman 
Tauzin and I want to fix this problem by ensuring that the funding 
source for the erate program is secure.
    The Schools and Library Internet Access Act would protect the 
technology assistance program for over 1,800 schools in Illinois alone 
by slashing the World War I three percent telephone excise tax 
(currently sent to the general fund) to 1% and earmarking the remaining 
revenue to fund the important school and library Internet access 
programs through block grants to the states. In addition to slashing 
the current tax, The Schools and Library Internet Access Act would 
repeal the 3% unconstitutional Tax on long distance customers. Our 
legislation will save consumers $5 billion while providing $1.7 billion 
in the first year to equip our nation's schools and libraries with 
Internet access.
    The legislation effectively kills two birds with one stone. First, 
the legislation preserves and expands funding for the important 
Internet access assistance program to 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 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 unconstitutional 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 Schools and Library Internet Access 
Act. It is the right thing to do. Lets work in a bipartisan fashion to 
get it done.
    Therefore I ask my colleagues to give the Schools and Libraries 
Internet Access Act favorable consideration in this committee.
    Thank you, Mr. Chairman

    Mr. Tauzin. Thank you, Mr. Weller, and now the Honorable 
Tom Tancredo from Colorado.

   STATEMENT OF HON. THOMAS G. TANCREDO, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF COLORADO

    Mr. Tancredo. Thank you, Mr. Chairman. I want to thank you 
for the opportunity to testify on H.R. 1746, the Schools and 
Libraries Internet Access Act, and appreciate the forum that 
you have provided to discuss the problems that frankly I 
believe to be inherent in a bizarre and incredibly complex 
world of telecommunications taxation.
    As an original cosponsor of this bill, I look forward to 
seeing its passage in the near future. The Schools and Library 
Internet Access Act goes a long way toward bringing some degree 
of relief to the confused and overtaxed phone customer. Simply 
trying to decipher the typical charges on one's phone bill 
today requires an analysis of a perplexing array of charges 
that defy easy explanation or a defensible rationale.
    Mr. Chairman, your bill could be called the telephone 
taxpayer's Bill of Rights as it epitomizes three cardinals of 
good tax policy: Simplicity, accountability and fairness, I 
believe all three are lacking in the present--and I sort of 
hesitate to use the word--system.
    I brought with me a constituent's phone bill from this last 
February, and I think it illustrates the point perfectly. We 
have since received many similar in nature. In the course of 1 
month the gentleman from Lakewood, Colorado, made a 1-minute 
phone call to Minneapolis costing 15 cents. As you will see by 
the facsimile of the bill that he sent me, he had $1.84 in 
taxes and charges on that 15-cent phone call. He was confused 
about this, of course. He thought that he might be actually 
paying $1.84 in taxes for every minute he spent on the phone. I 
don't know what it did to his long distance dialing from that 
point on and access, but it certainly probably scared him to a 
certain extent. I can only imagine that he has not used his 
long distance since then, at least to any extent.
    Although we can try to explain to the best of our ability 
what these charges were for, and of course he would face many 
of these inexplicable charges regardless of his calling 
frequency, at least the way this particular company, AT&T, 
chooses to bill for it. Other companies bill differently. They 
do bill as a result of a percentage of your usage. In this 
case, this company does not.
    To recover the costs of the universal service fund which 
funds the schools and libraries E-Rate program as well as other 
more traditional universal service programs, this gentleman's 
long distance phone company charged a flat rate of 93 cents per 
customer. Add on the 85 cents line charge for local service 
providers and the almost 100-year-old 3 percent 
telecommunications excise tax, the total is $1.99.
    Unfortunately, like all overtaxed phone customers, my 
constituent remains a victim to the whims of the FCC. In May of 
this year without so much as the expressed consent of Congress, 
the FCC raised the E-Rate tax by $600 million. The Wall Street 
Journal estimated that the increase could amount to an 
additional 40 cents per month on the average bill. The FCC's 
abilities to raise this tax has slipped through the cracks of 
the 1996 Telecommunications Act and more recently through the 
Federal judicial system, I think. It remains largely 
unaccountable for the way it levies these charges on a day-to-
day basis. There is no doubt in my mind that the FCC will 
appear before the Congress next year demanding statutory 
increases above the $2.25 billion cap on the E-Rate program.
    The first bill I introduced into the Congress was H.R. 692, 
the E-Rate Termination Act, to end the FCC's program entirely. 
I have consistently referred to the E-Rate program as a tax 
because I believe it meets the criteria of a tax. I certainly 
believe that my constituents, and this particular customer, 
would think of all those charges as a tax. I guess I could 
explain to them that they really are not a tax, that the FCC 
said they are not a tax, that the Court says they are not a 
tax. I don't really know whether or not he would believe that 
this thing that waddles, quacks and has feathers is anything 
but the duck that it really and truly is. It is a tax.
    By levying the charge on telecommunications companies that 
will not participate in providing services to schools and 
libraries, the FCC has extended the intent of the 1996 
Telecommunications Act. Testifying before the Ways and Means 
Committee, Commissioner Harold Furtchgott-Roth explains that 
quote: A tax confers no special benefit on the payee, is 
intended to raise general revenue, and is imposed for some 
public purpose. In contrast, a fee is a payment for a voluntary 
act such as obtaining a permit.
    Certainly the E-Rate program is not voluntary and the 
Congressional Budget Office has determined that all universal 
service contributions, including E-Rate contributions, should 
be treated as Federal revenues.
    The Schools and Libraries Internet Access Act will fund the 
E-Rate program in a more honest fashion by eventually bringing 
the program into the general fund where it can be subjected to 
the annual scrutiny of the congressional appropriators.
    Simplicity, accountability, fairness. Americans who support 
these principles in our tax policy should support the Schools 
and Libraries Internet Access Act, and I should say also, Mr. 
Chairman, that I am fully aware of the altruistic motives that 
were--that motivated the Congress of the United States in the 
adoption of the original legislation, and I am not arguing with 
them at all. But regardless of how altruistic they were, we 
have to recognize that some problems may exist because they 
were--because the bill developed in a vacuum to a certain 
extent. It developed without a lot of discussion about what was 
going on in this particular area to begin with. How many 
programs were we funding in the Federal Government for 
technology in the public schools?
    I am on the Committee on Education and the Workforce. The 
Secretary of Education came before our committee and I asked 
him specifically that question: How much are we doing just in 
the Education Department? How many programs do we actually use 
to fund technology in the schools? He said he was not sure. I 
said do you have any idea how many programs that other agencies 
are involved with? He said he was not sure but he would get 
back to us on that. He never has up to this point in time.
    The fact is when it is as uncoordinated as this is, to add 
another program of this nature, again no matter how altruistic 
in nature, could be counterproductive if we do not know what 
the government is doing in total, if we do not know exactly 
what is being collected and spent for the technology in 
classrooms and how that money actually produces some sort of 
change in classrooms.
    And we also make a--it is sort of a--well, an assumption 
about the present system, the present sort of industrial model 
educational system that we have in America as being the one we 
are going to have for throughout the next century and the one 
most able to accept this technology and deal with it 
successfully. And I suggest to you that we really don't know 
that this industrial model system where you have one building 
brick-and-mortar facility, all kinds of kids coming in the 
morning, all kinds of adults to meet them for 6 hours a day 184 
days a year inside this facility and we call that education. We 
don't know if that will really be the way we will be educating 
children in the next century.
    But we have made an assumption about that when we built the 
process into this particular piece of legislation or in the 
original Telecommunications Act. It is something I think that 
needs to be fixed and I thank you again, Mr. Chairman and 
members of the committee, for the opportunity to voice my 
support for this bill.
    [The prepared statement of Hon. Thomas G. Tancredo 
follows:]
  Prepared Statement of Hon. Thomas G. Tancredo, a Representative in 
                  Congress from the State of Colorado
    Good morning Mr. Chairman and Members of the Committee. I thank you 
for the opportunity to offer testimony on H.R. 1746, the Schools and 
Libraries Internet Access Act and appreciate the forum you have 
provided to discuss the problems I believe to be inherent in the 
bizarre and incredibly complex world of telecommunications taxation. As 
an enthusiastic original cosponsor of this bill, I look forward to 
seeing its passage in the near future.
    The Schools and Libraries Internet Access act goes a long way 
toward bringing some degree of relief to the confused and overtaxed 
phone customer. Simply trying to decipher the typical charges on one's 
phone bill today requires an analysis of a perplexing array of charges 
that defy either easy explanation or a defensible rationale.
    Mr. Chairman, your bill could be called the Telephone Taxpayer's 
Bill of Rights as it epitomizes three cardinal principals of good tax 
policy--simplicity, accountability, and fairness. I believe all three 
are lacking in the present ``system.''
Simplicity
    I have brought with me a constituent's phone bill from this past 
February that I think illustrates this point perfectly. In the course 
of one month, this gentleman from Lakewood, Colorado, made only a one-
minute phone call to Minneapolis costing 15 cents, and as you will see 
by the facsimile of the bill he sent me, he believed he was charged 
what is essentially $1.84 in taxes and charges. In his confusion over 
these charges, he feared he might be charged $1.84 in taxes for every 
minute he spent on the phone! I can only imagine that this poor man has 
not used his long distance service since!
    A closer examination of his phone bill shows that he would face 
many of these same inexplicable charges regardless of his calling 
frequency. To recover the costs of the universal service fund, which 
funds the Schools and Libraries E-Rate Program as well as other, more 
traditional universal service subsidies to rural areas, this 
gentleman's long distance phone company charged a flat rate of 93 cents 
per customer. Add on the 85 cents line charge for local service 
providers, and the 100-year-old three percent telecommunications excise 
tax, and his total bill was $1.99.
    The Schools and Libraries Internet Access Program would help 
Americans like my constituent from Lakewood by immediately reducing, 
and eventually phasing out the telephone customer excise tax, and by 
bringing the charges associated with the E-Rate Program in to the 
Treasury, and eventually on budget. No longer will the FCC have the 
ability raise his taxes through this program, and no longer will he be 
assessed a 100 year old federal tax originated as a luxury tax to fund 
the Spanish American War.
    Simplicity, my colleagues, is the message we want to support here, 
and that the Schools and Libraries Internet Access Act moves toward. 
Simplicity-not only in light of the myriad of taxes and surcharges that 
deluge a phone customer-but also in the way we manage our funding for 
the technology that schools receive. In a hearing before this 
Subcommittee last year, the Government Accounting Office estimated that 
at least 27 federal programs provide funding that may be used to 
purchase this technology for Schools and Libraries. For three of these 
programs that specifically target funding for technology in schools and 
libraries, the President requested a funding level of more than $1 
billion for Fiscal Year 2000.
    As a member of the Education Committee, I am delighted that this 
bill returns the control of technology funding in schools and libraries 
to the nation's elected officials. There is much work to be done in the 
Education Committee on this front. Of course, I find it ironic that the 
only intriguing argument I have heard in favor of the program as it 
currently stands, is that it is probably better managed than if it were 
run under the Department of Education. Again, that is another matter 
that Congress must address.
Accountability
    Americans deserve to hold their federal agencies, and Congress, 
accountable for the money spent on technology funding in schools and 
libraries. Moreover, they deserve accountability for the charges they 
pay on their phone bills.
    In a recent testimony before the Senate Committee on Commerce, FCC 
Commissioner Harold Furchtgott-Roth lamented that the FCC has made 
little progress in addressing the problems that plague the E-Rate 
program highlighted by the GAO in 1998 and denounced by many members of 
Congress. In March of 1999 the GAO published a progress report on the 
E-Rate program, riddled with evidence of poor, if any, accountability 
for the issuance of discounts. Specifically, the GAO stated that the 
FCC has not yet implemented the GAO's recommendation to cite adequate 
goals, performance targets, and measures for the program. It also cited 
a serious concern that too many schools were issued inappropriate 
discounts, and that an increasing number of such problems may occur if 
this program continues.\1\
---------------------------------------------------------------------------
    \1\ GAO/RCED-99-5 1. GAO Report to the Chairman, Committee on 
Commerce, Science, and Transportation, U.S. Senate, March 1999, pp. 7-
8.
---------------------------------------------------------------------------
    In May of this year, without so much as the expressed consent of 
Congress, the FCC raised the E-Rate tax by $600 million. The Wall 
Street Journal estimated that the increase could amount to an 
additional 40 cents per month on the average bill.\2\ The FCC's ability 
to raise this tax has slipped through the cracks of the 1996 
Telecommunications Act and more recently through the federal judicial 
system. It remains largely unaccountable for the way that it levies 
these charges on a day to day basis.
---------------------------------------------------------------------------
    \2\ ``Gore Tax Hike'' The Wall Street Journal, May 12, 1999.
---------------------------------------------------------------------------
    There is no doubt in my mind that the FCC will appear before 
Congress next year demanding a statutory increase of the $2.25 billion 
cap on the E-Rate program. Throughout the course of time that the FCC 
has so zealously fought for billions in E-Rate funding, it has delayed 
its consideration of revamping the more traditional channels of 
universal service funding, particularly those programs serving rural 
Americans.
    Mr. Chairman, the first bill I introduced in Congress was H.R. 692 
The E-Rate Termination Act, to terminate the FCC's program entirely. I 
introduced that bill on the same day that the House passed the Mandates 
Information Act, which will serve as a warning flag within bills we 
consider that may cause unfunded mandates on the private sector and 
consumers. This program is not only an unfunded mandate, it is an 
uncontrolled one, and Americans deserve more accountability.
Fairness
    The Schools and Libraries Internet Access Act will eliminate and 
phase out the E-Rate tax and the telephone customer excise tax, 
respectively. This is a measure of fairness for both taxpayers and the 
many telecommunications companies that currently contribute to the E-
Rate Fund, a back-door tax masked with ludicrous misnomers such as a 
``Mandatory Contribution.''
    I have consistently referred to the E-Rate Program as a ``Tax'' 
because I believe it meets the criteria of a tax rather than that of an 
administrative fee or charge. By levying the E-Rate universal service 
charge on every interstate telecommunications company, the FCC has 
exceeded the intent of the 1996 Telecommunications Act by charging 
companies, such as wireless phone companies, that will not see a 
financial return by providing services to schools and libraries. 
Testifying before the Subcommittee on Oversight of the House Committee 
on Ways and Means on August 4, 1998, Commissioner Furtchgott-Roth 
stated the following:
          In general, taxes can be distinguished from administrative 
        fees by determining the recipient of the ultimate benefit: a 
        tax ``confers no special benefit on the payee,'' ``is intended 
        to raise general revenue,'' or is ``imposed for some public 
        purpose.'' In contrast, a ``fee'' is a ``payment for a 
        voluntary act, such as obtaining a permit.'' As the Supreme 
        Court has held, and the D.C. Circuit further explained, a 
        ``fee'' is a payment ``incident to a voluntary act, e.g., a 
        request that a public agency permit an applicant to practice 
        law or medicine or construct a house or run a broadcast 
        station. The public agency performing those services normally 
        may exact a fee for a grant which, presumably, bestows a 
        benefit on the applicant, not shared by other members of 
        society.''
          Here, all these factors point toward the category of a tax: 
        the fund, which creates internet access for schools and 
        libraries, confers no particular advantages upon 
        telecommunications carriers in exchange for their 
        contributions, such as a license or permit; the funds have not, 
        as far as I can tell, been segregated from other government 
        monies; the purpose of the fund is a broad, social one, 
        purportedly to improve education for all Americans; and the 
        payment requirement is not triggered by a voluntary act on the 
        part of telecommunications carriers, such as the filing of an 
        application, but is a flat mandate.\3\
---------------------------------------------------------------------------
    \3\ The Honorable Harold Furchtgott-Roth, Commissioner, Federal 
Communications Commission before the House Subcommittee on Oversight of 
the House Committee on Ways and Means. August 4, 1998.
---------------------------------------------------------------------------
    Therefore, the current E-Rate program is funded by a backdoor tax--
collected in a mandatory rather than voluntary fashion. In fact, the 
Congressional Budget Office has determined that all universal service 
contributions should be treated as federal revenues, supporting the 
argument that this is federal revenue generated in the form of a tax.
    The Schools and Libraries Internet Access Act will fund the E-Rate 
program in a more honest fashion, by first establishing a trust fund 
program through a reduced telecommunications excise tax, and eventually 
bringing the program into the general fund, where it can be subjected 
to the annual scrutiny of Congressional appropriators. No longer will 
constituents pay for the E-Rate program through the funds described as 
a ``Universal Charge'' or ``Mandatory Contribution.''
    Finally, this bill should provide an enormous tax relief for those 
companies that do not see a return of business through the E-Rate 
program. The arbitrary and unfair charges on companies levied by the 
FCC to fund the E-Rate program will cease. Billions of dollars will be 
returned to the nation's growing high-technology business sector.
    Simplicity, accountability, and fairness. Americans who support 
these principles in our tax policy should support the Schools and 
Libraries Internet Access Act. I thank you again, Mr. Chairman and 
members of the Committee, for the opportunity to voice my support for 
this important bill.

    Mr. Tauzin. Thank you both. The Chair recognizes himself 
quickly. I appreciate both of your comments and the 
contributions. And I would like at this point to ask unanimous 
consent that written statements for all members be made a part 
of the record as well as our witnesses and also to ask 
unanimous consent to file under the record of this proceeding a 
new recent study entitled ``The High Cost of Taxing Telecom,'' 
prepared by Jeffrey Eisenach of the Progress and Freedom 
Foundation.
    [The information referred to follows:]
                    The High Cost of Taxing Telecom
                  by jeffrey a. eisenach 1
---------------------------------------------------------------------------
    \1\ Jeffrey A. Eisenach is president and co-founder of The Progress 
& Freedom Foundation. The views expressed here are his own and do not 
necessarily reflect those of The Progress & Freedom Foundation, its 
officers or Board of Directors.
---------------------------------------------------------------------------
Introduction and Summary
    Driven by technological progress, the telecommunications industry 
is nearing the end of a 30-year transition from natural monopoly to 
competitive market. Public policy has recognized this change through 
substantial deregulation and creation of a legal framework designed to 
facilitate competition. Tax policy, however, has not kept pace with the 
changing nature of the telecommunications business. As a result, the 
telecommunications industry is subjected to a vast array of taxes that 
have no apparent justification in the modern era and can be explained 
solely as holdovers from all but forgotten era. Simply put, there are 
too many taxes on telecommunications services, and they are far too 
high.
    Taxes on telecommunications are, inevitably, taxes on the Internet. 
Whether through dial-up access or Digital Subscriber Lines (DSL), over 
cable modems or wireless ones, access to the Internet takes place over 
the telecommunications network. Thus, high telecommunications taxes 
slow the spread of Internet access and discourage deployment of the 
broadband networks needed for the next generation of Internet growth. 
They raise the costs of electronic commerce for every business, big or 
small, and raise the price of Internet access for every household, rich 
or poor. Their impact is probably greatest, however, on poor 
households, small businesses and rural communities.
    The convergence of previously separate telecommunications 
technologies--cable, telephone, satellite, wireless--into a single 
marketplace adds further urgency to the need for telecommunications tax 
reform. Each of these different industry sectors is subject to its own 
tax regime, meaning that the same service can be subject to very 
different tax treatment depending on the type of firm that offers it, 
and efforts to eliminate such consistencies are hampered by the extreme 
complexity of the system.
    This paper represents a first step in an effort to reassess and to 
recommend reforms in telecommunications taxes. It describes the current 
regime and presents very preliminary findings about the impact of 
current policies in terms of both economic efficiency and fairness. The 
paper concludes with a brief discussion of potential policy 
implications.\2\
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    \2\ This paper was prepared for presentation to the Advisory 
Commission on Electronic Commerce, September 14, 1999. It presents 
preliminary results from an ongoing study of telecommunications 
taxation underway at The Progress & Freedom Foundation. All results are 
tentative and subject to further modification. The final study is due 
out in mid-2000.
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Telecommunications Taxes in the United States
    Telecommunications services in the United States are subject to an 
almost incomprehensible array of taxes at the local, state and Federal 
levels. Indeed, there are so many taxing entities levying so many 
taxes, fees and other charges that there literally is no comprehensive 
data source from which a complete listing can be obtained. 
Nevertheless, it is possible to paint a fairly accurate picture of the 
overall level of telecommunications taxes.3
---------------------------------------------------------------------------
    \3\ A major new study by the Committee on State Taxation (COST) 
provides a wealth of data on state and local taxation of 
telecommunications services. See Committee on State Taxation, 50-State 
Study and Report on Telecommunications Taxation (Washington, DC: 
Committee on State Taxation, 1999). This study will make possible far 
more sophisticated analyses of telecommunications taxes than have been 
possible in the past. While the study was not completed in time for its 
results to be incorporated in this paper, the author wishes to thank 
COST for an advance copy.
---------------------------------------------------------------------------
    Federal Taxes: The Federal government taxes telecommunications in 
three significant ways. First, it levies a three-percent excise tax on 
all telecommunications services. Second, it imposes fees on long-
distance carriers that are used to subsidize the provision of 
telecommunications services, wiring and computer-related equipment at 
schools, libraries and rural health care centers. Third, it oversees a 
system of ``access charges'' through which long-distance phone carriers 
subsidize the below-cost provision of local telephone service to 
selected customers. Of these, only the first is universally agreed to 
be a ``tax.'' 4
---------------------------------------------------------------------------
    \4\ While these are the three most significant Federal taxes, they 
are by no means the only ones. Telecommunications carriers pay a wide 
variety of regulatory fees, participate in extremely complex cross-
subsidization programs, are subject to a number of unfunded mandates 
and face numerous unfavorable depreciation and related provisions.
---------------------------------------------------------------------------
    The Federal telecommunications excise tax (FET) adds three percent 
to the cost of every telecommunications bill. It covers both long 
distance and local telephone service for both residential and business 
customers. Revenues from the tax are treated as general revenues. The 
FET is projected to raise about $5 billion in FY 1999. As shown below, 
this makes it the third largest general revenue excise tax in the U.S. 
budget, just behind alcohol and tobacco. Nevertheless, the tax accounts 
for less than four tenths of one percent of Federal revenue. By 
comparison, the Office of Management and Budget estimates the FY 1999 
Federal budget surplus at $99 billion.

