[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]



 
        STATE TAXATION OF INTERSTATE TELECOMMUNICATIONS SERVICES

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   COMMERCIAL AND ADMINISTRATIVE LAW

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 13, 2006

                               __________

                           Serial No. 109-120

                               __________

         Printed for the use of the Committee on the Judiciary


      Available via the World Wide Web: http://judiciary.house.gov

                                 _____




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                       COMMITTEE ON THE JUDICIARY

            F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois              JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina         HOWARD L. BERMAN, California
LAMAR SMITH, Texas                   RICK BOUCHER, Virginia
ELTON GALLEGLY, California           JERROLD NADLER, New York
BOB GOODLATTE, Virginia              ROBERT C. SCOTT, Virginia
STEVE CHABOT, Ohio                   MELVIN L. WATT, North Carolina
DANIEL E. LUNGREN, California        ZOE LOFGREN, California
WILLIAM L. JENKINS, Tennessee        SHEILA JACKSON LEE, Texas
CHRIS CANNON, Utah                   MAXINE WATERS, California
SPENCER BACHUS, Alabama              MARTIN T. MEEHAN, Massachusetts
BOB INGLIS, South Carolina           WILLIAM D. DELAHUNT, Massachusetts
JOHN N. HOSTETTLER, Indiana          ROBERT WEXLER, Florida
MARK GREEN, Wisconsin                ANTHONY D. WEINER, New York
RIC KELLER, Florida                  ADAM B. SCHIFF, California
DARRELL ISSA, California             LINDA T. SANCHEZ, California
JEFF FLAKE, Arizona                  CHRIS VAN HOLLEN, Maryland
MIKE PENCE, Indiana                  DEBBIE WASSERMAN SCHULTZ, Florida
J. RANDY FORBES, Virginia
STEVE KING, Iowa
TOM FEENEY, Florida
TRENT FRANKS, Arizona
LOUIE GOHMERT, Texas

             Philip G. Kiko, Chief of Staff-General Counsel
               Perry H. Apelbaum, Minority Chief Counsel
                                 ------                                

           Subcommittee on Commercial and Administrative Law

                      CHRIS CANNON, Utah Chairman

HOWARD COBLE, North Carolina         MELVIN L. WATT, North Carolina
TRENT FRANKS, Arizona                WILLIAM D. DELAHUNT, Massachusetts
STEVE CHABOT, Ohio                   CHRIS VAN HOLLEN, Maryland
MARK GREEN, Wisconsin                JERROLD NADLER, New York
J. RANDY FORBES, Virginia            DEBBIE WASSERMAN SCHULTZ, Florida
LOUIE GOHMERT, Texas

                  Raymond V. Smietanka, Chief Counsel

                        Susan A. Jensen, Counsel

                        Brenda Hankins, Counsel

                   Mike Lenn, Full Committee Counsel

                   Stephanie Moore, Minority Counsel



                            C O N T E N T S

                              ----------                         

                             JUNE 13, 2006

                           OPENING STATEMENT

                                                                  Page
The Honorable Chris Cannon, a Representative in Congress from the 
  State of Utah, and Chairman, Subcommittee on Commercial and 
  Administrative Law.............................................     1
The Honorable Melvin L. Watt, a Representative in Congress from 
  the State of North Carolina, and Ranking Member, Subcommittee 
  on Commercial and Administrative Law...........................     3

                               WITNESSES

Mr. Steven Rauschenberger, Assistant Republican Leader, Illinois 
  Senate, and President, National Conference of State 
  Legislatures, Springfield, IL
  Oral Testimony.................................................     6
  Prepared Statement.............................................     8
Mr. Stephen P. B. Kranz, Tax Counsel, Council on State Taxation 
  (COST)
  Oral Testimony.................................................    24
  Prepared Statement.............................................    26
Mr. David Quam, Director, Office of State and Federal Relations, 
  National Governors Association, Washington, DC
  Oral Testimony.................................................    32
  Prepared Statement.............................................    34
Mr. Scott Mackey, Economist and Partner, Kimbell Sherman Ellis 
  LLP, Montpelier, VT
  Oral Testimony.................................................    37
  Prepared Statement.............................................    40

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Prepared Statement of the Honorable Chris Cannon, a 
  Representative in Congress from the State of Utah, and 
  Chairman, Subcommittee on Commercial and Administrative Law....     2


        STATE TAXATION OF INTERSTATE TELECOMMUNICATIONS SERVICES

                              ----------                              


                         TUESDAY, JUNE 13, 2006

                  House of Representatives,
                         Subcommittee on Commercial
                            and Administrative Law,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 3:07 p.m., in 
Room 2141, Rayburn House Office Building, the Honorable Chris 
Cannon (Chairman of the Subcommittee) presiding.
    Mr. Cannon. Good afternoon, ladies and gentlemen. This 
hearing of the Subcommittee on Commercial and Administrative 
Law will now come to order. I apologize for being a few minutes 
late. We just had a vote.
    Every month, we'll receive at least one bill from a 
telecommunications company and some receive more. I know I do. 
These bills are for our home phone, cell phone, cable, DSL, 
cable Internet, and other services. Whenever I look at my bill, 
one thing I keep thinking is how much do I have to pay in taxes 
just to be able to communicate with others.
    In our increasing mobile society, communications services 
hold us together. These services allow us to keep in touch with 
our families while we are away from home. They allow us to 
communicate with our kids when they leave home. I personally e-
mail or text message my son. It turns out to be the most 
convenient way to get more than three words out of him. And not 
often and they sometimes are ``