                               Table One:
                      General Fund Excise Taxes \5\
------------------------------------------------------------------------
                                                          Share of On-
              Product               Revenue (FY 1998,    Budget Federal
                                        millions)           Revenue
------------------------------------------------------------------------
Alcohol...........................             $7,215              0.53%
Tobacco...........................             $5,657              0.44%
Telecommunications................             $4,910             0.38%
------------------------------------------------------------------------
\5\ Beginning in 1998, revenues from the excise tax on motor fuels were
  removed from general revenues and dedicated virtually entirely to the
  highway trust fund. At nearly $40 billion, the tax on motor fuels is
  far and away the largest Federal excise tax in terms of revenue
  raised. Source: Office of Management and Budget, Budget of the United
  States: Historical Tables (Washington: Government Printing Office,
  1999).
Source: Office of Management and Budget

    The second major tax on telecommunications services is the tax 
levied on long distance carriers to support the Federal Communications 
Commission's ``e-rate'' program. In May 1999, the FCC voted to raise 
the annual amount of this tax by approximately $1 billion to $2.25 
billion annually.6 These taxes are passed through by long 
distance carriers to individual customers, increasing monthly bills by 
just over $1 per month per line.7
---------------------------------------------------------------------------
    \6\ See Federal Communications Commission, In re: Federal-State 
Board on Universal Service: Twelfth Order on Reconsideration in CC 
Docket No. 96-45 (May 27, 1999). See also Dissenting Statement of 
Commissioner Harold Furchtgott-Roth (August 5, 1999). The FCC has gone 
to great lengths to ensure that the charges associated with the e-rate 
are not seen by the public as taxes. [See, for example, In re: First 
report and Order and Further Notice of Proposed Rulemaking, Truth-in-
Billing and Billing Format; CC Docket 98-170 (May 11, 1999). In this 
``truth in billing'' proceeding, the FCC effectively prohibited long 
distance carriers which pay into the fund from including on their bills 
a line showing the portion being passed through to consumers.] All 
documents available at www.fcc.gov.
    \7\ The e-rate program has been roundly criticized by academic 
economists. See, for example, Jerry Hausman, Taxation by 
Telecommunications Regulation: The Economics of the E-Rate, 
(Washington: The AEI Press, 1998).
---------------------------------------------------------------------------
    The third major Federal tax levied on telecommunications services 
is the most ambiguous and controversial of all: It is the system of 
access charges imposed on long-distance carriers to compensate local 
carriers for use of the local facilities used to complete long distance 
calls. While a comprehensive analysis of the access charge system is 
far outside the scope of this paper, it is generally agreed that the 
charges are higher than can be justified by the economics of local 
access per se, and in fact are part of the ``universal service'' regime 
that holds prices for some customers below cost by raising prices on 
other customers. To the extent access charges represent de facto 
government mandated transfers from some customers to others, it is 
difficult to argue that they are not ``taxes.''
    State and Local Taxes: While Federal taxes on telecommunications 
services are both high and complex, state and local taxes are both much 
larger and far more complex.
    As shown in Table Two below, there are approximately 37 different 
types of taxes levied on telecommunications services by state and local 
governments in the United States. These include excise taxes, franchise 
fees, right of way charges, gross receipts taxes, license fees, 911 
fees, public utility taxes and even special levies for programs such as 
poison control centers. In some cases these taxes apply to local 
telephone services only; in others they extend across state borders and 
apply to long distance services as well. Wireless services are often 
taxed differently from landline services, and--as discussed further 
below--telecommunications services offered by non-traditional carriers 
such as competitive local exchange carriers (CLECS) may in practice be 
taxed differently from the same services when offered by traditional 
carriers.

                               Table Two:
                State and Local Telecommunications Taxes
------------------------------------------------------------------------
                   State                           Local/Municipal
------------------------------------------------------------------------
Franchise Taxes...........................  Franchise Taxes
Sales & Use Taxes.........................  Sales & Use Taxes
Telecommunications Excise Taxes...........  Local 911 Tax
Gross Receipts Taxes......................  Excise Taxes
License Fees..............................  Telecommunications Taxes
Utility Taxes, Utility User Taxes, PUC      Gross Receipts Taxes
 Fees.
Rental/Lease Taxes........................  License Fees
Utility Sales Taxes.......................  Utility Taxes
Business & Occupation Taxes...............  Access Line Tax
Infrastructure Maintenance Fees...........  Rental/Lease Taxes
911 Fees, Emergency Operation Charges, 911  Telephone Relay Surcharge/
 Database Charges, 911 Equalization          Universal Lifeline
 Surcharge.                                  Surcharge
Intrastate Surcharge......................  Public Service Taxes
High Cost Fund Surcharge..................  Utility Users Tax
Relay Service, Communications Devices       Infrastructure Maintenance
 Surcharges, Universal Access Charges.       Fees
Access Line Charges.......................  Right-of-Way Charges
Infrastructure Fund Reimbursement.........  911 Fees
Poison Control Surcharge (TX).............  Business & Occupation Taxes
Public Utility Commission Fees............
Teleconnect Fund..........................
Universal Service Charges, Universal
 Lifeline Telecommunications Surcharge.
------------------------------------------------------------------------
Source: AT&T, The Progress & Freedom Foundation

    One important data base for analysis of telecommunications taxes is 
contained in a survey published annually by the Federal Communications 
Commission. The FCC survey reports on 21 types of actual taxes, fees 
and other charges appearing on local telephone bills for 95 communities 
in 41 states.
    The FCC data do not include taxes levied on long distance services, 
nor do they distinguish between taxes levied by state governments and 
those levied at the local level. However, they do make it possible to 
determine the overall level of Federal, state and local taxes on local 
phone bills in both absolute and percentage terms.
    Table Three below summarizes this FCC survey data for the 20 
highest-tax major metropolitan areas for 1997, the last year for which 
the Commission has made available the disaggregated data required for 
our purposes.8 It shows that taxes on local telephone 
service amount to as much as 35 percent of the total phone bill, 
accounting in some jurisdictions for over $4 per month, or as much as 
nearly $60 per year. For the 95 jurisdictions overall, taxes average 
just over $2 per month, or about 16 percent of the total local service 
bill.9
---------------------------------------------------------------------------
    \8\ While data from its 1990-1997 surveys is posted on the FCC's 
Web site, Commission staff have refused without explanation repeated 
requests to make available the 1998 data needed to break out the 
various components of taxes and fees that make up local bills. We 
remain hopeful this data will be made available in the immediate 
future.
    \9\ These figures are broadly consistent with those reported in the 
COST study, which found an overall average rate of 18 percent 
nationally, with the highest state-average rate approaching 30 percent.
---------------------------------------------------------------------------
    The FCC data also permit us to compare the relative magnitude of 
different types of taxes. As shown in Figure One (on the following 
page), state and local excise taxes account for over half (52 percent) 
of the taxes on a local telephone bill. State and local fixed fees add 
another four percent of the total, while 911 fees (also levied by state 
and local governments) make up yet another 22 percent. The Federal 
excise tax accounts for less than one fourth (22 percent) of the taxes 
on a local phone bill.

                               Table Three
     Telecommunications Taxes in the Twenty Highest-Tax Cities \10\
------------------------------------------------------------------------
                                                             Tax
                       City                        ---------------------
                                                      Amount      Rate
------------------------------------------------------------------------
Richmond, VA......................................      $4.85      35.7%
Corpus Christi, TX................................      $2.57      27.7%
Tampa, FL.........................................      $3.06      25.9%
Chicago, IL.......................................      $2.74      25.3%
Baltimore, MD.....................................      $4.15      25.1%
Dallas, TX........................................      $2.63      24.9%
St. Louis, MO.....................................      $2.57      22.7%
Kansas City, MO...................................      $2.55      22.5%
Brownsville, TX...................................      $1.99      22.2%
Houston, TX.......................................      $2.44      21.7%
Los Angeles, CA...................................      $2.43      21.6%
San Antonio, TX...................................      $2.10      21.0%
Fort Worth, TX....................................      $1.93      19.2%
Oakland, CA.......................................      $2.14      19.0%
Atlanta, GA.......................................      $3.31      19.0%
Salinas, CA.......................................      $1.97      17.5%
San Jose, CA......................................      $1.85      16.5%
Miami, FL.........................................      $1.73      16.2%
Detroit, MI.......................................      $2.15      16.2%
Huntsville, AL....................................      $2.48      15.2%
Weighted Average (95 Cities)......................      $2.04      15.7%
------------------------------------------------------------------------
\10\ Calculated based on data collected by the Federal Communications
  Commission. Listed cities include only those over 100,000 population.
  Weighted average includes all 95 cities in sample. Taxes include the
  Federal excise tax (3%), state and local excise taxes, state and local
  fixed taxes, 911 excise taxes and 911 fixed taxes appearing on local
  residential telephone bills. Additional taxes (e.g. franchise taxes,
  public utility taxes, property taxes, etc.) not shown on the
  customer's bill are not included, nor is the Federal Subscriber Line
  Charge. See 1999 Reference Book of Rates, Price Indices, and
  Expenditures for Telephone Service (Industry Analysis Division, Common
  Carrier Bureau, Federal Communications Commission, February 1999),
  Table 14.1. The disaggregated data used to calculate the figures in
  this table are posted on the FCC's Web site, at www.fcc.gov/Bureaus/
  Common--Carrier/Reports/FCC-State--Link/lec.html

                 Figure 1: Composition of Telecom Taxes
[GRAPHIC] [TIFF OMITTED] T9995.001

    Because these figures include only taxes that are imposed on local 
telephone service, they do not reflect the Federal ``e-rate'' tax 
(which is imposed on long-distance carriers and passed through to 
consumers on long-distance bills). Similarly, they do not account for 
the portion of the Federal excise tax applied to long distance charges, 
or whatever portion of Federally mandated access charges one might 
attribute to universal service and thus appropriately characterize as a 
tax. Even if these charges were included, however, they would not 
change the basic conclusion that emerges from Figure One: On average, 
states and localities tax telecommunications even more heavily than 
does the Federal government.11
---------------------------------------------------------------------------
    \11\ Again, this conclusion is consistent with the findings of the 
COST study.
---------------------------------------------------------------------------
    The FCC data also permit an examination of the trend in 
telecommunications taxes over time. As shown in Figure Two below, the 
trend is towards significantly higher taxes. Since 1986, the average 
tax rate on local phone bills has risen from 10.7 percent to 17.6 
percent. In dollar terms, taxes on the average monthly phone bill have 
risen by 62 percent during this period, from $1.51 in 1986 to $2.41 in 
1998.

            Figure 2: Telecommunications Tax Rates 1986-1998
[GRAPHIC] [TIFF OMITTED] T9995.002

    Source: Federal Communications Commission, Trends in Telephone 
Service (February 1999), Table 14.1.12
---------------------------------------------------------------------------
    \12\ The PFF estimates in Table Three above are based on a somewhat 
more conservative methodology than that used by the FCC to calculate 
the percentages in Figure Two above. Thus, the FCC estimates the 
average tax rate in 1997 as 17.4 percent, compared with PFF's 15.7 
percent.
---------------------------------------------------------------------------
    In summary, telecommunications taxes in the United States are 
numerous, complex, and high relative to other goods and services--and 
getting higher.
The High Cost of Taxing Telecom
    Economists and other policy analysts agree on three broad criteria 
by which tax policy should be judged: Efficiency, equity and 
enforceability. The efficiency criteria implies that taxes should 
reduce overall economic welfare as little as possible. The equity 
criteria suggests that taxes should contribute to (or at least not 
detract from) some generally accepted sense of fairness in the 
distribution of income and wealth. The enforceability criteria simply 
means that taxes ought to be designed in a way that minimizes the 
administrative and other costs of collecting them.
    In the pre-competition, pre-Internet world of plain old telephone 
service, telecommunications taxes probably looked relatively good by 
these traditional standards of tax analysis:

 Efficiency: Historically, telecommunications taxes probably 
        caused relatively small welfare losses. This is because the 
        quantity of plain old telephone service (POTS) purchased 
        (especially local service) was relatively insensitive to price 
        (it was price inelastic), and thus unresponsive to any price 
        increases caused by high tax rates.13 So long as 
        taxes did not produce large changes in the quantity or types of 
        telecommunications services purchased, the misallocation of 
        economic resources caused by telecommunications taxes was 
        small.
---------------------------------------------------------------------------
    \13\ The demand for basic local telephone service is highly 
inelastic. See, for example, Hausman, 1999.
---------------------------------------------------------------------------
 Equity: Telecommunications taxes were part and parcel of a 
        system of price regulation that provided significant subsidies 
        for those at the lower end of the income spectrum or who, for 
        whatever reason, were felt to deserve relatively low telephone 
        prices. And, because telecommunications carriers were 
        guaranteed a regulatory rate of return, neither they nor their 
        shareholders suffered when taxes were raised.
 Enforceability: Telecommunications taxes were levied on a 
        single provider, the monopoly telephone company, which was 
        sufficiently large and sophisticated to comply efficiently with 
        even a fairly complex tax regime. To the extent there were 
        ambiguities in the system, these could be worked out between 
        the lawyers for the phone company and the tax collectors, 
        probably in conjunction with the state regulators.
    As discussed in the Appendix, however, there are massive changes 
underway in the telecommunications marketplace. These changes turn the 
calculus of telecommunications taxes on its head. Whereas 
telecommunications taxes may once have been relatively desirable (as 
compared with other taxes), they are now arguably the most destructive 
taxes being levied on the American economy.
    The work now underway at The Progress & Freedom Foundation aims to 
present a complete analysis of the impact of telecommunications taxes, 
and the objective of this paper is not to anticipate or prejudge the 
results of that analysis. At the same time, it is already quite 
apparent that, in today's converged, digital, Internet-defined 
marketplace, telecommunications taxes do not hold up well to the 
scrutiny of the traditional analysis described above.
    Telecom Taxes and Economic Efficiency: From the perspective of tax 
analysis, the most significant change in telecommunications markets may 
lie in the changing nature of telecommunications demand. Whereas demand 
for POTS was relatively inelastic, demand for the vast array of new 
telecommunications products appears to be relatively price elastic. 
Technically, this means that a relatively small percentage change in 
the price of telecommunications products results in a relatively large 
percentage change in the quantity purchased. In practical terms, it 
means that telecommunications taxes may cause many people to purchase 
fewer telecommunications services than economic efficiency would 
require.
    Consider, perhaps most importantly, the market for broadband 
communications--i.e. for high-speed connections to the Internet. In the 
past, high-speed Internet access was available only through so-called 
``T-1'' lines which, at $2,000 or more per month, were affordable only 
by large corporations or the very wealthy. Recently, however, two new 
technologies have emerged that make broadband access potentially 
affordable for virtually everyone. Digital Subscriber Line (or ``DSL'') 
technology allows a standard telephone line to be converted into a 
high-speed data line. Offered by the major telephone companies, as well 
as a growing cadre of competitive ``CLECs'' and ``DLECs,'' DSL services 
are being offered in many areas of the country for $40-$60 per month. 
At the same time, Cable Modem technology is now offering very similar 
services at competitive prices.14
---------------------------------------------------------------------------
    \14\ See Federal Communications Commission, Inquiry Concerning the 
Deployment of Advanced Telecommunications Capability (CC Docket 98-146, 
August 7, 1998).
---------------------------------------------------------------------------
    Making affordable broadband services available to all Americans is 
one of America's highest economic priorities. As FCC Chairman Bill 
Kennard put it in a recent speech, ``despite all the technical advances 
and globalization, the formula for economic success has remained the 
same: economic prosperity relies on high-speed access to the critical 
network of information and commerce. That network is the Internet, and 
the type of access needed is broadband.'' 15
---------------------------------------------------------------------------
    \15\ Hon. William Kennard, ``The Road Not Taken: Building a 
Broadband Future for America,'' Speech to the National Cable Television 
Association, June 16, 1999.
---------------------------------------------------------------------------
    The available evidence suggests that demand for broadband services 
is highly elastic--that is, sensitive to price. A recent study by 
Robert Crandall and Chuck Jackson, for example, estimated that only 
four million consumers would be willing to pay $70 per month for an 
upgrade from 56.6 kb/s Internet access to 1.1 Mb/s, but 20 million 
would pay $25.16
---------------------------------------------------------------------------
    \16\ See Robert W. Crandall and Charles L. Jackson, Eliminating 
Barriers to DSL Service, unpublished manuscript, May 1998.
---------------------------------------------------------------------------
    Applying the available evidence on elasticities of demand for 
broadband services to current telecommunications tax rates yields 
disturbing results. Indeed, as shown in Table Four below, the available 
evidence suggests telecommunications taxes already are having a 
significant impact in slowing the adoption of high speed Internet 
access to American households. And, as the number of households with 
access to broadband services grows, this effect will grow in the 
future. Specifically, at the national average telecom tax rate of 16 
percent, we estimate that at least 165,000 households, and perhaps as 
many as 2.9 million households, are being effectively priced out of the 
market for broadband Internet access in 1999. As the availability of 
broadband services spreads, and the number of potential customers 
grows, these estimates go up significantly over time. By 2002, at 
current tax rates, we estimate that between 1.2 million and 4.2 million 
households will be denied broadband Internet access by high 
telecommunications taxes.
    If telecommunications taxes were to continue to rise, the impact 
would grow more than proportionately. For example, a 20 percent tax 
burden (similar to current rates in Baltimore, Dallas, Los Angeles and 
Tampa) is estimated to reduce broadband penetration by approximately 11 
percent. However, a 33 percent burden (similar to the current rate in 
Richmond, Virginia) reduces predicted broadband penetration by nearly 
20 percent.

                                                   Table Four:
                         The Impact of Telecommunications Taxes on Broadband Penetration
----------------------------------------------------------------------------------------------------------------
                                                                                          Children in Households
            Tax Rate \17\               Impact on Penetration      Households Denied      Denied Internet Access
                                            (Percent) \18\        Internet Access \19\             \20\
----------------------------------------------------------------------------------------------------------------
                                                                           1999
16%..................................   -7.5%.................  0.2 million-2.9 million  0.1 million-1.9 million
20%..................................   -9.3%.................  0.2 million-3.6 million  0.1 million-2.3 million
33%..................................  -18.9%.................  0.4 million-7.3 million  0.3 million-4.8 million
                                                                           2002
16%..................................   -7.5%.................  1.2 million-4.2 million  0.8 million-2.7 million
20%..................................   -9.3%.................  1.5 million-5.2 million  1.0 million-3.4 million
33%..................................  -18.9%.................  3.0 million-10.6         1.9 million-6.9 million
                                                                 million.
----------------------------------------------------------------------------------------------------------------
Source: The Progress & Freedom Foundation
\17\ Actual tax rate applied to sales of broadband services, per month per line, irrespective of whether applied
  on a percentage or per line basis.
\18\ Arc price elasticities of demand are assumed to be -0.51 in the $40-$50 range and -1.23 in the $50-$60
  range. See Crandall & Jackson, p. 26. Costs are assumed to be constant at $40 throughout the range of output.
\19\ Upper bound based on estimate of 38.8 million Internet connected households in 1999; 56.0 million Internet
  connected households in 2002. Lower bound based on estimate of 2.2 million broadband-connected households in
  1999; 15.8 million broadband connected households in 2002. Both estimates by Forrester Research. See Erran
  Carmel, Jeffrey A. Eisenach and Thomas M. Lenard. The Digital Economy Fact Book (Washington: The Progress &
  Freedom Foundation, 1999), pp. 7,35. Hereafter cited as Fact Book.
\20\ Based on U.S. Census Bureau, Current Population Reports, March 1998 Update (Approximately 35 percent of
  American households have children under 18 living at home, and these families have an average of 1.86 children
  per family).

    Telecom Taxes and Equity: The equity consequences of 
telecommunications taxes are also being affected by the changing 
marketplace. As noted above, telecommunications taxes in the pre-
competition, pre-digital environment were part and parcel of a 
regulatory regime that set virtually all prices at levels designed to 
ensure equity while offering a fair return to telephone companies. 
Thus, prices could be set in such as way as to offset the inherently 
regressive nature of fixed and excise (i.e. percentage) taxes on 
telecommunications.
    In a competitive environment, of course, such cross-subsidies are 
simply unsustainable, and indeed the Federal Communications Commission 
is moving gradually in the direction of reducing and/or eliminating 
such cross subsidies.
    For products, like POTS, where elasticities of demand are low and 
prices (even if allowed to rise to full cost) are affordable for most 
families, the impact of removing such cross subsidies should be 
relatively small. Again, however, the analysis is quite different when 
one considers the full impact of telecommunications taxes on products 
with high elasticities of demand.
    Returning again to the example in Table Four above, we have 
estimated the impact of current and possible future telecommunications 
taxes on the availability of at-home broadband Internet access for 
children. As shown in the table, we estimate that, at current tax 
rates, between 800,000 and 2.7 million children will be denied such 
access over the next three years.
    It should also be noted that these figures reflect the average 
impact of telecommunications taxes on all customers, assuming all are 
equally sensitive to price changes. This assumption is open to 
question, in at least two specific ways. First, households with lower 
incomes are likely to be more sensitive to changes in 
telecommunications prices than those with higher incomes.21 
Thus, telecommunications taxes are likely to deny broadband access to 
proportionately more ``poor'' families (and their children) than to the 
rich. Second, because the costs of deploying broadband services in 
rural areas are higher and rural incomes are lower than the national 
average, it is also likely that high telecommunications taxes will have 
a greater impact on rural areas than on urban or suburban ones. Thus, 
telecommunications taxes contribute directly to the digital divide, 
whether it is expressed in terms of geography, income or both.
---------------------------------------------------------------------------
    \21\ See, for example, U.S. Department of Commerce, Falling Through 
the Net (July 1999), p. 81.
---------------------------------------------------------------------------
    Telecom Taxes and Enforceability: As discussed further in the 
Appendix, the emerging market for telecommunications services is the 
antithesis of a monopoly. As former White House Internet Advisor Ira 
Magaziner put it in a recent Progress & Freedom Foundation paper, 
``with the Internet and this new environment of convergence, we are 
going to have the greatest amount of competition the world has ever 
seen.''
    The competition now breaking out in the telecommunications 
marketplace is of two types. First, it consists of numerous companies 
all competing to offer the same product in the same market. Thus, 
nearly all U.S. markets now have more than one company offering local 
telephone service, and most states have literally dozens of companies--
many of them small and relatively young--offering telephone services in 
their states. An obvious implication of this sort of competition for 
telecommunications taxes is to increase administrative costs for both 
tax collectors and for the companies. And, because such costs are, in 
effect, fixed costs of entering new markets, they end up serving as 
barriers to entry, thereby reducing economic efficiency.
    The second type of competition is even more problematic for tax 
authorities: It is competition to offer new and different services, 
often through new and different means. It is here that the current tax 
regime begins simply to collapse.
    When, for example, is a service a ``telecommunications service''? 
This used to be a pretty straightforward question: It was a 
telecommunications service if it was offered by the phone company. Then 
along came wireless (i.e. cellular) telephony. For the most part, 
wireless telephony was also treated as a telecommunications service. At 
about this same time, AT&T was broken up into its local and long-
distance components. Could the states tax the long distance 
(interstate) part of the bill? As it turned out, under a 1989 Supreme 
Court decision, they could: Interstate calls were telecommunications 
services too.
    Once data services are added to the pot, however, the question 
becomes far more ambiguous. Is ``Internet access'' a telecommunications 
service? The answer, at the moment, is that no one knows for sure. 
Indeed, just two weeks ago, on August 25, 1999, the U.S. Court of 
Appeals for the District of Columbia granted the FCC's request to 
remand an August 1998 order determining that ``advanced'' 
telecommunications services are either ``telephone exchange'' or 
``telephone access'' services.22 In other words, even the 
national authority on telecommunications policy--the FCC--isn't sure 
what counts as telecommunications anymore.
---------------------------------------------------------------------------
    \22\ See Federal Communications Commission, ``Comments Requested in 
Connection with Court Remand of August 1998 Advanced Services Order'' 
(Public Notice, September 9, 1999).
---------------------------------------------------------------------------
    In fact, the question of who should pay telecommunications taxes, 
and on what tax base, is certain to get more complex before it gets 
simpler. For example: 23
---------------------------------------------------------------------------
    \23\ The issues described below are illustrative of a vast array of 
questions now facing taxing authorities with respect to 
telecommunications taxes. For one thoughtful review of such issues, see 
Richard McHugh, Sales Taxation of Telecommunications Service in the 
State of Utah (Georgia State University School of Policy Studies, 
February 1997).

 When telephone companies bundle Internet Service Provider 
        services with DSL services, are those services taxable as 
        telecommunications services? Or are they exempt from taxation 
        under the moratorium imposed by the Internet Tax Freedom Act? 
        Perhaps they are taxable only in part. If so, how should taxing 
        authorities decide where to draw the line?
 Does the answer to the above question change if the same 
        service is provided by an Internet Service Provider using DSL 
        lines leased from a telephone company? (The answer, apparently, 
        is that it depends what state you are in, as some states in 
        fact treat the two situations differently while others treat 
        them the same.)
 Is broadband Internet access offered by a cable television 
        company a telecommunications service? What if the service is 
        offered over telephone lines leased from a phone company? If it 
        is offered over the cable company's own phone lines?
    The list of such questions could go on indefinitely--and, on the 
current path, it will, as each of these questions and literally 
thousands more will need to be decided by taxing authorities all across 
the U.S. It seems unlikely that the decisions they reach will be 
consistent with one another, forcing telecommunications providers to 
create increasingly complex compliance systems--or, again, to choose 
not to enter some markets in order to avoid the administrative burdens 
of doing so.
    In summary, applying the current, highly complex system of 
telecommunications taxes to the new, competitive telecommunications 
market will create serious problems of enforceability, imposing high 
compliance costs on both tax collectors and companies.
Conclusions and Tentative Policy Implications
    The circumstances that made it possible to subject 
telecommunications services to a complex system of extremely high tax 
rates have changed. In fact, the same traditional tax policy analysis 
that suggests that telecommunications taxes were relatively efficient 
ways to raise revenue in the pre-competition, pre-Internet environment 
strongly suggests that they are quite costly and highly inefficient 
today.
    Policymakers need to re-examine the panoply of taxes currently 
applied to telecommunications with an eye towards both tax 
simplification and tax reduction. For states and localities, which 
together account for more than three-fourths of all telecom taxes, 
there is an urgent need to put such reforms in place at a pace 
consistent with the rapid development of the marketplace. In this case, 
at least, tax policy needs to be worked on ``on Internet time.''
                               Appendix:
               the changing market for telecommunications
    The market for telecommunications has changed dramatically in 
recent years. It has changed from a natural monopoly to a competitive 
market. It has changed from technologically homogenous and stable 
market to one with many competing and rapidly changing technologies. 
And, it has changed from a market that followed the overall economy to 
one that is, more than any other, leading it.
    For most of its history, the telecommunications industry has been 
thought of as a natural monopoly and regulated as a traditional public 
utility. During the 1970s and 1980s, however, technological progress 
began to transform the telecommunications marketplace into one in which 
competition was both possible and desirable. In the 1980s, digital 
switching technologies first made it economical to interconnect 
multiple long distance and wireless carriers to the local switching 
system. The results were the breakup of AT&T, the creation of the 
cellular telephone industry and the development of competitive markets 
for both long distance and wireless telephone services. Local telephone 
service, however, continued to be viewed as a natural monopoly and 
regulated as a public utility.
    By 1996, it was generally agreed that further technological 
progress was rapidly making competition possible not only in the long 
distance and wireless markets, but also in the market for local 
telephone service. Similarly, most policymakers agreed that, thanks 
largely to competition from direct satellite broadcasting, the market 
for cable television was also becoming competitive. Recognizing these 
changes, Congress passed Telecommunications Act of 1996, which ended 
rate regulation of cable television and initiated a transition to a 
competitive market for local telephone service.
    Importantly, the Telecommunications Act also called for an end to 
the use of hidden cross subsidies, concealed within regulated prices, 
that previously had kept some prices (e.g. rates for basic telephone 
services in rural areas) below cost while artificially raising others 
(e.g. rates for urban business customers). As Congress correctly 
recognized, a precondition for competition was that prices reflect the 
actual costs of providing services, and thus that any cross-subsidies 
be made explicit.
    One phenomenon the Telecommunications Act could not and did not 
anticipate was the explosive growth of the Internet and its impact on 
the telecommunications network.24 The Internet has resulted 
in very rapid growth in the volume of data travelling on the public 
switched telephone network, to the point that data traffic will soon 
exceed voice traffic. The resulting demand for data transport 
(especially for the high-capacity broadband transport needed to 
facilitate increasingly rich Internet-based applications and to support 
electronic commerce), combined with the competitive framework 
established by the Telecommunications Act, has led to an explosive 
growth in the number and the types of both telecommunications services 
and telecommunications providers.
---------------------------------------------------------------------------
    \24\ While growth of the Internet has slowed somewhat since 1995, 
it continues to grow by 50 percent or more per year, as measured by the 
number of Internet host computers (and faster by some other measures). 
See Erran Carmel, Jeffrey A. Eisenach and Thomas M. Lenard. The Digital 
Economy Fact Book (Washington: The Progress & Freedom Foundation, 
1999).
---------------------------------------------------------------------------
    The impact of these changes on the nature of the telecommunications 
marketplace is quite profound. As former White House Internet advisor 
Ira Magaziner explains in a recent Progress & Freedom Foundation 
publication:
        With the Internet and this new environment of convergence, we 
        are going to have the greatest amount of competition the world 
        has ever seen. We are going to have telecom companies, computer 
        companies, software companies, satellite companies, wireless 
        companies, consumer electronics companies, and electric 
        utilities all competing to build out this infrastructure, and 
        the best thing we could do is let that competition take place 
        and not try to regulate it or interfere with it.25
---------------------------------------------------------------------------
    \25\ See Ira Magaziner, ``Creating a Framework for Global 
Electronic Commerce,'' Future Insight 6.1, (Washington: The Progress & 
Freedom Foundation, July 1999).
---------------------------------------------------------------------------
    As Magaziner explains, technological convergence has brought 
previously separate sectors of the telecommunications industry into 
direct competition with one another. Most notably, the cable industry 
has become a major competitor in the market for telecommunications 
services of all kinds, especially broadband communications offered 
through cable modems.26
---------------------------------------------------------------------------
    \26\ See Barbara Esbin, Internet Over Cable: Defining the Future in 
Terms of the Past (Office of Plans and Policy, Federal Communications 
Commission) OPP Working Paper No. 30, August 1998. See also
---------------------------------------------------------------------------
    These changes are no longer a matter of speculation. Indeed, in the 
first paragraph of its recently released restructuring proposal, the 
Federal Communications Commission states unequivocally that:
        In five years, we expect U.S. communications markets to be 
        characterized predominantly by vigorous competition that will 
        greatly reduce the need for direct regulation. The advent of 
        Internet-based and other new technology-driven communication 
        services will continue to erode the traditional regulatory 
        distinctions between different sectors of the communications 
        industry.27
---------------------------------------------------------------------------
    \27\ A New FCC for the 21st Century (Federal Communications 
Commission, August 1999)
---------------------------------------------------------------------------
    The third major change--and the one that makes reform of 
telecommunications taxes so crucially important--is that the 
telecommunications sector has become the catalyst for overall 
macroeconomic growth. Indeed, most economists now agree that the 
information technology sector of the economy is responsible for a 
disproportionate share of American economic growth in recent years.
    Testifying before Congress in February 1998, for example, Federal 
Reserve Board Chairman Alan Greenspan stated that:
        [O]ur nation has been experiencing a higher growth rate of 
        productivity--output per hour worked--in recent years. The 
        dramatic improvements in computing power and communications and 
        information technology appear to have been a major force behind 
        this beneficial trend.28
---------------------------------------------------------------------------
    \28\ Alan Greenspan, Monetary Policy Testimony and Report to 
Congress, February 24, 1998.
---------------------------------------------------------------------------
More recently, the U.S. Department of Commerce has reported that the 
information technology sector of the economy (which includes 
telecommunications)--though making up less than 10 percent of total 
output and employment--is responsible for over 40 percent of growth in 
Gross Domestic Product.29
---------------------------------------------------------------------------
    \29\ See U.S. Department of Commerce, The Emerging Digital Economy 
II (June 1999).
---------------------------------------------------------------------------
    These statistics highlight the importance of constructing a 
sensible public policy framework that permits and encourages continued 
growth in the telecommunications sector. Obviously, tax policy is an 
important part of any such framework. As discussed in the body of this 
paper, our current policies are a long way from meeting this standard.

    Mr. Tauzin. And just for a couple of minutes to highlight 
some of his findings, extraordinary findings. First of all, the 
combination of State, Federal, and local taxes since 1986 on 
telecommunications services has risen from 10.7 percent now to 
17.6 percent. The taxes in many jurisdictions of State, 
Federal, and local on telephone talking in America, free speech 
society are now higher than the taxes on such so-called sin 
products as alcohol and tobacco.
    It points out that there are approximately 37 different 
types of taxes levied on telecommunications services by State 
and local governments alone and that for some cities, for 
example, Richmond, Virginia, the rate of local taxation and 
city taxation, State taxation, now 35.7 percent of the 
telecommunications services. 35.7 percent State and local only, 
then you add all of these Federal taxes on top of it.
    In short, the study indicates that if there is one thing 
that makes it harder for us to provide telecommunications 
services to the poorest of Americans, it is because the 
government takes out of those services from the get-go in the 
form of taxation. And I think it strongly supports the effort 
that we are jointly making to reduce taxes on 
telecommunications services and at the same time use some of 
those taxes, one-third of the 1913, 3 percent telephone tax, to 
continue and to hopefully make better a program out of Internet 
connection for our children.
    So, gentlemen, I want to thank you for your contributions 
and I know the leg work that you are doing to try to encourage 
other members to pay attention to this one because it is not 
only a constitutional problem, Mr. Weller, as you point out, 
for the Ways and Means Committee and the Congress, but it is as 
many of our witnesses will later tell us, an administration 
problem, a policy question. Do we let the FCC run this 
education program? Or do we let the educators with the guidance 
and advice of our National Telecommunications Agency here in 
Washington that tends to follow all the new technologies and 
probably can recommend a wireless technology, perhaps over a 
wire technology, that may have a better utility for the kids in 
the future.
    In Baton Rouge on October 11 I will be having a major high-
tech conference. We will introduce there technology that will 
put kids on the Internet for $5 a month on television. Analog 
television. Not digital. Today, $5 a month. And we will 
probably be announcing some pilot programs to make it available 
free to eighth graders in several school districts as a pilot 
program in their homes just to test it out and see the power of 
connecting kids to the Internet without the necessity of many 
of the expenditures this program entails.
    And so, again I want to thank you and ask if any of our 
colleagues have any questions or comments they would like to 
make while you are here and to engage you in any kind of 
colloquy. Mr. Markey? Any one of you?
    Mr. Markey. I thank you so much. This is a very complex 
policy area because obviously a huge decision was made back in 
the 1930's to create a universal service structure, so that 
people from Boston would subsidize people in rural America.
    Mr. Tauzin. And we appreciate it.
    Mr. Markey. I appreciate that. But the question I would 
have to our witnesses is whether or not they would support a 
line item that would explain to each ratepayer how much higher 
their phone bill is in Boston because they are subsidizing 
rural America. And would they also put a line item on--support 
a line item for rural America so they would understand how much 
lower their bill is that it would be a doubling or tripling or 
quadrupling of their phone bill if we pull out those taxes--
using the terminology that the majority is using. They consider 
this taxes--that goes in urban America to help out rural 
America. Would you support having that as a line item as well?
    Mr. Weller. Mr. Markey, I find I represent South Side of 
Chicago and the suburbs. I have the neighboring district to my 
friend Mr. Rush as well as a lot of rural areas and I think 
that the rural areas feel they are subsidizing the folks in the 
cities on various issues and so forth.
    Mr. Markey. But I just mean in this area of universal 
service where there is a phone bill which is used here to 
subsidize ensuring that the schools of the poorest communities 
especially but all schools qualify, but the poor schools get 
this additional funding to hook up, we do the same thing for 
farmers. My father was a milkman for the Hood Milk Company and 
his phone bill subsidizes wealthy farmers. And should he know 
that in--should every American know that the poor city--not the 
poor, but the working class city dwellers are subsidizing rural 
America and it is right on their phone bill and each year they 
are paying all of this extra money so the rural farmer can have 
a lower phone bill? Should that be on each, as a line item on 
each phone bill?
    Mr. Weller. It sounds like it could be a subject of a 
potential future hearing but the challenge before us today is 
really what type of tax do we use to fund a program which has 
bipartisan support and that is providing Internet access 
through our local schools and libraries? And I certainly 
believe as a member of the Ways and Means Committee that under 
our Constitution it is Congress' job to levy a tax. And of 
course the issue before us is the case where the FCC levied a 
tax without the approval of Congress.
    And while we all support Internet access through our local 
libraries and schools and that is a goal we all share, the 
question is how best can we fund it? And we believe that with 
our legislation, the Schools and Libraries Internet Access Act, 
the most appropriate thing to do is to earmark an existing tax 
that has been in place since 1913, one penny on the dollar will 
provide--one-third of that existing tax will provide $1.7 
billion, which is actually more than the existing FCC tax. And 
perhaps it should be labeled ``the FCC tax on the phone bill'' 
so that people identify who gave it to them and why it is 
unconstitutional.
    Mr. Markey. I guess the only point I am trying to make here 
is that it would be honest for these subsidies to be on your 
bill so that there is just a line saying you are subsidizing 
schools and libraries, you are subsidizing rural Americans and 
then everyone would know it. It would cause a huge furor, of 
course, in urban America if we ever put that on as a line item. 
Phone bills are three or four times lower in rural America than 
they should be just because of some policy was made of 
universal service but just truth in billing and the honesty of 
ensuring that people understand the level of subsidies that do 
flow through this universal service fund not just to poor 
children but also to wealthy farmers, I think would help to 
have a good honest debate on this.
    Mr. Tancredo. I couldn't disagree with you. I think it 
would be fine. I recognize fully well the interesting political 
ramifications that may develop out of such honesty on a phone 
bill and on a tax policy. But that is exactly why we are here. 
And I am suggesting that what we are doing today is dishonest. 
I am suggesting that we should be much more forthcoming with 
the gentleman from my district and everybody else who receives 
a phone bill and is trying to figure out exactly what all of 
these taxes are paying for. And I would be more than willing to 
explain that directly.
    And you know, the fact is that there is a great degree of 
cynicism, and we all know that, on the part of the general 
public. Tax policies such as the ones that we are here today to 
try to address I think only tend to exacerbate that cynicism 
that exists on the part of the American public. And a degree of 
candor that you suggest might go a long way toward reducing 
that. So I have no qualms about that.
    Mr. Markey. Can you go along with that, Jerry? To list on--
--
    Mrs. Wilson. Will the gentleman yield? Does he have a list 
of those wealthy farmers because I am not sure I have met any.
    Mr. Markey. I am listening to my father speak. That was his 
view of it.
    Mrs. Wilson. That is a certain downtown Boston prejudice.
    Mr. Weller. In quick response, Mr. Markey and Mr. Chairman, 
as Chairman Tauzin pointed out, roughly 35 percent of the cost 
of telecommunications today is consumed by taxes imposed at the 
local and State level. And then, of course this is an 
additional tax imposed at the Federal level. And, of course, 
then the 3 percent excise tax that was imposed beginning 1913. 
I think it is very helpful that the American people have an 
understanding of the high level of tax burden that has been 
placed on them. When 40 percent of the average Illinois 
family's income is going to government today, that tax burden 
is too high, when 21 percent of our gross domestic product is 
consumed by the Federal Government. In 1993 it was only about 
18 percent. So that tax burden is so high and I think it is 
useful that we share with the American people every opportunity 
that we identify how high that tax burden is.
    Mr. Markey. So you would support this as a line item, 
Jerry?
    Mr. Weller. It is something that you and I could talk about 
some more.
    Mr. Markey. Let's have some principles here, Jerry. 
Principles.
    Mr. Weller. It is a useful discussion.
    Mr. Tauzin. I think we need to get your dad in on that 
meeting. We have to break for a vote and come back and hear the 
next panel. We thank both of you. It has been a very exciting 
and useful discussion. Come back after the vote.
    [Brief recess.]
    Mr. Tauzin. The committee will please come back to order 
and our guests will take seats. We are pleased to welcome our 
second panel, composed of Mr. Christopher Wright, General 
Counsel of the FCC; Mrs. Kelly Levy, Acting Associate 
Administrator, Office of Policy Analysis and Development for 
the National Telecommunications and Information Administration; 
Dr. Lois Gerber, Chairman of the board of National Independent 
Private Schools Association; Cheryl Parrino, CEO of the 
Universal Service Administrative Company; and Mr. Kent Lassman, 
Deputy Director of Technology and Communications for the 
Citizens for Sound Economy.
    Ladies and gentlemen, thank you for your attendance today. 
We welcome your testimony. We have a 5-minute rule. And we have 
this incredible marvelous modern technology that we use to time 
you, along with eggs, which we cook in the back room. So when 
the bell goes off, your 5 minutes is up. We would like you to 
know that your written statement is part of the record. You 
don't have to read them to us. Please don't. Give us the 
highlights in the 5 minutes that you have so that we can get 
into a Q and A with you as rapidly as possible.
    We will start with Mr. Christopher Wright of the FCC.

 STATEMENTS OF CHRISTOPHER J. WRIGHT, GENERAL COUNSEL, FEDERAL 
COMMUNICATIONS COMMISSION; KELLY KLEGAR LEVY, ACTING ASSOCIATE 
   ADMINISTRATOR, OFFICE OF POLICY ANALYSIS AND DEVELOPMENT, 
  NATIONAL TELECOMMUNICATIONS AND INFORMATION ADMINISTRATION, 
 U.S. DEPARTMENT OF COMMERCE; LOIS M. GERBER, CHAIRMAN OF THE 
BOARD, NATIONAL INDEPENDENT PRIVATE SCHOOLS ASSOCIATION; CHERYL 
  PARRINO, CEO, UNIVERSAL SERVICE ADMINISTRATIVE COMPANY; AND 
 KENT LASSMAN, DEPUTY DIRECTOR, TECHNOLOGY AND COMMUNICATIONS, 
                  CITIZENS FOR A SOUND ECONOMY

    Mr. Wright. Thank you, Chairman Tauzin. Last December 1 I 
had the wonderful opportunity to visit New Orleans for only the 
second time in my life and argue the case in the Fifth Circuit, 
and there were 10 attacks on the schools and libraries program 
and we won nine.
    Mr. Tauzin. Which one did you lose?
    Mr. Wright. The jurisdictional argument. Cincinnati Bell 
claimed that the way that we assessed the amounts was 
incorrect, that we should only assess based on interstate 
rather than intrastate revenues. It is a decision that is 
troubling to us, but has nothing to do with--it has to do with 
the relative amounts the different telephone companies pay 
rather than anything that is of interest to this committee.
    The nine issues on which we prevailed were divided into two 
groups. There were four constitutional attacks, all made by 
Celpage, and there were five statutory attacks, all made by 
GTE. And we won all of the four constitutional attacks in short 
order. It was a great range of attacks. The telecom industry is 
extraordinarily resourceful and litigious. They claimed the 
program violated the origination clause, the taxing clause, the 
equal protection clause, and the takings clause. And in light 
of your admonition that our testimony is in the record, I will 
not go through each one of those except to say that we won each 
and every one of those.
    GTE's five statutory arguments were, first, that it was 
erroneous under the statute to fund internal connections and 
Internet access, an issue that the Court gave the most 
attention to and certainly found merit in GTE's position, 
although it ultimately held that the statute was ambiguous and 
the Commission's reading of it was proper and affirmed.
    Mr. Tauzin. In fact he did more. He called it sometimes 
mysterious section.
    Mr. Wright. That is what the Fifth Circuit said, not us.
    But I take it that there is really no dispute anymore that 
internal connections and Internet access ought to be funded. As 
I understand it, your bill would do that in a different way.
    The next issue that we won on that the Fifth Circuit gave 
some attention to was GTE's argument that only telephone 
companies like itself should get money out of the system. That 
if a school district wanted to obtain Internet access from a 
lower priced provider like AOL they couldn't choose them. The 
Fifth Circuit rejected that claim. GTE also argued that we 
funded too many telecommunications services. The Fifth Circuit 
rejected that claim. And rejected two other GTE claims that I 
don't really think warrant attention here.
    So it took 3\1/2\ years to get where we are. We completed 
our rulemaking on Congress' schedule 15 months after the act 
was passed. It took the Court of Appeals more than 2 years 
after that to reject these 9 out of 10 challenges. No one 
sought rehearing on any of these nine issues. And it is 
possible that someone could still raise some in the Supreme 
Court. But that would surprise me.
    Mr. Tauzin. If I could interrupt you, has there been an 
appeal or will there be an appeal to this ruling?
    Mr. Wright. Petitions for certiorari in the Supreme Court 
are not due until December. The parties haven't shared with me 
their plans but it took us 3\1/2\ years to get there. We view 
it as now being essentially settled, these key elements. The 
danger of disrupting the program that is in place is that the 
bill that is proposed would require the Department of Commerce 
to hold a rulemaking and I fear that would have the potential 
of setting up another round of litigation.
    My former colleague and friend, Andy Pincus, who is General 
Counsel of the Department of Commerce, would, I guess, then 
take over on that. But if that litigation proceeds on the same 
schedule we would be in the year 2003 before we get the clarity 
we now have.
    Thank you.
    [The prepared statement of Christopher J. Wright follows:]
 Prepared Statement of Christopher J. Wright, General Counsel, Federal 
                       Communications Commission
    Mr. Chairman and Members of the Subcommittee: I am pleased to be 
here today representing the Federal Communications Commission to 
discuss H.R. 1746, the ``Schools and Libraries Internet Access Act.'' 
The bill would repeal Section 254(h) of the Communications Act, which 
authorizes the Commission to provide support to schools and libraries 
for the purpose of purchasing telecommunications services, internal 
connections, and internet access. The bill would replace Section 254(h) 
with a new provision that directs the Secretary of Commerce to 
``prescribe such regulations as may be necessary'' to govern the 
distribution of funds to schools and libraries to purchase 
``telecommunications and related services'' and the ``installation of 
equipment . . . essential to permit such school or library to have 
access to advanced technologies.'' H.R. 1746, Sec. 5 (adding Section 
106(a)(5) to the National Telecommunications and Information 
Administration Organization Act).
    As general counsel for the Commission, I think it would be most 
helpful for me to focus on the relevant provisions of the universal 
service decision that the Fifth Circuit issued this past July. See 
Texas Office of Public Utility Counsel v. FCC, 183 F.3d 393 (5th Cir. 
1999). That decision affirmed the key elements of the Commission's 
implementation of Section 254(h), and thus puts to rest many of the 
legal questions that have been raised concerning the Commission's 
schools and libraries program. The replacement of Section 254 with a 
similar provision could lead to delay and uncertainty because the 
Commerce Department would first have to issue rules implementing the 
new provision and then defend its interpretation in court. Although the 
Commission issued its order implementing Section 254(h) exactly 15 
months after its enactment, as Congress directed, it took the court of 
appeals more than two years to resolve the legal challenges to the 
program raised by Celpage, GTE, and Cincinnati Bell. If H.R. 1746 were 
adopted tomorrow and a rulemaking and litigation followed on the same 
course, it would be 2003 before a court of appeals issued a ruling 
resolving the challenges that would almost inevitably follow.
The Fifth Circuit Decision
    In most--but not all--respects, the Fifth Circuit upheld the 
Commission's May 8, 1997, order implementing the universal service 
provisions of the Communications Act.
    As relevant here, the court first rejected Celpage's various 
arguments that the Commission's schools and libraries program is an 
``unconstitutional tax'' or is otherwise unconstitutional. By and 
large, the court dispatched these claims summarily. Celpage's principal 
argument was that Section 254(h) is a ``Bill for raising Revenue'' 
within the meaning of the Origination Clause, U.S. Const., art. I, 
Sec. 7, cl. 1, and hence unconstitutional because it originated in the 
Senate rather than the House of Representatives. The court held that 
Celpage's ``Origination Clause claim cannot survive United States v. 
Munoz-Flores, 495 U.S. 385, 398 (1990), . . . because `a statute that 
creates a particular government program and that raises revenue to 
support that program . . . is not a ``Bil[l] for raising Revenue'' 
within the meaning of the Origination Clause.'' 183 F.3d at 427. The 
court dismissed Celpage's claim based on the Taxing Clause, U.S. Const. 
art. I, Sec. 8, cl. 1, in a footnote. The court explained that, in 
light of the clear nexus between the payments made by 
telecommunications carriers under Section 254(d) and the program 
supported by Section 254(h), ``the universal service contribution 
qualifies as a fee.'' Id. at n. 52.
    The court next dismissed Celpage's Equal Protection claim in a 
single paragraph, concluding that ``Celpage does not come close'' to 
establishing that there is no reasonable relationship between the 
contributions telecommunications providers make to the universal 
service program and the benefits provided by the program. Id. at 428. 
It similarly disposed of Celpage's ``unconvincing takings claim,'' 
explaining that Celpage had failed to establish any basis for the 
claim. Id. As this treatment indicates, the court of appeals was 
convinced that the four constitutional challenges to the schools and 
libraries program were totally lacking in merit.
    The court found more merit to GTE's argument that the Commission 
should not have provided support for internet access and internal 
connections, but ultimately rejected that argument too. GTE first 
argued that Section 254 permitted the Commission to authorize payments 
to support telecommunications services only. Thus, in GTE's view, the 
program could support ordinary telephone service but not payments for 
internet access or the internal connections necessary to obtain 
internet access. The court found considerable support for GTE's 
contentions, but also found that other evidence supported the 
Commission's interpretation of Section 254(h). In particular, the court 
noted that Section 254(h)(2) directs the Commission to ``enhance . . . 
access to advanced telecommunications and information services,'' which 
plainly is something more than ``plain old telephone service.'' In 
addition, the court added, ``some of the legislative history implies 
that Congress intended for subsection (h) to support internet access.'' 
Id. at 442. The Fifth Circuit ultimately held that the Act is ambiguous 
with respect to this issue. Like the Supreme Court in AT&T v. Iowa 
Utilities Board, 119 S. Ct. 721 (1999), it concluded that ``Congress 
realizes that many of these ambiguities will be resolved by the FCC 
during its implementation of the statue, and we, like the Court, 
generally defer to the agency's interpretation.'' Accordingly, the 
court ``affirm[ed] those aspects of the Order providing internet 
services and internal connections to schools and libraries.'' 183 F.3d 
at 443.
    The court next rejected in summary fashion GTE's fallback argument 
that only telephone companies like itself--and not others, even if they 
provided superior service at lower prices--could receive support for 
providing internet access and internal connections. The court concluded 
that the Commission properly took ``modest steps to ensure that 
Congress's instructions on expanding universal service in the form of 
internet access and internal connections will not be frustrated by 
local monopolies.'' Id. at 444. The court summarily rejected the 
argument that the Commission erred by conditioning its support for 
funding for intrastate services on the states' establishing discounts 
equal to those authorized by the Commission for interstate services. 
Id. Similarly, the court found no merit at all to the contention that 
the Commission erred by authorizing discounts to schools and libraries 
for all commercially available telecommunications services; in GTE's 
view, the Commission should have supported only a subset of 
telecommunications services. Id. at 445. And the court dismissed in a 
footnote the contention that support for internal connections may not 
be provided because they are ``goods'' rather than ``services.'' Id. at 
441 n.88.
    However, the court accepted Cincinnati Bell's argument that the 
Commission erred by calculating assessments to the schools and 
libraries program on a carriers' intrastate revenues as well as its 
interstate revenues. The court acknowledged that the Commission had 
given a reasonable reading to Section 254, but gave substantial weight 
to Section 152(b), which generally preserves authority over intrastate 
telecommunications issues not addressed by federal law to the state 
regulatory commissions, and concluded that carriers' assessments should 
be based on their interstate revenues only. We filed a petition asking 
the en banc court to rehear that issue because the panel's decision 
conflicts with the Supreme Court's decision in the Iowa Utilities Board 
case, rendered earlier this year. The Court in that case addressed the 
``local competition'' provisions of the Communications Act, which are 
Sections 251 through 261 of the Act and hence include Section 254. In 
our view, the court of appeals failed to heed Justice Scalia's 
interpretation of Section 152(b), provided on behalf of the Supreme 
Court in that case. Justice Scalia explained that ``the question is not 
whether the Federal Government has taken the regulation of local 
telecommunications competition away from the States. With regard to the 
matters address by the 1996 Act, it unquestionably has.'' 119 S. Ct. at 
n. 6. He added that ``[a]fter the 1996 Act, Sec. 152(b) may have less 
practical effect. But that is because Congress, by extending the 
Communications Act into local competition, has removed a significant 
area from the States' exclusive control.'' Id. at n. 8. Other parties 
sought rehearing as well--but none on issues relating to the schools 
and libraries program. The court of appeals recently denied all of the 
petitions for rehearing. There is little doubt that the Supreme Court 
will be asked to review some aspects of this decision.
Future Commission Action
    The Commission continues to work with the state members of the 
Joint Board and other parties to improve its rules regarding universal 
service so that the administration is as effective and efficient as 
possible, and so that support is set at the right levels and targeted 
to the appropriate schools and libraries. For example, the Commission 
will review by November 1999 its decision to name Universal Service 
Administrative Company (USAC) the permanent Administrator, to ensure 
that the support mechanisms are being administered ``in an efficient, 
effective, and competitively neutral manner.'' 47 C.F.R. 
Sec. 54.701(a). The Commission also has committed to convening the 
Joint Board to review the definition of universal service on or before 
January 1, 2001. As Congress noted, universal service is an 
``evolving'' level of services, and the Commission recognizes that 
there is always room for improvement to achieve all of the goals 
Congress set forth in section 254.
H.R. 1746: Schools and Libraries Internet Access Act
    The Commission was charged by Congress with implementing Section 
254, including the provisions that require universal service support 
for carriers that provide discounted services to schools and libraries. 
It has not been an easy task, and it certainly has not been without 
controversy. The Commission is pleased that the Fifth Circuit upheld 
most of the agency's decisions regarding the schools and libraries 
support mechanism, and that at least the legal challenges to those 
decisions have apparently been laid to rest. It took a long time to get 
this far--three and a half years after Congress enacted Section 254 and 
more than two years since the Commission issued its initial Report and 
Order on universal service. But today, the schools and libraries 
support mechanism is up and running, and providing benefits to schools 
and libraries in every state.
    The proposed legislation, H.R. 1746, appears to be consistent with 
many of the goals of the schools and libraries and rural health care 
support mechanisms set forth in section 254. It seems clear that the 
substantive goal--making sure that schools, libraries, and health care 
providers have affordable access to telephone and other communications 
services--is not being questioned, and that the real debate is how, 
administratively, to achieve that goal. However, the proposed bill is 
not without ambiguity, and the Commerce Department would need to 
resolve that ambiguity in implementing the bill and then in defending 
its interpretation in the face of the judicial challenges that are 
likely to follow. For example, although it seems reasonably clear that 
the provision is designed to provide support for internet access and 
internal connections, like the existing program, the bill does not use 
those words, but instead speaks of ``telecommunications and related 
services.'' Accordingly, opponents of connecting schools to the 
internet may raise some of the same objections that they raised to the 
Commission's implementation of Section 254(h). Similarly, the bill 
speaks of equipment ``essential to permit . . . access to advanced 
technologies.'' It is not clear whether the use of the word 
``essential'' is meant to require the use of a stricter standard than 
is currently employed in reviewing requests by schools and libraries 
for internal connections and, if so, what that standard is. Unless 
matters such as these are clarified, another round of litigation and 
uncertainty may follow.
    In light of the Fifth Circuit's decision rejecting the challenges 
to the Commission's rules regarding the schools and libraries program, 
there is no legal need to modify the current method of administration 
in order to provide support to schools and libraries seeking assistance 
in obtaining internet connections. Thus, the question before Congress 
is a policy decision. Congress must determine whether the benefits of a 
different method of administration will outweigh the difficulties that 
starting afresh might create. Whatever decision Congress makes with 
respect to the administration of universal service, the Commission, of 
course, will continue to work diligently to satisfy its 
responsibilities.
    I would be happy to answer any questions that you and any other 
members of the Subcommittee may have.

    Mr. Tauzin. Thank you very much, Mr. Wright. And next will 
be Kelly Levy, Acting Associate Administrator of the Office of 
Policy Analysis, NTIA, of the Department of Commerce. Ms. Levy.

                 STATEMENT OF KELLY KLEGAR LEVY

    Ms. Levy. Thank you, Mr. Chairman. Good morning. On behalf 
of the administration, I want to thank you and the other 
members of the subcommittee for having me up here today. It is 
an honor. Thank you for letting us testify on H.R. 1746, the 
Schools and Libraries Internet Access Act.
    Mr. Chairman and members of the subcommittee, the 
administration shares your goal of providing advanced 
telecommunications services to schools and libraries. Both 
President Clinton and Vice President Gore have made connecting 
schools and libraries to the Nation's information 
infrastructure one of their highest priorities. As the 
President stated, until every child has a computer in the 
classroom and the skills to use it, until every student can tap 
the enormous resources of the Internet, until every high-tech 
company can find the skilled workers to fill high-wage jobs, 
America will miss the full promise of the Information Age.
    The administration strongly supported section 254(h) of the 
Telecommunications Act of 1996, which established the E-Rate 
program as part of the overall universal service fund. And the 
administration has supported full funding of that program.
    Today, the E-Rate program is helping to connect schools and 
libraries at a very rapid pace. For instance in the first year 
of the program, over 640,000 classrooms were connected to the 
Internet. Importantly, the E-Rate program gives priority 
funding to poor and rural schools and libraries. Mr. Chairman, 
NTIA shares your concern that the schools and libraries program 
be administered expertly, efficiently and impartially. However, 
we see no need for new legislation to change the E-Rate program 
in order to bring the full promise of the Information Age to 
our children.
    Congressional oversight, including input from the House 
Commerce Committee, and a two-tiered auditing process have 
helped to ensure that the Universal Service Administrative 
Company, USAC, is running the E-Rate program efficiently and 
that schools and libraries are using E-Rate money to fund only 
eligible services.
    H.R. 1746, the Schools and Libraries Internet Access Act, 
would establish NTIA as the administrator of the universal 
service program for schools and libraries as well as health 
care providers. NTIA believes that it is premature to consider 
such a drastic measure. First, we believe that the third-party 
nongovernmental entities have a commendable performance record 
in this regard. While the USAC may have experienced some 
startup difficulties, we believe that it has taken the 
appropriate corrective actions.
    Second, in the competitive environment, many believe that 
the fund administrator must not advocate telecommunications 
policy positions, a role that would be incongruous with NTIA's 
existing statutory mandate.
    Third, as fund administrator, NTIA would incur large 
startup costs, costs that have already been incurred by the 
USAC. In its current operating mode, NTIA does not possess the 
resources or the infrastructure to run the proposed E-Rate 
program. In addition, last year the administration, through a 
letter from the Office Management and Budget to Chairman Tauzin 
as well as to Senator Burns, also raised significant budget 
issues on similar legislation that was before this subcommittee 
last year.
    Finally, our greatest concern is that any fundamental 
change in the administration of the E-Rate program will delay 
and even forfeit opportunities for our children.
    In conclusion, as Secretary of Commerce William Daley has 
stated: Tomorrow's economy will demand technological literacy. 
The E-Rate program is an important step to ensure that our 
economy grows strongly and that in the future no one is left 
behind.
    Thank you again for the opportunity to testify and I am 
pleased to answer any questions you may have.
    [The prepared statement of Kelly Klegar Levy follows:]
       Prepared Statement of Kelly Klegar Levy, Acting Associate 
  Administrator, Office of Policy Analysis and Development, National 
 Telecommunications and Information Administration, U.S. Department of 
                                Commerce
    Mr. Chairman and Members of the Subcommittee: Thank you for this 
opportunity to testify this morning, setting forth the views of the 
National Telecommunications and Information Administration (NTIA) with 
respect to H.R. 1746, the Schools and Libraries Internet Access Act. 
NTIA serves as a principal adviser to the President, Vice President, 
and Secretary of Commerce on domestic and international 
telecommunications and information policy issues and has been an active 
participant in the schools and libraries support process.
    The Administration shares your goal of providing advanced 
telecommunications services to schools and libraries. Both President 
Clinton and Vice President Gore have made connecting schools and 
libraries to the nation's information infrastructure one of their 
highest priorities. The importance of enabling schools, including 
classrooms, and libraries to access the Internet, in conjunction with 
an integrated, well-developed curriculum, cannot be overstated. As the 
President stated: ``Until every child has a computer in the classroom 
and the skills to use it . . . until every student can tap the enormous 
resources of the Internet . . . until every high-tech company can find 
skilled workers to fill its high-wage jobs . . . America will miss the 
full promise of the Information Age.'' Once viewed with curiosity, the 
information revolution has brought fundamental changes to the fabric of 
society and to the foundations of the emerging global economy.
    In June 1999, the Department of Commerce released The Emerging 
Digital Economy II, a report that demonstrated the increasingly pivotal 
role that information technologies play in our economy and the dramatic 
growth of electronic commerce. In July 1999, the Department of Commerce 
released Falling Through the Net: Defining the Digital Divide, a report 
examining which American households have access to key information 
tools--telephones, computers, and the Internet--and which do not. 
Overall, we found that more Americans than ever before own computers 
and are online. At the end of 1998, over 40 percent of American 
households owned computers, and almost one-quarter of all households 
had Internet access.
    Yet, Falling Through the Net also documented that there remains a 
significant digital divide separating American information ``haves'' 
and ``have nots.'' Indeed, in many instances, the digital divide has 
widened in the last year. Certain minorities, low-income persons, the 
less educated, and children of single-parent households, particularly 
when they reside in rural areas or central cities, are among the groups 
that lack access to information resources. Because access to computers 
and the Internet is increasingly critical to successful participation 
in our digital economy, we need to ensure that everyone has access to 
these technologies.
    One of the interesting findings of Falling Through the Net is that 
community access centers--such as schools, libraries, and other public 
access points--are particularly well used by those groups that lack 
access at home or at work. For example, Hispanics and American Indians/
Eskimos/Aleuts are especially likely to use schools for access if they 
live in rural areas. Households with incomes less than $25,000, those 
with less than a high-school education, those in female-headed 
households, and American Indian/Eskimos, Aleuts, Blacks, and Hispanics 
who have low Internet access rates at home are relying with a great 
deal of frequency on public libraries for access to the Internet.
    Thus, the Falling Through the Net data underscore the importance of 
efforts by Congress, as well as the Administration, to ensure that all 
schools and libraries have affordable access to the Internet on 
sustained basis. The Administration strongly supported Section 254(h) 
of the Telecommunications Act of 1996, which established the E-rate 
program as part of the overall Universal Service Fund. And the 
Administration has supported full funding of that program. Under the E-
rate program, telecommunications carriers are providing eligible 
schools and libraries with a discounted rate for telecommunications 
services, internal connections among classrooms, and Internet access. 
As a result, the E-rate program is helping to connect schools and 
libraries at a very rapid pace. In the first year of the program, 
640,000 classrooms were connected to the Internet. This year, $2.25 
billion is available to connect an expected 528,000 additional 
classrooms. Eighty percent of public schools and fifty percent of 
public libraries participate in the E-rate program. Importantly, the E-
rate program gives priority for funding to poor and rural schools and 
libraries.
    Moreover, the E-rate monies are proving to be a catalyst for other 
efforts to connect schools and libraries to online resources. Many 
states and communities are combining the Federal E-rate funds with 
state and/or private sector money to address access problems. In 
Louisiana, for example, $500,000 in E-rate funding received by the 
State Library of Louisiana combined with $2 million in state funding 
and $7 million from the Gates Library Foundation will enable the state 
library to provide Internet access and computers for every library in 
the state. While just three years ago many parts of Louisiana were 
entirely cut off from the Internet, now every library in the state has 
computers and Internet access, which are available for free to all 4.3 
million residents.
    The American public joins us in strongly supporting the E-rate 
program. As information technology becomes increasingly important in 
our global economy, Americans have come to overwhelmingly support the 
need for computers in our nation's classrooms and libraries. A non-
partisan poll commissioned by EdLiNC found that 87 percent of 
respondents support the mission of the E-rate program. The public's 
support of the E-rate program is echoed by parent and teacher groups, 
library organizations, high-tech companies, many telecommunications 
providers, and civil rights groups.
    On July 30, 1999, the Fifth Circuit Court upheld the structure of 
the E-rate program, including coverage for Internet access and 
connections to the classroom as well as telecommunications services, 
and upheld the Federal Communications Commission's authority to target 
discount levels to the schools and libraries with greatest needs. Now 
with the court case behind us, we hope that this program can achieve 
its full potential.
    Mr. Chairman, NTIA shares your concern that the schools and 
libraries program be administered expertly, efficiently, and 
impartially. However, we see no need for new legislation to change the 
E-rate program in order to bring the full promise of the Information 
Age to our children. Congressional oversight, including input from the 
House Commerce Committee, and a two-tiered auditing process have helped 
to ensure that the Universal Service Administrative Company (USAC) is 
running the E-rate program efficiently, and that schools and libraries 
are using E-rate money to fund only eligible services. Moreover, the E-
rate program is part of Universal Service--a program that, for the vast 
majority of Americans, has worked well for over 60 years.
    H.R. 1746, the Schools and Libraries Internet Access Act, would 
establish NTIA as the administrator of the universal service program 
for schools and libraries as well as rural health care providers. NTIA 
believes that it is premature to consider such a drastic measure. 
First, we believe that third-party, non-governmental entities have a 
commendable performance record in this regard. While the USAC may have 
experienced some start-up difficulties, we believe that they have taken 
the appropriate corrective actions. More time is needed to allow the 
system to work. Second, in the new competitive environment, many 
believe that the fund administrator must not advocate 
telecommunications policy positions, a role that would be totally 
antithetical to, and incongruous with, NTIA's existing statutory 
mandate. Third, as fund administrator, NTIA would incur large start-up 
costs--costs that have already been incurred by the USAC. In its 
current operating mode, NTIA does not possess the resources or 
infrastructure to run the proposed E-rate grant program. While we feel 
confident that we could administer the fund on an impartial basis and 
do so in an accountable manner, these factors would not offset the 
above disadvantages. In addition, the Administration, through a letter 
from the Office of Management and Budget to Chairman Tauzin, as well as 
to Senator Burns, also raised significant budget issues on similar 
legislation before this subcommittee last year.
    Aside from these issues, our greatest concern is that any 
fundamental change in the administration of the E-rate program will 
delay and forfeit opportunities for our children. Delay denies students 
and teachers access to information and telecommunications technologies 
and their benefits. Research shows that technology can enhance learning 
opportunity and achievement, increase student motivation to learn, help 
students acquire essential workplace skills, improve professional 
development for teachers, and enable students to access high-quality 
education regardless of time or place. As Vice President Gore has 
noted, ``[f]or the very first time in our history, it is now possible 
for a child in the most isolated inner-city neighborhood or rural 
community to have access to the same world of knowledge at the same 
instant as the child in the most affluent suburb.''
    Another recent Commerce Department report, The Digital Work Force: 
Building Infotech Skills at the Speed of Innovation, stresses the 
importance of expeditiously meeting the burgeoning demand for a highly-
skilled labor force. In testimony before the Congressional Joint 
Economic Committee, such notables as Federal Reserve Board Chairman 
Alan Greenspan, Bill Gates, and many other leaders from the technology 
industry have testified not only that technology has played a leading 
role in building and strengthening our economy but also that the 
foundation for this growth is a quality education for every student. If 
students--and others--cannot obtain the high-tech skills and ready 
access to information that is critical for success in the emerging 
digital economy, then our nation's ability to compete and prosper will 
be put at risk. Particularly hard hit would be students at the 
disadvantaged schools and libraries--those in low-income, rural, or 
inner-city areas who likely would have to do without Internet access 
unless universal service support is made available.
    As Secretary of Commerce William Daley has noted, ``[t]omorrow's 
economy will demand technological literacy--the E-rate is an important 
step to ensure that our economy grows strongly and that in the future 
no one is left behind.'' During its evolution, the E-rate program has 
already demonstrated its value, and the Administration continues its 
strong support for the existing program and its goals. Thank you again 
for the opportunity to testify.

    Mr. Tauzin. Thank you very much. Next will be Dr. Lois 
Gerber, Chairman of the Board of the National Independent 
Private Schools Association.

                   STATEMENT OF LOIS M. GERBER

    Ms. Gerber. Thank you, Mr. Chairman. You know it is a real 
challenge for an educator to have 5 minutes but I will do the 
best I can.
    The organization that I represent is fast becoming a 
minority in this group, and you, yourself, have said that you 
wish not to establish or leave out or make another minority. 
But, unfortunately, Schools and Libraries Internet Access Act 
is using as definition what the Elementary and Secondary Act of 
1965 described as ``school.''
    Now, many of you perhaps were not as old as I am and you 
don't remember that act but that act was developed on child 
benefit and we have talked this morning and we have heard about 
child benefit. I have heard all children, every school.
    Unfortunately, there are a group of children, 50,000 which 
I represent and probably 100,000 more out there, that are being 
eliminated because you are using the Child Benefit Act 
description of schools that the regulators then took that act 
and described what a school was. A school according to the 
Department of Education in America is a public school, a 
nonprofit school or a parochial school.
    In 1965, there were very few taxpaying schools in this 
country. Most of them were vocational. However, since then we 
all know life in the world has changed and so has the world of 
education. We now have a viable organization that I represent 
that are all taxpaying academic schools.
    Most of us are family owned businesses but we have 
multischools and corporations also. Most of us are nonselective 
in the type of children that we put into our schools. 30 
percent of us have learning disabled children, physically 
challenged children. Our school particularly, the one that my 
husband and I own, have mentally challenged children. And we 
take children--we give millions of dollars a year in 
scholarships to disadvantaged children because the only thing 
that our schools offer is education. We do not have any reason 
for a parent to come to our school except for the product of 
education.
    It is our job to keep that level of product at a point that 
they can afford. Everything we do in our schools are tuition 
driven. And yet on the other end we have chosen to take this 
financial risk to prove that education can work, that we can 
serve the children that wish to come, and yet we pay millions 
of dollars in property taxes, sales taxes and corporate taxes 
and get nothing in return.
    Now, this is an interesting position for me to be in 
because usually when I come up on the Hill and Members of 
Congress ask me what we want I keep saying we really don't want 
anything, please don't bother us. But in this case we do. We 
want the definition of what a school in America is to change. 
We want you to realize that if you keep that definition in the 
Schools and Libraries Internet Access Act, you are literally 
disenfranchising our children. What we are asking for is for 
them to have it. We are not asking for a business advantage but 
we are asking help to provide for our children those services 
that all other children in all schools are being provided.
    You see by keeping that definition, it infers all nonprofit 
schools are good and anything else is not good. And yet the 
Immigration and Naturalization Service has said that they 
accept accredited schools as schools able to not have to go 
through a curriculum review in order to give student visas. Our 
accreditation has been accepted and approved and scrutinized by 
the National Council for Private School Accreditation. We are 
working in a partnership with all the regional organizations to 
form the International Academy of School Accreditors.
    My point is this, that accreditation and viable 
accreditation is a much better way to say whether a school is 
viable than to lump them into nonprofit or for-profit schools. 
Secretary Riley said this, he said it in 1996 when he said the 
administration's goal was for all children to have access. 
Well, all we would like to say is that there are no nonprofit 
and for-profit children in this country to educate. We all 
educate children and our children do not want to become the 
next educational minority of this country. Thank you and I 
would love to answer any questions.
    [The prepared statement of Lois M. Gerber follows:]
 Prepared Statement of Lois M. Gerber, Chairman of the Board, National 
                Independent Private Schools Association
    Thank you Mr. Chairman and Members of the Committee. As Chairman of 
the Board of the National Independent Private Schools Association. 
Commonly known as NIPSA and Co-owner and Co Director of Bradenton 
Academy in Bradenton Florida. It is my pleasure to be here today to 
discuss with you an inequity in the proposed legislation. That is the 
inclusion of schools, but only those as defined in the Elementary and 
Secondary Appropriation bill.
    The time has come in America that we begin to look at our 
definition of schools public and private. Although public schools have 
become the primary source of education in the United States, it was not 
always that way. In fact, the first schools in the United States were 
privately owned. Our founding Fathers relied on free enterprise to 
educate the youth of their new nation. Almost 200 years later, The 
National Independent Private Schools Association (NIPSA) was founded to 
represent the virtues of educational choice and high academic 
standards. All NIPSA members are private, tax-paying, academic, non-
religiously affiliated independent institutions located in both urban 
and suburban areas throughout the country. These elementary and 
secondary schools are run by proprietors who believe strongly that 
education can be made better and they are willing to assume all the 
financial and operating risks associated with running a private school. 
These dedicated educators have met this challenge while maintaining the 
highest education standards. In the process of doing this, NIPSA 
members have also kept the doors open to all children. Many of our 
members have made significant contributions to public education at 
earlier stages in their careers, ie. Some have been superintendent of 
schools and administrators.
    Mr. Chairman and Members of this distinguished Committee, I 
respectfully ask that you review today: Section 106.6A DEFINITION--For 
purposes of this section: (A) ELEMENTARY AND SECONDARY SCHOOLS--The 
terms `elementary and `secondary school' have the same meanings given 
those terms in paragraphs (14) and (25), respectively, of section 14101 
of the Elementary and Secondary Education Act of 1965.
    The Elementary and Secondary Education Act of 1965 was funded on 
the basis of ``child benefit''. It was when the regulators wrote the 
rules that we began this stipulation of funding only public and non-
profit schools. If you continue on the premise that you are funding 
education on ``Child Benefit'' but by definition of the regulators, you 
have excluded 50,00 children in NIPSA and probably another 100,000 that 
are in unaffiliated schools. This is an unintentional oversight but an 
oversight just as well.
    Let me explain the logic of why NIPSA children should be included 
in this Act cited as ``Schools and Libraries Internet Access Act''.
    There are four significant traits of all NIPSA Member Schools:

 Accreditation--All member schools undergo a stringent NIPSA 
        accreditation process which has been reviewed and accepted by 
        the National Council for Private School Accreditation;
 Accountability--Teachers and staff gladly understand that if 
        their school does not provide a quality education for students, 
        the school will be forced to close its doors. Parents simply 
        will not continue sending their children to NIPSA schools;
 Financial management expertise--In order to remain viable, 
        NIPSA schools have learned proper budgeting, inventory control, 
        regulation of administrative costs, and prudent purchasing 
        strategies;
 Emphasis on children--All NIPSA schools are singularly focused 
        on building students not administrative organizations-
        administrative staff is kept to a minimum, classroom size is 
        kept small, decisions are made on-site.
    NOIPSA schools are, in essence, true educational schools of choice, 
with a sole funding source-parents. We receive no federal funds, 
endowments, foundation funds or donations. Our schools are held to the 
highest accountability standards because, in a free market, schools 
that deliver a quality educational product at an affordable price 
become successful schools while schools that deliver poor educational 
results go out of business.
    NIPSA schools provide before and after-school care, summer 
programs, scholarships for disadvantaged children, and most importantly 
many are dedicated to educating that segment of the school population 
that has been termed as ``high-risk''. Thirty percent of our schools 
enroll children with learning disabilities, one percent have physically 
challenged youngsters, and ninety-five percent have programs for gifted 
learners.
    Perhaps one of the most important factors to consider is that NIPSA 
schools are tax paying schools. We contribute to the tax base of this 
country that is contributing these grants to schools that are public or 
non-profit. Our schools pay property taxes, sales taxes and millions in 
corporate income taxes. There should be some benefit for our students. 
We are not asking for help in managing our business or in any area that 
would give us a business advantage. It is difficult enough, to provide 
quality education, professional staff and all of the necessary 
materials plus housing for students when the income for all of this is 
tuition driven. We are dedicated to continuing this however we wish to 
provide our students with the library and internet access at a 
reasonable educational fee, not a commercial rate.
    Finally, let me quote Secretary of Education Richard Riley. 
Speaking at a teleconference in San Diego in 1996 , he noted that 
schools and libraries were already making big investments in 
technology. He reminded Reed Hundt , the chairman of the FCC, that 
under the administration proposal, ALL k-12 schools public and private 
and parochial schools, as well as public libraries, would receive a 
basic package of services for free. He closed by reminding the board 
further that, ``The proposal advances the long-standing American 
tradition of providing free education and free access to libraries to 
EVERY AMERICAN CHILD''.
    I respectfully submit to this distinguished Committee that America 
does not have nonprofit children and for profit children. We have 
children to educate. Thank you for your consideration.

    Mr. Tauzin. Thank you very much. Next Ms. Cheryl Parrino, 
the CEO of the USAC corporation. Ms. Parrino.

                   STATEMENT OF CHERYL PARRINO

    Ms. Parrino. Good morning. It is a pleasure to be here with 
you today representing the Universal Service Administrative 
Company and to share with you a bit of information about the 
administration and our work of administering the four funds 
that were established by the FCC in response to the Telecom Act 
of 1996.
    As you recall, Congress authorized four universal service 
programs, the High Cost Program, Low-Income, Rural Health Care, 
and Schools and Libraries. USAC is charged with administering 
all four of those programs.
    The High Cost Program that was mentioned earlier today by 
Congressman Markey provides support primarily to high cost 
areas, rural areas of this country, and we fund those entities 
to the tune of about $1.7 billion on an annual basis.
    Attachment A to my testimony provides you information for 
each of the parts of that program on a State-by-State basis, 
how much money is distributed across the country under the High 
Cost Program.
    We also administer the Low-Income Program which provides 
opportunities or subsidies for low-income customers to be able 
to hook up to the telephone and help buy down their monthly 
rates. About 5 million customers across the United States have 
taken advantage of that program in 1998 and we have funded 
those customers to the tune of about $500 million.
    Attachment B, again State by State for each component of 
the program, it gives you information on how much money has 
been distributed in 1998 for the Low-Income Program.
    The third program is the Rural Health Care Program, which 
provides subsidies to buy down the difference between the rural 
and urban rate so that rural health care providers can use 
technology to provide health services to rural parts of this 
country. To the extent that the High Cost Program has been very 
successful in balancing or equalizing the rates between urban 
and rural places in this country, that has minimized the impact 
of that program. But in the first year we had an indication of 
interest from about 2,800 rural health care providers. About 
600 of those have filed complete applications and to date we 
have funded about $1 million to 170 eligible rural health care 
providers in 34 States. Attachment C provides you with the same 
sort of information as the previous attachments for that 
program.
    Last but not least, the Schools and Library Program, which 
is the primary subject of this hearing today, is also 
administered by USAC. In the first year we received more than 
30,000 applications. We supported 25,785 applicants 
representing public and private schools and public libraries up 
to the FCC cap of $1.9 billion for the first 18 months of the 
program.
    Again, attachment D provides you information for the 
Schools and Libraries Program.
    In year two we have received 32,000 applications and we 
will fund up to the FCC cap of $2.25 billion.
    As you well know, USAC's mandate is a very narrow one. We 
have been charged with administering the four universal service 
programs I have described. USAC charter from the FCC strictly 
limits our role. USAC cannot and does not establish policy or 
advocate any position before the FCC or Congress. Over the past 
2 years we have hired independent auditors Price Waterhouse 
Coopers and Deloitte Touche to assist us in designing efficient 
operating procedures for the new programs. Each of these firms 
have attested that our procedures are efficient and suitable, 
designed to prevent or detect any material departures from 
program objectives.
    We have also been given a clean bill of health by Arthur 
Andersen in our 1998 financial and operational audits. At 
direction of Senator McCain, the General Accounting Office 
reviewed the procedures of the Schools and Libraries Division 
and observed in their July 16 testimony that the Schools and 
Libraries Division has made substantial progress in 
establishing an operational framework for the program that is 
consistent with the relevant FCC orders.
    I thank you. Again I would like to highlight that I am not 
able to, given my narrow charge, I am not able to comment on 
your bill, but I would be happy to answer any questions you may 
have about the program.
    [The prepared statement of Cheryl Parrino follows:]
    Prepared Statement of Cheryl Parrino, Chief Executive Officer, 
                Universal Service Administrative Company
    Good morning, Mr. Chairman and Members of the Committee. It is my 
privilege to be here today to speak to you about the Universal Service 
Administrative Company (referred to as USAC) and our administration of 
the universal service programs as established by the FCC as a result of 
the Telecommunications Act of 1996.
    As you will recall, Congress authorized four universal service 
programs: the High Cost Program, the Low Income Program, the Schools 
and Libraries Program, and the Rural Health Care Program. I would like 
to very briefly describe the programs as they exist today and provide 
you with information concerning the benefits that are being provided.
    The High Cost Program provides support to Eligible 
Telecommunications Carriers (companies) who deliver basic ``core'' 
telephone service to customers in areas of the country that are more 
costly to serve. There are three parts of the High Cost program which 
help companies deliver telephone service to all Americans. The High 
Cost Loop portion covers the cost of the last mile to the customer if 
it is 115% greater than the national average, the Local Switching 
Support portion of the fund covers switching costs for small companies 
that serve less than 50,000 customers, and the Long Term Support 
portion helps offset access charge rates charged by small and 
predominately rural companies. In 1998, USAC provided approximately 
$1.7 billion in High Cost support. Attachment A provides detail for 
each state, each portion of the program and the total high cost funding 
for 1998.
    The Low Income Program helps make telephone service more affordable 
for low-income consumers through two national programs, Lifeline and 
Link-Up. Approximately 5 million customers have taken advantage of this 
program. The Lifeline program helps to offset the monthly bill and the 
Link-Up program helps to offset the one-time hookup or connection 
charge. The program will also pay for the cost of toll blocking which 
helps the customer control the phone bill. In 1998, USAC provided 
approximately $465 million in Low Income Universal Service support to 
Eligible Telecommunications Carriers to offset charges on low-income 
consumers' bills. Attachment B provides detail for each state, each 
portion of the program and the total low income funding for 1998.
    The Rural Health Care Program provides support to rural health care 
providers to ensure that they pay no more than their urban counterparts 
for telecommunications services. Support applies to monthly 
telecommunications service charges, installation charges, and long 
distance charges for access to the Internet. During the first year of 
the program, 2835 rural health care providers indicated an interest in 
the program and 616 submitted applications for support. To date almost 
$1 million has been committed to 170 eligible rural health care 
providers in 34 states. The Rural Health Care Division continues to 
process Year 1 applications. Attachment C provides a summary of the 
funds committed thus far for Year 1.
    Finally, the Schools and Libraries Program (commonly referred to as 
the E-Rate) helps provide affordable access to telecommunications 
services for all eligible schools and libraries, particularly those in 
rural and economically disadvantaged areas. The program provides 
discounts of 20% to 90% on telecommunications services, Internet access 
and internal connections. The level of discounts that schools and 
libraries are eligible to receive depends on economic need and 
location, rural or urban. More than 30,000 applications were received 
during the first year of the program. Support was provided to 25,785 
applicants representing public and private schools and public libraries 
up to the FCC cap of $1.9 billion for the first 18 months of the 
program. For your reference, Attachment D provides a summary of the 
funding commitments that were made for Year 1. In Year 2 we have 
received 32,000 applications. USAC will fund eligible requests up to 
the $2.25 billion cap established by the FCC.
    USAC's mandate is a narrow one. We have been charged with 
administering the four universal service programs I have briefly 
described. The USAC charter from the FCC strictly limits our role. USAC 
cannot and does not establish policy or advocate any position before 
the FCC or Congress. Since its creation in September of 1997, USAC has 
worked hard to increase its efficiency and effectiveness. On January 1, 
1999, as ordered by the FCC, the Rural Health Care Corporation and the 
Schools and Libraries Corporation merged into USAC. The merger has 
resulted in an initial savings of 10%. We continue to look for 
efficiencies and additional opportunities for streamlining.
    In summary, USAC has worked diligently to ensure that the programs 
are administered in accordance with the rules promulgated by the 
Federal Communications Commission. As the administrator of these 
programs, USAC has no authority to advocate policy and therefore I 
cannot take a position on HR 1746. I would however be pleased to 
respond to any questions you may have about the programs or USAC.
                              Attachment A

                           Universal Service Administrative Company High Cost Program
                               Total Projected Support Payments for 1998 by State
----------------------------------------------------------------------------------------------------------------
                                              Universal         Long Term      Local Switching
          State or Jurisdiction             Service Fund         Support           Support        Total Support
----------------------------------------------------------------------------------------------------------------
ALABAMA.................................       $21,947,616        $6,812,558       $10,153,266       $38,913,440
ALASKA..................................       $31,963,777       $16,287,535       $14,909,157       $63,160,470
ARIZONA.................................       $19,492,163        $2,996,004        $7,785,833       $30,274,001
ARKANSAS................................       $46,089,633       $14,974,038        $9,584,889       $70,648,560
CALIFORNIA..............................       $28,886,748       $15,252,293        $8,255,564       $52,394,605
COLORADO................................       $29,084,089       $12,480,408        $4,354,619       $45,919,116
CONNECTICUT.............................                $0          $173,885        $1,229,387        $1,403,271
DELAWARE................................                $0                $0                $0                $0
DISTRICT OF COLUMBIA....................                $0                $0                $0                $0
FLORIDA.................................       $11,300,827        $6,216,006        $4,622,852       $22,139,686
GEORGIA.................................       $41,660,333       $17,469,442       $12,673,651       $71,803,426
GUAM....................................                $0        $1,036,397                $0        $1,036,397
HAWAII..................................                $0          $253,710          $645,216          $898,926
IDAHO...................................       $19,505,787        $2,651,783        $6,406,782       $28,564,351
ILLINOIS................................        $5,717,032        $5,260,687       $11,745,592       $22,723,310
INDIANA.................................        $2,922,762        $5,051,789        $8,062,461       $16,037,012
IOWA....................................        $5,682,281        $7,444,862       $16,926,049       $29,053,192
KANSAS..................................       $36,263,126        $9,228,572       $12,687,975       $58,179,674
KENTUCKY................................       $14,146,447        $5,274,410        $5,764,233       $25,185,091
LOUISIANA...............................       $41,626,484       $17,112,419        $8,025,003       $66,763,905
MAINE...................................        $5,142,391        $5,566,003        $6,145,029       $16,853,424
MARYLAND................................                $0           $93,174          $497,916          $591,089
MASSACHUSETTS...........................            $6,686           $89,836          $270,257          $366,779
MICHIGAN................................       $13,982,051        $8,628,866       $10,042,616       $32,653,533
MINNESOTA...............................        $8,924,455       $11,401,747       $18,068,447       $38,394,648
MISSISSIPPI.............................       $18,338,576        $4,903,515        $4,226,669       $27,468,760
MISSOURI................................       $29,578,017       $10,545,430        $9,463,755       $49,587,202
MONTANA.................................       $23,467,678        $9,989,579        $9,693,921       $43,151,178
NEBRASKA................................        $6,281,317        $3,723,244       $10,408,820       $20,413,381
NEVADA..................................        $3,252,723        $1,029,177        $4,789,246        $9,071,146
NEW HAMPSHIRE...........................        $2,473,619        $1,583,426        $4,873,081        $8,930,126
NEW JERSEY..............................        $2,012,385                $0        $1,097,875        $3,110,260
NEW MEXICO..............................       $19,260,613        $5,929,144        $9,278,954       $34,468,711
NEW YORK................................       $10,664,865        $7,008,888       $18,238,267       $35,912,019
NORTH CAROLINA..........................       $21,836,970       $13,015,756        $6,240,669       $41,093,395
NORTH DAKOTA............................        $5,074,893        $5,440,606       $11,023,045       $21,538,543
NORTHERN MARIANA ISLANDS................        $3,601,484                $0        $1,332,414        $4,933,899
OHIO....................................        $4,476,642        $5,189,569        $5,023,827       $14,690,038
OKLAHOMA................................       $27,353,330       $15,826,197       $15,833,411       $69,012,937
OREGON..................................       $18,563,458       $10,471,338        $7,584,140       $36,618,937
PENNSYLVANIA............................        $1,383,836       $14,037,268        $8,771,332       $24,192,436
PUERTO RICO.............................       $48,786,061       $93,890,023                $0      $142,676,084
RHODE ISLNND............................                $0                $0                $0                $0
SOUTH CAROLINA..........................       $23,680,509        $9,971,023       $12,919,526       $46,571,058
SOUTH DAKOTA............................        $3,160,201        $4,331,610       $10,412,199       $17,904,010
TENNESSEE...............................        $8,152,076        $9,452,075       $10,515,599       $28,119,750
TEXAS...................................       $75,837,949       $29,658,890       $19,282,803      $124,799,642
UTAH....................................        $2,981,619        $1,268,015        $4,761,353        $9,010,987
VERMONT.................................        $4,144,186        $3,291,398        $4,766,929       $12,202,512
VIRGIN ISLANDS..........................       $11,315,559        $4,935,577                $0       $16,251,136
VIRGINIA................................        $4,780,376        $3,348,990        $5,225,657       $13,355,023
WASHNGTON...............................       $23,442,891       $12,470,927        $6,955,915       $42,869,733
WEST VIRGINIA...........................       $17,173,230        $1,069,241        $3,064,611       $21,307,082
WISCONSIN...............................       $13,108,671       $13,716,424       $24,465,366       $51,290,461
WYOMING.................................       $22,501,742        $4,082,462        $4,528,568       $21,112,772
INDUSTRY................................      $831,030,165      $471,936,214      $412,634,743    $1,715,601,122
----------------------------------------------------------------------------------------------------------------

                              Attachment B

                                     Universal Service Administrative Company Schedule of Low Income Program Dollars
                                                                  January-December 1998
--------------------------------------------------------------------------------------------------------------------------------------------------------
                       State or Jurisdiction                             Lifeline          Linkup            TLS              PICC            Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
ALABAMA............................................................       $1,416,925          $37,716           $2,119          $16,305        1,473,065
ALASKA.............................................................          188,578           17,367           14,584               60          220,589
AMERICAN SOMOA.....................................................            8,167            3,660                0                0           11,827
ARIZONA............................................................        1,100,289           12,446           13,621            1,035        1,127,391
ARKANSAS...........................................................          579,799          141,989            2,837            4,832          729,457
CALIFORNIA.........................................................      243,424,958       28,644,537        1,938,526        1,259,338      275,267,359
COLORADO...........................................................        1,830,137           44,217           18,578            8,345        1,901,277
CONNECTICUT........................................................        3,611,946          201,089           27,447           21,318        3,861,800
DELAWARE...........................................................           23,198            2,376                0                0           25,574
DISTRICT OF COLUMBIA...............................................                0                0                0                0                0
FLORIDA............................................................       10,035,286          196,450            9,789           70,479       10,312,004
GEORGIA............................................................        6,129,291          204,596            8,052           49,896        6,391,835
GUAM...............................................................           18,061            3,521                0                0           21,582
HAWAII.............................................................          551,000           34,784                0              150          585,934
IDAHO..............................................................          567,496           11,509            3,877            1,000          583,882
ILLINOIS...........................................................        1,832,182          317,772              995           17,291        2,168,240
INDIANA............................................................          782,948          103,698            1,527            9,888          898,061
IOWA...............................................................          146,995           28,639           10,959            1,815          188,408
KANSAS.............................................................          336,607           26,737              993            1,822          366,159
KENTUCKY...........................................................          304,340          143,819            4,200            5,307          457,666
LOUISIANA..........................................................          366,692           73,810            1,433           10,857          452,792
MANE...............................................................        5,284,914          476,938           19,660           19,402        5,800,914
MARYLAND...........................................................          319,809                0                0                0          319,809
MASSACHUSETTS......................................................       13,572,243          108,720                0           55,882       13,736,845
MICHIGAN...........................................................        9,676,719          384,007            8,773           73,502       10,143,001
MINNESOTA..........................................................        3,505,814           15,793            3,233              932        3,525,772
MISSISSIPPI........................................................          876,569           38,181            1,234            9,295          925,279
MISSOURI...........................................................          545,922           83,766            2,683            2,062          634,433
MONTANA............................................................          665,191           20,099           10,524            1,945          697,759
NEBRASKA...........................................................          585,475            8,380           12,640            3,411          609,906
NEVADA.............................................................          214,009            1,875              410               13          216,307
NEW HAMPSHIRE......................................................          161,458           26,155                0              873          188,486
NEW JERSEY.........................................................          317,378           22,502              149                0          340,029
NEW MEXICO.........................................................        2,494,090          116,219           70,603           31,716        2,712,628
NEW YORK...........................................................       53,778,248        5,479,060               19          969,876       60,227,203
NORTH CAROLINA.....................................................        2,412,287           38,516            1,971           13,365        2,466,139
NORTH DAKOTA.......................................................          853,729           23,136           10,603            4,525          891,993
NORTHERN MARIANA ISLANDS...........................................           10,659            5,887                0                0           16,546
OHIO...............................................................        5,231,163          319,261           20,325           99,255        5,670,004
OKLAHOMA...........................................................          104,641           47,836              883              928          154,288
OREGON.............................................................        2,328,845           44,007           19,739           10,280        2,402,871
PENNSYLVANIA.......................................................        1,689,112          898,486               90              800        2,588,488
PUERTO RICO........................................................          587,156           68,116                0                0          655,272
RHODE ISLAND.......................................................        3,753,152           29,878                0           23,846        3,806,876
SOUTH CAROLINA.....................................................        1,794,933           42,388            6,278           21,106        1,864,705
SOUTH DAKOTA.......................................................          647,158           29,448           15,138            3,267          695,011
TENNESSEE..........................................................        1,862,505           78,042            1,364           10,248        1,952,159
TEXAS..............................................................       17,075,909        2,243,803          173,804          161,996       19,655,512
UTAH...............................................................        1,665,225           36,078           24,856            9,191        1,735,350
VERMONT............................................................        2,207,827           24,157              487            2,958        2,235,429
VIRGIN ISLANDS.....................................................           49,229            2,005                0                0           51,234
VIRGNIA............................................................        1,772,255           27,350              474              627        1,800,706
WASHINGTON.........................................................        4,029,780          409,930           89,905           33,236        4,562,851
WEST VIRGINIA......................................................          367,781            1,280                0               23          369,084
WISCONSIN..........................................................        2,715,202          376,880            3,037           48,748        3,143,867
WYOMING............................................................           92,637              424              456              127           93,644
TOTALS.............................................................     $416,503,919      $41,779,335       $2,558,875       $3,093,173     $463,935,302
--------------------------------------------------------------------------------------------------------------------------------------------------------
SOURCE: Universal Service Administrative Company.
NOTE: These dollars represent submitted claims to USAC for the time period January through December 1998 only, including true-ups reported to date
  (April 1999). District of Columbia has reported data to USAC for the entire period in question, but has not as of yet been compensated due to the fact
  that eligible telecommunications carrier (ETC) status has not been granted retroactive to January 1998.

                              Attachment C

 Universal Service Administrative Company Schedule of Rural Health Care
                                 Program
                        Dollars Committed Year 1
------------------------------------------------------------------------
                                                              Dollars
                          State                              Committed
------------------------------------------------------------------------
Alaska..................................................      $34,053.57
Alabama.................................................       $9,198.81
Arkansas................................................       $9,216.67
Arizona.................................................      $36,626.71
California..............................................       $9,525.23
Colorado................................................      $52,057.81
Hawaii..................................................      $91,612.44
Idaho...................................................       $5,277.50
Illinois................................................      $13,712.28
Kansas..................................................      $33,316.73
Maine...................................................       $1,344.16
Michigan................................................      $12,630.84
Minnesota...............................................      $28,004.39
Missouri................................................      $24,451.71
Mississippi.............................................      $38,183.72
Montana.................................................     $106,726.75
North Carolina..........................................      $21,005.41
North Dakota............................................      $83,777.85
Nebraska................................................      $11,688.33
New Hampshire...........................................      $10,443.97
New Mexico..............................................      $38,614.30
Nevada..................................................      $21,584.88
New York................................................     $124,386.36
Ohio....................................................      $28,865.94
Oklahoma................................................      $20,537.43
Oregon..................................................       $6,346.38
Tennessee...............................................       $9,990.61
Texas...................................................      $12,278.68
Utah....................................................      $29,534.58
Virginia................................................      $28,768.26
Vermont.................................................       $3,789.52
Washington..............................................      $12,256.55
West Virginia...........................................       $1,219.80
Wyoming.................................................       $1,022.52
                                                             $972,049.69
------------------------------------------------------------------------
\1\ Includes Funding Commitment Letters expected to be mailed week of 9/
  27/99

                              Attachment D

    Universal Service Administrative Company Schedule of Schools and
                            Libraries Program
                        Dollars Committed Year 1
------------------------------------------------------------------------
                        State                              $ Amount
------------------------------------------------------------------------
AK..................................................      $11,932,992.58
AL..................................................      $45,769,470.99
AR..................................................      $13,154,643.52
AS..................................................       $3,557,348.10
AZ..................................................      $35,610,282.85
CA..................................................     $206,391,757.29
CO..................................................      $13,945,827.03
CT..................................................      $23,788,196.36
DC..................................................       $4,866,571.30
DE..................................................       $1,006,045.70
FL..................................................      $48,003,718.99
GA..................................................      $77,786,315.87
HI..................................................       $4,974,590.09
IA..................................................       $7,266,755.15
ID..................................................       $4,542,270.99
IL..................................................      $78,887,519.99
IN..................................................      $18,304,745.93
KS..................................................      $10,181,488.23
KY..................................................      $50,167,390.09
LA..................................................      $39,005,354.98
MA..................................................      $29,001,101.46
MD..................................................      $11,486,773.49
ME..................................................       $2,923,471.63
MI..................................................      $56,927,837.75
MN..................................................      $24,551,883.83
MO..................................................      $23,641,930.13
MS..................................................      $24,691,838.83
MT..................................................       $3,622,895.02
NC..................................................      $25,504,323.54
ND..................................................       $2,408,800.40
NE..................................................       $4,865,343.20
NH..................................................       $1,583,922.28
NJ..................................................      $61,387,902.07
NM..................................................      $18,865,472.13
NV..................................................       $5,213,870.49
NY..................................................     $164,546,935.89
OH..................................................      $57,272,501.29
OK..................................................      $32,648,986.93
OR..................................................       $9,377,406.30
PA..................................................      $49,659,748.96
PR..................................................      $47,646,855.08
RI..................................................       $6,009,681.71
SC..................................................      $25,041,848.84
SD..................................................       $2,799,130.09
TN..................................................      $27,098,296.97
TX..................................................     $128,767,624.83
UT..................................................       $6,154,438.20
VA..................................................      $24,997,720.78
VI..................................................       $2,153,443.53
VT..................................................       $2,027,333.55
WA..................................................      $29,903,483.48
WI..................................................      $37,455,756.57
WV..................................................       $9,319,829.21
WY..................................................       $1,218,192.24
Total...............................................   $1,660,008,866.73
------------------------------------------------------------------------
Schools and Libraries Division, USAC, March 1, 1999


    Mr. Tauzin. I understand. Thank you very much. And finally 
Mr. Kent Lassman, Deputy Director of Technology and 
Communications for the Citizens for Sound Economy. Kent, your 5 
minutes are started.

                    STATEMENT OF KENT LASSMAN

    Mr. Lassman. ``For every old blackboard there are hundreds 
of new electronic computers.'' That is what Dwight Eisenhower 
said on January 17, 1961 in his televised farewell address. Of 
course this speech is more famous for Eisenhower's warning to 
guard against the acquisition of unwarranted influence, whether 
sought or unsought, by The military industrial complex. But 
with the spirit of President Eisenhower's remark about 
computers firmly in mind today, we would do well to guard 
against the acquisition of unwarranted influence over the 
technology in our lives by regulation, albeit well intended.
    Mr. Chairman and members of the committee, thank you for 
the opportunity to share my views on the E-Rate and public 
mechanisms to subsidize telecommunications services. I present 
these views on behalf of the members of Citizens for a Sound 
Economy Foundation.
    Mr. Chairman, the problem contemplated by H.R. 1746 is 
real. However, the solution presented by the proposed 
legislation can be improved. Too often policymakers take action 
on the following premise: If not for government action an 
essential public need will not be met. This premise doesn't 
apply to the infusion of technology in telecommunications into 
American education programs.
    As Mr. Shimkus pointed out, it did not apply at the turn of 
the century, it did not apply in 1961, and it certainly does 
not apply today.
    The problem with the E-Rate subsidy is that it does not 
address a critical and one might argue the most critical aspect 
of education reform. If the promise of America's future is in 
her children and their preparedness for the social economy and 
social challenges of tomorrow, then we would do well to provide 
the tools that they will need. Unfortunately, the E-Rate 
subsidizes the tools that are easy to provide, not necessarily 
the tools that are most needed.
    As much emphasis as we place on what is new and novel we 
should also focus on the tried and true.
    The very fundamentals of education. Can our children read? 
Do young people have sufficient writing and logical thinking 
skills? Are our schools teaching children how to learn how to 
learn? And most important to the discussion before us today, 
are the Federal subsidy for telecommunication services the best 
use of our resources?
    I suggest to you that a computer is a poor substitute for 
concerned parents. A computer is a poor substitute for well 
trained and caring teachers. An Internet connection with high 
speed web access is of little good to a child who cannot read 
at grade level. Think about your own child. Would you provide 
her with a computer or an inspiring teacher? Is it more 
important to master today's technologies or to learn the skills 
that permit learning the technologies of tomorrow?
    Nonetheless, today's hearing is on the E-Rate. You may know 
that elsewhere I have recommended the elimination of the E-
Rate. However, it is altogether different to ask about how to 
best administer the program. My written statement offers five 
principles that should guide any reform.
    First, the program must be constitutional. The 1996 
Telecommunications Act did not give the FCC the power to 
establish or increase taxes. In fact, had the act attempted to 
delegate such a power it would have been unconstitutional.
    The E-Rate should also be limited. The difference between 
the law and the implementation of the E-Rate is stark. For 
example, the law says that subsidies may be granted for, quote, 
an evolving level of telecommunications services that the 
Commission shall establish periodically. But nothing about 
desktop computers servers, network administration, software or 
teacher training.
    The E-Rate should be targeted. The E-Rate should be 
transparent, as Mr. Markey has correctly suggested, the costs 
as well as the benefits of the program must be made clear to 
consumers. One need look no further than the FCC's so-called 
truth in billing proposals to see how these subsidies are 
hidden from consumers today by the FCC.
    Finally, the E-Rate should be performance based. Funding 
for the subsidies should be directly linked to the performance 
of the E-Rate program. Constitutional, limited, targeted, 
transparent and performance-based. These are the watch words 
for reform. H.R. 1746 is a step toward a better subsidy system 
but it can be strengthened. For example, while the sunset 
provision is an asset, it can be improved by a small 
modification to repeal the remainder of the excise tax on 
telecommunication services when the trust fund expires.
    I see that my time has expired and I look forward to any 
questions from the committee.
    [The prepared statement of Kent Lassman follows:]
   Prepared Statement of Kent Lassman, Citizens for a Sound Economy 
                               Foundation
Introduction
    ``For every old blackboard there are now hundreds of new electronic 
computers.'' So said President Dwight Eisenhower in his televised 
farewell address on January 17, 1961. Of course, this speech is more 
famous for Eisenhower's warning to ``guard against the acquisition of 
unwarranted influence, whether sought or unsought, by the military-
industrial complex.''
    His early recognition of the growing role that technology might 
play in education seems even more relevant 38 years later, and informs 
the on-going policy debate about the E-Rate. And to paraphrase 
President Eisenhower's earlier warning about government power, today we 
would do well to guard against the acquisition of unwarranted influence 
over the technology in our lives by misguided--albeit well intended--
regulatory policy.
    Mr. Chairman, and members of the Committee, thank you for the 
opportunity to share my views on the E-Rate and public mechanisms to 
subsidize telecommunications services. I present these views on behalf 
of Citizens fora Sound Economy (CSE) Foundation's members. At CSE 
Foundation, I am the deputy director for technology and communications 
policy.1
---------------------------------------------------------------------------
    \1\ CSE Foundation does not receive any funds from the U.S. 
Government.
---------------------------------------------------------------------------
    More than a quarter of a million strong, CSE Foundation's members 
are in every corner and congressional district of America. Our members 
distinguish themselves as policy activists. They constantly remind us 
that decisions made in Washington, D.C. are felt in places far away 
from here. And that is where CSE Foundation can be found. We fight at 
the grassroots level for lower taxes and less economic regulation. CSE 
Foundation members are also consumers. They understand from their own 
personal experiences how markets and competition--not government 
regulations--enable individuals to make better decisions about the 
products and services they want and need, including telecommunications 
services. Public policies we are here to discuss today should seek to 
increase, and not limit the choices, control, and information available 
to consumers.
    The E-Rate, and the taxes collected from consumers to support it, 
have long been interests for CSE Foundation. At the most basic level, 
the E-Rate is a part of a complex wealth transfer system where the 
units of value are telecommunications services. The E-Rate is based 
upon a policy that takes from one consumer in order to give to another 
consumer; the effect is to distort the marketplace and to be inherently 
unfair.
    The legislation before you today, H.R. 1746, correctly identifies a 
problem but presents a solution that would be--at best--a marginal 
improvement over the current situation. More likely, it would result in 
an unfunded entitlement that might actually limit opportunities for 
America's children to learn from, and by, using technology.
The Problem
    Too often policymakers take action based on the following premise: 
If not for government action--a new program, a new law or subsidy--an 
essential public need will not be met. This premise does not apply to 
the infusion of technology and telecommunications into American 
education programs.
    One week ago, on the 23rd of September, the Associated Press ran a 
story about a report featured in Education Week that detailed the 
prevalence of technology in American schools. All told, there are 5.7 
students per instructional computer. 71 percent of our schools use the 
Internet in a classroom. It is simply incorrect to claim that computers 
and Internet access are not available to our students.
    Despite its overwhelming size and the speed by which the E-Rate has 
grown, growth of technology in the classroom has not been the result of 
this federal policy. Looking forward, it is more likely that local 
administrators and teachers working with parents and the local 
community will make the decisions for what will work in their schools. 
This suggests that any subsidy program should have clear goals and 
should be phased out upon their completion.
    A second problem with the E-Rate subsidy is that it does not 
address a critical--one might argue the most critical--aspect of 
education reform. If the promise of America's future is in her children 
and their preparedness for the social, economic, and international 
challenges of tomorrow, then we would do well to provide the tools that 
they will need. Unfortunately, the E-Rate subsidizes the tools that are 
easy to provide--not necessarily the tools that would most add value to 
our students, society, and economy.
    Technology has wrought great change in America. An extensive review 
of these changes would not surprise or necessarily inform the members 
of this committee. Our jobs, workplaces, leisure, education, and social 
networks have responded to the advances of information technology.
    However, some things do not change. As much emphasis as we place on 
what is new and novel, we should also focus on education fundamentals. 
Can all of our children read? Do young people have sufficient writing 
and logical thinking skills? Are our schools teaching children to learn 
how to learn? And most important to the discussion before us today, is 
a federal subsidy for telecommunications services the best use of our 
resources? Can a computer or an Internet connection teach a child the 
habits of the mind to understand basic mathematics and science? Will 
tomorrow's workers know how to communicate and think as a result of a 
new technology subsidy system today?
    I suggest to you that a computer is a poor substitute for concerned 
parents; a computer is a poor substitute for well-trained and caring 
teachers; an Internet connection with high-speed web access is of 
little good to a child that cannot read at a basic level.
    And if the recommendations that I present today are too 
challenging, consider the following thought experiment to help guide 
your decisions. Would it be better provide your own child with a 
mastery of today's technologies without the skills that permit learning 
the next set of technologies? Or, would it be better for your daughter, 
or your son, to have the skills to maximize her own, or his own, 
flexibility in the workforce and in society?
    Obviously, it is the latter. Children must be taught how to think 
critically, to learn on their own, and to communicate with others. 
Technology can augment this process. It is not however, a stopgap or 
substitute for something else entirely, namely a basic education. The 
skills most attractive to employers are not centered on web-browsing. 
For example, computer programming requires a solid foundation in 
analytical skills--basic mathematics and science.
    A federal subsidy program for telecommunications services is the 
wrong way to address fundamental education reform.
Principles for Reform
    All of universal service, and in particular the E-Rate program, is 
in need of a comprehensive overhaul. Following are a handful of 
principles to guide any such effort.
    It should be Constitutional. The 1996 Telecommunications Act did 
not give the Federal Communications Commission (FCC) the power to 
establish or increase taxes. In fact, had the act attempted to delegate 
that power, it would be clearly unconstitutional.
    A power delegated in the Constitution cannot be re-delegated. This 
is the starting point of a legal theory called the non-delegation 
doctrine. The non-delegation doctrine is not a musty relic from 
history. On May 14, 1999 the 10th Circuit struck down air quality 
regulations promulgated by the Environmental Protection Agency (EPA) on 
the basis that the agency was implementing regulations not expressly 
approved by Congress. In American Trucking Association v. United States 
Environmental Protection Agency 2 the court held that 
without a clear standard from Congress, the EPA could not 
constitutionally create and mandate rules and regulations. This need 
for a clear statutory standard is consistent with Supreme Court 
decisions such as Industrial Union Department v. American Petroleum 
Institute 3 and J.W. Hampton v. United States.4 
As in these cases, there is no clear statutory standard by which the 
FCC can create or increase taxes to fund the E-Rate program. If 
Congress does not administer the E-Rate, then it is imperative that a 
clear statutory standard is established to provide guidance to, and 
legal authority for, the its implementation and administration.
---------------------------------------------------------------------------
    \2\ 1999 WL 300 618 (D.C. Cir. 1999).
    \3\ 448 U.S. 607 (1981).
    \4\ 276 U.S. 394 (1928).
---------------------------------------------------------------------------
    While the Supreme Court has not ruled on the question of a clear 
statutory standard for the E-Rate, a hint of the Court's opinion might 
be gleaned from the opinion in AT&T Corp. v. Iowa Utilities 
Board.5 Justice Scalia, writing for the majority, declared 
that ``It would be gross understatement to say that the 
Telecommunications Act of 1996 is not a model of clarity. It is in many 
important respects a model of ambiguity or indeed even self-
contradiction.''
---------------------------------------------------------------------------
    \5\ 119 S.Ct. 721 (1999).
---------------------------------------------------------------------------
    It should be limited. Federal support programs for 
telecommunications services should be consolidated and limited. The 
General Accounting Office has identified 40 subsidy programs to support 
telecommunications services. In addition, section 254(h)(B) of the 1996 
Telecommunications Act requires a discount to be provided to schools, 
libraries and the like for the services of a telecommunications 
provider. The current administration of the E-Rate is not limited to 
telecommunications services as contemplated by the law. Finally, reform 
of the E-Rate should include a sunset provision for the program. 
Without such a measure, the E-Rate will become an entitlement that 
hides and distorts budget decisions in local school districts.
    It should be targeted. A subsidy for the needy--students, rural 
health facilities, or local libraries--should be targeted to those in 
the most need. Pressure to better target the federal largesse of the E-
Rate will grow as limits to the size, scope, and duration of the E-Rate 
are implemented.
    It should be transparent. Section 254(b)(5) of the 1996 
Telecommunications Act requires that universal service programs adhere 
to a principle of specific and predictable support mechanisms. Section 
254 (e) of the 1996 Telecommunications Act requires all subsidies to be 
explicit. As a result, any reform to universal service--including the 
E-Rate--must rely upon a predicable source of revenue that is collected 
in an open manner from consumers. The current mechanisms to fund 
universal service do not meet this minimal standard. An improvement to 
this standard would be to require that in addition to making the costs 
associated with universal service explicit, the benefits (and 
beneficiaries) of universal service subsidies should also be made clear 
to consumers.
    It should be performance-based. Funding for the E-Rate should be 
directly linked to the performance of the program. This simple 
guideline would create an incentive to limit wasteful spending. If 
students were to learn more through additional appropriations for the 
E-Rate, then the program would likely thrive. If, however, students did 
not fare better despite extravagant expenditures for E-Rate funding, 
then America would be best served by spending those precious dollars on 
a more effective education program. In addition, this principle creates 
a means through which the merits of the program--if they exist--will be 
justified by an honest taxpayer assessment.
    A significant problem with funding a government program through an 
excise tax--either alone or funneled through a trust fund--is that it 
divorces the results of a program from the source of the revenue. 
Consider that as consumers spend more money on telecommunications 
services the amount of funding for the E-Rate will continue to climb 
regardless of need or efficacy of additional revenues.
    An assessment by taxpayers--most often through the Congressional 
oversight process--requires objective measures of success. Currently, 
we measure the amount of money that goes into the E-Rate program. 
However, it would be more helpful to know how much of the multi-billion 
dollar E-Rate program makes it into the classroom versus being spent on 
administrative costs. Is web access as good of a teaching tool as a 
local area network run by teachers trained in HTML? Does this question 
produce different answers at different grade levels? These questions, 
and not numbers about the quantity of applications for federal aid, 
would do more to help understand the merit and performance of this 
federal subsidy. In turn, better information about the performance of 
federally funded program can translate into a better use of scarce 
resources.
Reforming Reform: H.R. 1746
    Common wisdom suggests that unless Congress, or the FCC, steps into 
the marketplace with a tax and regulatory system then our schools, 
libraries, and rural health care providers will not have adequate 
telecommunications services. If that were true, and if a federal 
subsidy were introduced, then we would certainly attempt to design the 
most efficient system to administer that subsidy. H.R. 1746 is a step 
toward a better subsidy system that the current E-Rate program. 
However, this proposed legislation can be significantly improved.
    The principles outlined above should guide any effort--including 
the development and refinement of H.R. 1746--to reform the E-Rate 
program. Following are only a few examples of where this legislation 
can be improved.

 People use the Internet. Students, library patrons, and rural 
        health care professionals are not the direct beneficiaries of 
        the E-Rate. H.R. 1746 would make resources available to states, 
        not to schools and certainly not to students. The closer a 
        subsidy is moved to the ultimate beneficiary, the better and 
        more accountable the subsidy system.
 The sunset provision in H.R. 1746 is very important. It, 
        however, could be improved by repealing the remainder of the 
        federal excise tax on telecommunications at the same time that 
        the proposed trust fund expires. This excise tax was introduced 
        to fund the Spanish-American War. The war lasted approximately 
        three months and ended more than 100 years ago. It is time to 
        get rid of this tax.
 By definition, a program funded by an excise tax is poorly 
        structured. The excise tax--a tax on talking--should be 
        repealed and the E-Rate should be funded out of general 
        revenues. This structural change to H.R. 1746 would strengthen 
        the proposal to reform the E-Rate.
 A criterion such as ``living in a sparsely populated area'' is 
        not the same as an area in need of a subsidy. For example, some 
        rural areas may be served by wireless telecommunications 
        services at a lower cost--and therefore lower need for 
        subsidy--than traditional landline services. A change of 
        perspective from rural to high-cost would better target the 
        resources made available by the E-Rate program.
 H.R. 1746 sends unexpended balances in the trust fund to the 
        general treasury. At the same time, consumers are led to 
        believe that the telecommunications taxes that they pay are 
        putting computers in a classroom. Taking money for one purpose, 
        putting it in a trust fund, and then spending it on another 
        purpose is not good public policy. It is dishonest. Instead, 
        any subsidy program should be funded out of general revenues, 
        where it would have to compete with other priorities. If this 
        change is not made, at the very least, unexpected balances 
        should be returned to taxpayers, and not shifted into an 
        already-bloated federal budget.
Conclusion
    This impetus behind H.R. 1746 is well-intentioned. The current E-
Rate is a case study in government waste, fraud, and abuse. However, 
the proposed reforms contained in this legislation should not go 
forward without substantial improvement based on the principles 
outlined above..
    As we move forward, I trust that we will heed the warning of 
President Eisenhower to ``guard against the acquisition of unwarranted 
influence, whether sought or unsought.''
    Thank you.

    Mr. Tauzin. Thank you very much. The Chair recognizes 
himself quickly. The GAO study that looked at the beginnings of 
this program was highly critical of it and criticized the 
corporations that were created to carry the program out, even 
indicated to all of us that there were 27 existing programs 
that could provide funding for the purchase of technology for 
schools and libraries and questioned the need for corporations 
that were not subject to ordinary congressional oversight 
review and appropriation.
    What became of that study and what was done? Perhaps Mr. 
Wright you want to get into that? What was done to respond to 
that GAO study?
    Ms. Parrino. There were a number of GAO studies. GAO came 
in to look at our operating procedures. They made a number of 
recommendations for improvement. As an example, they suggested 
or highly recommended that our internal auditors complete--or 
that our independent auditors completely review before we issue 
any commitments to schools and libraries. And we adopted that 
recommendation and implemented it so we completed our audit----
    Mr. Tauzin. They called these corporations illegal at one 
point, didn't they?
    Ms. Parrino. In a response, I believe to Senator Stevens 
and Senator McCain, they identified or raised concerns and 
issues. As of this point in time, both of those corporations 
have been merged into USAC and I am not aware that that opinion 
addressed the legality of USAC. But I would defer to Mr. 
Wright.
    Mr. Tauzin. So we can understand it, USAC is a corporation 
organized under what law?
    Ms. Parrino. USAC is a not-for-profit corporation organized 
and incorporated in the State of Delaware.
    Mr. Tauzin. And who created it?
    Ms. Parrino. The National Exchange Carriers Association 
suggested to the Commission that they should create an 
independent entity that was neutral primarily for--at that 
point in time for the administration of the High Cost Fund.
    Mr. Tauzin. So the Commission asked for its creation or 
created it?
    Ms. Parrino. The National Exchange Carriers Association 
suggested or recommended to the Commission that they--that NECA 
create an independent corporation.
    Mr. Tauzin. So the association created this corporation?
    Ms. Parrino. That is correct.
    Mr. Tauzin. And this corporation now administers these 
funds. Who collects these funds? Where do they come and where 
do they go?
    Ms. Parrino. The Universal Service Administrative Company 
collects the funds, the FCC establishes the rate on a quarterly 
basis and based on that order we collect the funds that the FCC 
designates.
    Mr. Tauzin. An agency of government decides how much 
telephone users are going to pay, and then instructs a private 
corporation organized under the State of Delaware to collect 
the money and distribute it? Is that an accurate description? 
Mr. Wright?
    Ms. Parrino. I will defer to Mr. Wright.
    Mr. Tauzin. I want to know how the legal is set up. We have 
another corporation called ICANN we have been looking at in the 
Internet services area, a private corporation, and the way 
these private corporations function in connection with 
associations and government agencies always intrigues me. In 
this case, you decide how much is going to be collected from 
each telephone user's bill; is that correct, Mr. Wright?
    Mr. Wright. No, Mr. Chairman.
    Mr. Tauzin. How do you do that, then?
    Mr. Wright. The money is collected from telephone 
companies, not from users.
    Mr. Tauzin. Telephone companies collect it from their 
users.
    Mr. Wright. They can.
    Mr. Tauzin. Where do they get it? Out of the sky?
    Mr. Wright. They have three choices. Like anybody else when 
they have a fee imposed on them, they can pass it on to their 
users.
    Mr. Tauzin. Or they could assess their stockholders.
    Mr. Wright. Lower their profits or decrease their rates.
    Mr. Tauzin. Wait, wait, stop, they can't take it out of 
profits without taking the same money out of their consumer. 
The money comes from consumers, doesn't it? Let's not beat 
around the bush.
    Mr. Wright. Absolutely.
    Mr. Tauzin. So the dollars you assess the corporation are 
going to be assessed to their consumers, us, telephone 
consumers.
    Mr. Wright. That is what usually happens.
    Mr. Tauzin. So without playing games, when you tell a 
corporation you want so much money from it you are telling it 
to go out and collect it from its consumers and obviously it is 
going to show up on my bill and your bill.
    Mr. Wright. We are certainly aware that that has happened. 
We have been deregulatory in our approach.
    Mr. Tauzin. Do you think it is a mystery that it happens?
    Mr. Wright. No, Mr. Chairman.
    Mr. Tauzin. Normally, when taxes or fees are assessed 
against corporations, don't they pass those on to their 
consumers as part of the cost of business? That is normal, so 
you know in advance when you assess a charge against the 
corporation for these universal service functions that they are 
going to pass them on to consumers and they will show up on our 
phone bills; right?
    Mr. Wright. Most likely.
    Mr. Tauzin. So you assess these charges against them. 
Companies pay the money in. Where do they pay it in?
    Mr. Wright. To USAC.
    Mr. Tauzin. So it never goes to the Treasury?
    Mr. Wright. No, Mr. Chairman.
    Mr. Tauzin. The United States Treasury never sees this 
money?
    Mr. Wright. That is right.
    Mr. Tauzin. The money goes to a private corporation set up 
under the laws of the State of Delaware. What relationship do 
you have with this private corporation?
    Mr. Wright. They are our agent, Mr. Chairman. As Ms. 
Parrino said, they are the successor to NECA, which has been in 
existence for years and was largely praised as an example of 
outsourcing by us, rather than doing it in-house.
    Mr. Tauzin. I am not heaping scorn or praise. I am just 
trying to understand. So this corporation is your agent? It is 
an agent of a government agency.
    Mr. Wright. For decades in the high cost area NECA and now 
USAC have collected money from telephone companies to support 
the High Cost Fund.
    Mr. Tauzin. And now this corporation acting as your agent 
disburses money. Does any committee of Congress, the 
appropriators who oversee the collection and expenditure of 
Federal dollars ever audit, account for, appropriate and 
oversight collection and spending of this money?
    Mr. Wright. Well, this Congress of course enacted section 
254(d), which requires us to assess telephone companies.
    Mr. Tauzin. Does any appropriator oversee the collection 
and expenditure of this money? Do you go to any Appropriations 
Committee with this business?
    Mr. Wright. I don't know the answer to that.
    Mr. Tauzin. Ms. Parrino, do you? Do you appear before an 
Appropriations Committee to talk about how this money is 
collected and spent?
    Ms. Parrino. No, I do not. I administer the rules and the 
orders as directed by the Federal Communications Commission.
    Mr. Tauzin. So you just follow their direction, but nobody 
in Congress ever oversees the collection and expenditure of 
that money?
    Ms. Parrino. We do not appear before the Appropriations 
Committee. But USAC has been subject to audits from the General 
Accounting Office.
    Mr. Tauzin. Is the money that is collected out of this 
system part of the budget of the United States, Mr. Wright?
    Mr. Wright. I don't believe--it doesn't go into the Federal 
Treasury. I am not sure what the question is. I do know there 
has been no shortage of oversight of the Schools and Libraries 
Program. Congress can't be faulted for that.
    Mr. Tauzin. You are saying, though, that it never goes to 
the Treasury? It is not counted in the budget?
    Mr. Wright. I know that----
    Mr. Tauzin. If it disappeared tomorrow, would there be an 
offset required under our budget laws? Do you know?
    Mr. Wright. I don't know the answer.
    Mr. Tauzin. Mr. Lassman, do you know the answer?
    Mr. Lassman. Mr. Tauzin, it is on the budget. It has been 
since 1997.
    Mr. Tauzin. So it never goes to the Treasury but it is in 
our budget and the appropriators never appropriate it or manage 
it in any respect? Do I have it accurate now? In that regard, 
Ms. Parrino, who is on this--who serves on this corporation? 
Who selects the members of it? Where do they come from?
    Ms. Parrino. You are referring to the board of directors, 
Mr. Chairman?
    Mr. Tauzin. Whoever runs the corporation. Is it run by a 
board?
    Ms. Parrino. There is a board of directors of the 
corporation. The board represents various constituencies that 
either benefit or pay into the various programs. It is a 19-
member board. The industry representation is spelled out in an 
FCC order.
    Mr. Tauzin. So it is all done by FCC order. Do you make 
decisions about who gets money or does the FCC tell you who 
should get money?
    Ms. Parrino. We make the decisions on who gets money on 
each of those programs consistent with FCC rules.
    Mr. Tauzin. They make general rules and then you make 
specific allocations?
    Ms. Parrino. That is accurate.
    Mr. Tauzin. One final thing. I was looking at one of your 
programs, the Health Care Program, where you administered 
almost $1 billion of money. There are lots of States that 
didn't get any money. Why is that?
    Ms. Parrino. Which program is that?
    Mr. Tauzin. Your Rural Health Care Program. I am looking 
for my own State. My own State, I don't even see it on the 
list. Some States were just left out.
    Ms. Parrino. It depends upon the rates that are established 
in your State. To the extent that your urban rates are very 
comparable to your rural sites, again to the extent the High 
Cost Program provides significant subsidies in Louisiana, there 
would be no subsidy in rural health because that particular 
program says to the extent rural rates are higher than urban 
rates----
    Mr. Tauzin. I think it would be very good if we got just a 
one-page explanation of the rules by which all of these moneys 
are distributed.
    Ms. Parrino. I would be happy to do that.
    [The following was received for the record:]

    The Rural Health Care Division (RHCD) of the Universal Service 
Administrative Company (USAC) administers the support program that was 
authorized by Congress and designed by the Federal Communications 
Commission (FCC) to make telecommunications services--including the 
more ``cutting-edge'' services--affordable for rural health care 
providers (RHCPs). Discounts apply to monthly telecommunications 
service charges and installation charges, but not to terminal equipment 
costs.
    What this means to RHCPs is that support is available for any 
telecommunications service, including T-1, fractional T-1, and ISDN. 
Support is also available for limited long distance charges to an 
Internet Service Provider (ISP). Level of support is determined by the 
location of the RHCP and the type of service chosen by the recipient. 
This will be calculated individually for each RHCP. Additionally, if an 
RHCP is already receiving services, they can opt to save on that 
service, or upgrade to another. Prior to committing to anything, RHCPs 
have an opportunity to know their level of support.
    In order to receive a discount, the primary concern for the RHCP is 
to make sure that they are eligible. They should be a rural health care 
provider, or, regardless of location, have no other means of reaching 
an ISP than by making a long distance phone call. They must also be a 
public, not-for-profit entity.
    After determining eligibility, it is important for RHCPs to have a 
clear understanding of how they will use the telecommunications 
services. For example, will they need to download information from the 
Internet? Will they need to transmit data, images, or interactive 
video? How fast will they need to send or receive data? With whom do 
they plan to communicate most? At this point the eligible RHCP 
identifies their telecommunications needs and submits Form 465 to the 
RHCD. The RHCD will then post Form 465 on their web site for 28 days so 
that telecommunications companies can contact them with service 
offerings. RHCPs may also approach service providers directly to 
encourage bids. The RHCP then chooses the service provider and the 
services they want, and notifies the RHCD by submitting Form 466, in 
addition to Form 468 which is completed by the service provider and is 
used by the RHCD to verify the services and calculate the discounted 
rate. Once the RHCP begins receiving services, they notify the RHCD by 
submitting Form 467. The RHCP is then billed by the service provider at 
the discounted rate. The service provider recovers the difference from 
the Universal Service Fund (administered by the RHCD). This process 
must be completed annually in order for RHCPs to continue to receive 
discounts on services.

    Mr. Tauzin. Apparently there are some formulas that might 
be very interesting to members if you kindly submit that to the 
record.
    The Chair is pleased to recognize the gentleman from 
Illinois, Mr. Rush.
    Mr. Rush. Thank you, Mr. Chairman. Let me go back to Ms. 
Parrino. Ms. Levy of the NTIA testified earlier that a large 
startup cost would be required if the program were moved to 
that agency. She indicated about--she testified about the large 
startup costs. Do you know how much you save if the E-Rate 
program went to the NTIA given that your organization would 
continue to be required to administer various other universal 
service programs such as the high cost and low-income subsidy 
programs?
    Ms. Parrino. If the NTIA were responsible for the Schools 
and Libraries Corporation Program, USAC would no longer incur 
any expenses associated with that program. We do have separate 
budgets for each of the other three programs which would still 
be in place. The Schools and Libraries Program is the largest 
chunk of the USAC consolidated budget. I don't have a 
percentage for you. I do have specific dollars that would be 
left or costs that would be left to administer the other 
programs. I don't have a percentage for you. I could certainly 
provide that.
    Mr. Rush. Would you, please?
    Ms. Parrino. Yes.
    Mr. Rush. Wouldn't this bill that we are currently 
considering, wouldn't that result in increased administrative 
costs for your agency?
    Ms. Parrino. For USAC?
    Mr. Rush. Yes.
    Ms. Parrino. I don't know what the overall impact would be. 
Again as far as my expenses and my budget, my budget would 
decrease because I would no longer have responsibility for that 
function.
    Mr. Rush. Maybe I should ask that question to Ms. Levy. 
Would there be an increased cost to your agency if, in fact, 
this bill were to pass?
    Ms. Levy. There would be. We don't have--we have other 
grant programs in place at NTIA but they are set up to function 
differently than a program like this, which is more of a block 
grant program. So we would have both staff and infrastructure 
costs.
    Mr. Rush. Staff and infrastructure. So there would be an 
increase?
    Ms. Levy. There would be.
    Mr. Rush. Okay. And would that be taking money away from 
the students that we are trying to service if, in fact, you had 
additional costs at your agency?
    Ms. Levy. It would take away money from the overall fund.
    Mr. Rush. Mr. Wright, it seems that the people actually 
affected by the Schools and Library Program, there are not many 
complaints from those individuals, the beneficiaries of the 
programs and even the companies. Do you agree with that?
    Mr. Wright. As I understand it, they are quite pleased with 
the way the program is going and hope it will continue.
    Mr. Rush. You testified earlier about court decisions and 
the Fifth Circuit decision that put to rest the legal challenge 
that universal service is a tax. Don't you think it is kind of 
inconsistent and disingenuous--you might not want to answer it 
in the way that I ask, but please--for the Congress to be 
pursuing and continue to be recalcitrant in its position that 
this is a tax when the Court of Appeals, the Fifth Circuit, has 
actually made a decision saying that it is not a tax?
    Mr. Wright. Let me say this. I had the pleasure of 
testifying before the House Ways and Means Committee last year 
on this, and I said that, gee, if we lost in the Fifth Circuit 
this would be a good fallback. But indeed we won in the Fifth 
Circuit and perhaps I can tie it to your earlier question to me 
that the Schools and Libraries filed a very nice amicus brief 
on our behalf in the Fifth Circuit defending our position in 
toto and that was helpful.
    Mr. Rush. And are you aware of an earlier decision 
yesterday by Senator McCain that he strongly endorsed the E-
Rate funding?
    Mr. Wright. I did read about that in Communications Daily 
yesterday. And, you know, just for the record this has always 
been a bipartisan program. Senators Snowe and Rockefeller also 
filed an amicus brief in the Fifth Circuit fully supporting how 
the FCC had implemented the program.
    Mr. Rush. I want to return to Ms. Levy. What types of 
services does the E-Rate program support that would not be 
supported by H.R. 1746? And then conversely, what type of 
services not currently supported would be included under H.R. 
1746? And the third part of that question is wouldn't they be 
basically the same type of programs?
    Ms. Levy. Yes, as I read the proposed legislation, I think 
the program itself would be very similar. I think Mr. Wright 
has identified some areas where the legislation is ambiguous 
and it might go to litigation on that. I think the major 
difference is in the administration of the program. It would be 
taken away from the FCC and it would be given to NTIA to run as 
more of a block grant program that received an appropriation.
    Mr. Tauzin. The gentleman's time has expired. Let me try to 
get one more round of questions before we have to break. Mr. 
Cox.
    Mr. Cox. Mr. Wright, I am wondering if you didn't just 
misspeak in response to Mr. Rush when you said we won it on the 
taxing issue in the Fifth Circuit. You didn't really win the 
question of whether that was an unconstitutional tax.
    Mr. Wright. The origination clause issue was the primary 
issue raised by Celpage that said it was an unconstitutional 
tax under the origination clause.
    Mr. Cox. Oh, the origination clause is the issue of whether 
the bill starts in the House or the Senate. The 
unconstitutionality of the tax, that is whether you can levy it 
or Congress can. You didn't win that issue, did you?
    Mr. Wright. That was the taxing clause issue.
    Mr. Cox. And you didn't win that, did you?
    Mr. Wright. There was a footnote that says we win it on two 
grounds. First, that they did not raise it and, second, that 
there is no merit to it anyway.
    Mr. Cox. Well, actually, I have the footnote and it is 
right in the text, and I have it before me. It says that 
Celpage raised it in their reply brief, therefore, we will not 
consider it. And I mean if a Court doesn't consider the 
question, then it doesn't decide it in your favor. Isn't that 
right?
    Mr. Wright. In footnote 52 the Court went on to say even if 
Celpage's taxing clause issue were properly before us we find 
no basis for reversal and went on in a few sentences to explain 
why there was not merit to it.
    Mr. Cox. The Court said it didn't consider the issue, 
right?
    Mr. Wright. And alternatively said in any event there is no 
merit to it.
    Mr. Cox. Did the Court consider and decide the question?
    Mr. Wright. I would certainly say that the issue has been 
waived at least. And the Court has said there is no merit to 
it.
    Mr. Cox. Actually, I disagree strongly with your 
interpretation of the opinion because it says in plain English: 
Therefore, we will not consider it. The Fifth Circuit did not 
consider your issue. That issue. It didn't decide it in your 
favor. It is not a decided issue. It is not stare decisis. It 
is not binding on anybody. It is not the law of the land in the 
Fifth Circuit or anything else.
    Mr. Lassman, did you want to say something on this?
    Mr. Tauzin. I think we have a minute left. We have a vote 
on.
    Mr. Cox. I can resume questioning when we get back.
    Mr. Tauzin. Why don't we do that. We will resume 
questioning when we get back.
    [Brief recess.]
    Mr. Tauzin. Thank you for your patience, ladies and 
gentlemen. Several of the members are coming, and I am going to 
have to leave you to attend a technology summit right now. But 
Chris Cox from California will assume the Chair and continue 
his round of questions and recognize members in order. And 
again I appreciate your consideration for interruptions like 
this.
    Mr. Chris Cox from California.
    Mr. Cox [presiding]. Thank you, and if the interruption on 
the floor results in our members not returning, then what I 
would like to do is ask all the members of the panel if they 
would be willing, and it may be an easy promise to make, to 
respond to additional questions in writing that we would submit 
that members might have.
    Ms. Levy, the FCC has recently increased the amount of the 
E-Rate tax. It was on an annual basis a billion, and now it has 
been increased to $2.25 billion.
    Ms. Levy. I think it went from $1.3 to $2.25.
    Mr. Cox. And so right now there is an exaction without 
prejudicing the argument about whether and how this acts as a 
tax. There is an exaction from the economy, to put it broadly, 
because we had this exchange with Chairman Tauzin about how it 
functions and what the FCC expects will happen when it makes 
these actions, but we do have an exaction of $2.25 billion that 
we are now going to levy on the economy, the U.S. economy. Is 
that essentially the case?
    Ms. Levy. Well, I believe that 2.25 is the full funding of 
the program as originally envisioned by both Congress and the 
FCC. It was brought down because of problems they were having 
during the first year.
    We would respectfully disagree with calling it a tax.
    Mr. Cox. That is why I said it is an exaction. To use 
really simple Anglo-Saxon words, we are going to get $2.25 
billion out of the economy under the aegis of this exaction. Is 
that not the case?
    Ms. Levy. And we will put it back into the economy.
    Mr. Cox. I understand.
    Ms. Levy. I think that is right. We are asking for $2.25 
billion from companies that are participating in the program, 
which I think it is consistent with how the statutory language 
was put in in terms of talking about this as part of the 
universal service fund, talking about this as an evolving 
definition of universal service.
    Mr. Cox. There is a levy of $2.25 billion and just to do 
some big number math off the cuff here--we won't need a 
calculator, we will do it rough justice--but if there is about 
a quarter of a billion people in America, and you have got 
$2.25 billion then something just shy of $10 a head is this 
exaction for every man, woman, child and infant in America. Is 
that not right?
    Ms. Levy. I don't think it is that much. I think if you see 
what people are paying on their phone bill.
    Mr. Cox. No, no, I think it is that much because it is 
pretty simple math. I will ask the question differently. If you 
divide the exaction, which is $2.25 billion, by a quarter 
billion, what is the answer?
    Ms. Levy. I agree with where you are going.
    Mr. Cox. There you go. We are talking about $9 and change, 
round figures, $10 per head. So in my household where I have 
three little kids, it is exaction on our family, unless we have 
some way to get through a loophole that most Americans don't 
have, net on average, the exaction on our family is $50 from 
this exaction which we won't call a tax. We are taking it away. 
My point is these are big numbers. And this is a program that 
Congress has not expressly authorized. The Congress has had 
nothing to do with these figures. Congress didn't come up with 
the $50 per household number for my household. Congress didn't 
come up with the $10 per capita amount of the tax. You guys 
came up with that.
    Ms. Levy. The FCC came up with that.
    Mr. Cox. Right. Do you understand why Democrats and 
Republicans in the Senate and in the House have written these 
letters saying that we don't have King George any more and 
Congress has this authority and the executive branch doesn't? 
That is a big amount of money to do in the executive branch 
without Congress being involved in any way. Don't you think?
    Ms. Levy. I understand. Yes, if it is a taxation issue, 
then it is for Congress to decide.
    Mr. Cox. Even if one were willing to hang his or her hat on 
some seemingly comforting language in a footnote that didn't 
decide the question, as a matter of policy do you think that 
billions of dollars ought to be taken away from the economy and 
then put back in in more pleasing ways without Congress as a 
policy matter being directly involved in that process on a 
regular basis?
    Ms. Levy. I think that when we are talking about taxation 
issues, it is up for Congress to decide. I think Congress did 
make a commitment and did make a conscious move in the 1996 
Telecom Act to establish a universal service fund that had a 
schools and libraries component that would do what the program 
is doing. And that is provide E-Rate moneys to children in 
schools and libraries throughout the country. I think the FCC 
has simply implemented what it has deemed to be the 
congressional mandate of the Telecom Act.
    Mr. Cox. Mr. Lassman, you have been trying to interject.
    Mr. Lassman. If I could make a clarification of what is 
being discussed, Congress very clearly, and the President 
signed a bill that told the Commission how to exact that amount 
of resources, the amount of resource being defined as an 
evolving series of definitions. They didn't say to what extent, 
they did not say a number, they didn't say so much per year. 
And that difference, that clarification of delegation is very 
important because the Supreme Court has ruled extensively over 
the last 100 years that ``to what extent'' is a standard that 
must be met. The Congress has to tell a regulatory agency to 
what extent may you regulate.
    Mr. Cox. We have got 37--by the estimate provided to 
members here on the committee, we have got 37 State and local 
exactions, taxes, I think we can say State and local taxes on 
telecommunications in the United States. This morning I just 
had a news conference with Senator Wyden in the Senate radio 
and TV gallery unveiling legislation that I think we are going 
to work with Larry Summers on that puts U.S. policy on the side 
of a global permanent moratorium on Internet taxes and tariffs 
around the world. We have got the WTO meeting coming up in 
Seattle in November, and we believe that it is in America's 
best interest to take the temporary moratorium that we have and 
make it permanent around the world. We want a 1-year standoff 
at that WTO meeting.
    And the reason that we are concerned about it is that 
France, for example, has a 20.6 percent value added tax. And if 
France decides that it wants to apply its VAT as the EC 
recommended in 1998, not only to goods traded over the Internet 
but also the information, to software, service going over the 
Internet, and that is just one country, you can very quickly 
see how these exactions accumulate and end up killing the goose 
that is laying the golden eggs, which is in this case the 
Internet and the possibility that it holds.
    In the U.S. we have got 37 different taxes and we have also 
got some 30,000 jurisdictions that could, if they chose to do 
so, levy taxes.
    My question to anybody that wishes to address it is whether 
or not, as reasonable as it might be for each one of these tax 
jurisdictions, and the FCC for its part to say, we are only 
going to take our little corner here, ought we not be concerned 
about the aggregation of all these charges inasmuch as the 
Internet is a global medium and might we not by our bad example 
defeat what we are trying to accomplish at the WTO and 
elsewhere if we are adding new taxes even though they are not 
authorized by Congress onto telecommunications?
    And last, inasmuch as telecommunications itself is an 
elusive thing that we are increasingly having difficulty 
defining, should we be a little bit wary about taking existing 
concepts, for example, of universal service, which we have 
always felt comfortable applying to a telephone system to 
subsidize local users with long lines, for example, and 
applying it to whatever in the world telecommunications might 
become because telecommunications might become something very 
different and we might have trouble recognizing it in the 
future.
    What we did in the Internet Tax Freedom Act of course is 
put a ban on taxes for Internet access. Any kind of 
telecommunications service that includes Internet access 
already runs smack in the middle of the Internet Tax Freedom 
Act. And so I just wondered whether or not this approach 
doesn't make more sense inasmuch as it gets you into general 
appropriations for block grants for ultimately the purpose that 
we are seeking to achieve here, which is schools and libraries, 
without using an interfering mechanism of taxing 
telecommunications and being the ``Nth'' tax on top of all of 
these other exactions.
    Does anybody want to deal with that?
    Mr. Wright. If I could respond, I am sure there is no 
dispute from anyone, and certainly not from the FCC, that 
Congress could always specify the amounts in these bills. And 
that is one of the few things that I don't think could even 
lead to further litigation.
    If I could just explain our perspective for a minute----
    Mr. Cox. I will just interject on that point. If the 
executive levies a tax on the country and the Congress by 
bicameral action passes a bill repealing that unconstitutional 
tax, and the President vetoes it, then you are still left with 
the problem, aren't you?
    Mr. Wright. I was suggesting that if Congress passed a law 
saying X dollars shall be----
    Mr. Cox. As long as the President went along with it. As 
long as it is the same executive branch that came up with this 
program against Congress' wishes went along with it, it is 
fine. But I am not sure for Congress to have to reassert itself 
and then to depend on the executive's approval is the right 
policy question.
    Mr. Wright. Imagine our perspective on the high cost issue. 
There is no question--I am sure no one would disagree that we 
have been instructed in section 254 to subsidize rural 
residential customers, as Mr. Markey was noting before. The Act 
does not tell us how much we are supposed to raise for that 
purpose either, but no one has ever suggested that we would be 
other than derelict in our duties if we didn't have a High Cost 
Fund. And, of course, Congress has to work with the President 
to come up with an amount, but, of course, that could be done.
    But from our perspective we would be derelict in our duties 
if we didn't do what Congress has told us, which is establish 
mechanisms to support high cost and education and we have to do 
that. Of course, if Congress tells us how much, that make its 
easier for us, but we cannot not do it because the amount 
hasn't been specified.
    Mr. Cox. Do you want to take a stab at whether we are 
better off with the Tauzin approach, which does not add an 
incremental exaction on telecommunications?
    Mr. Wright. Well, my thought on that was that it would 
probably lead to another round of litigation. The bill seems to 
me to say that it is supposed to fund internal connections and 
Internet access, but it doesn't say that in so many words. And 
I can imagine some Telco saying, going to court and saying, 
well, Congress meant to fund something different and that is 
why they passed a new law. And, therefore, the law also directs 
the Department of Commerce to conduct a rulemaking to determine 
what is to be funded, so they would have to do that. And the 
litigation would follow, and the arguments would be made, well, 
Congress meant something different or they would not have 
passed a new law.
    On the other hand, if Congress means to do just the same 
thing, the aspect of Congressman Tauzin's bill that specifies 
the amount, you know, we, of course, in the FCC and I am sure 
at NTIA will do whatever Congress tells us to do. And that 
specifying the amount just make its easier.
    Mr. Cox. And I am not sure I understand whether you are 
taking a position on whether we would be better off to use 
general appropriations rather than a specific levy on 
telecommunications?
    Mr. Wright. I don't think the FCC has a position on that. 
Our position is that we administer the Telecommunications Act.
    Mr. Cox. From a policy standpoint, as I say, a lot of us 
are very, very concerned about the multiplicity of different 
kinds of taxes and so on.
    Well, I think I have extended my own time for questioning 
under our rules substantially but I did so for the purpose of 
seeing whether other members would arrive, and they have begun 
to arrive, and so I would recognize the gentlewoman from New 
Mexico if she wishes to be recognized.
    Mrs. Wilson. I may not help you out, Mr. Chairman. I am 
beginning to understand some of the intricacies of this. I was 
not here, as you know, when the 1996 Telecom Act was passed. 
Although I have seen what it does in my local community, which 
is to provide access to the Internet, particularly for 
elementary, middle and high schools who did not have that 
access.
    And unlike Mr. Markey, New Mexico is a rural State and I do 
believe that universal service is a laudable goal, just as the 
electrification of America was a laudable goal in the 30's and 
40's. The people who live in rural areas shouldn't be left out. 
I happen to believe that it is probably more important for our 
elementary schools to have great teachers and good books and 
fine curricula than it is for them to have computer labs and 
access to the Internet. But I am also forward-looking enough to 
know that that may not be the case 10 or 20 years from now, and 
that all children should have access to the information that 
increasingly will be available on the World Wide Web when it is 
not available in their local library.
    As to the constitutional issues and how we decide who has 
the power to tax and whether the 1996 Communication Act gives 
the FCC the authorities that it has taken and how so if they 
are limited, that is not my area of expertise. I am not a 
lawyer, thank goodness, and I look at this with a fairly 
practical eye of what is its effect? Is it being administered 
properly? What would the change be for the constituents that I 
represent if we change the way this is being administered? And 
for that reason I am fairly pragmatic about all of this.
    I don't have specific questions for members of the panel, 
and I apologize for being kind of double scheduled and not 
being here for your actual presentations, but I appreciate the 
opportunity to read through your testimony.
    Mr. Cox. Well, I thank you. I think as is our custom we 
will leave the record open for 30 days and if any member, 
either present or not here, wishes to submit questions I think 
our panel would probably be willing to respond to those 
questions in writing.
    I won't make you swear to that under oath, but I am sure we 
can call you back if need be.
    I appreciate very much your spending time with us this 
morning and your testimony has been very, very enlightening and 
we look forward to continue working with you on solving these 
problems. Thanks again.
    The hearing is adjourned.
    [Whereupon, at 12:47 p.m., the subcommittee was adjourned.]
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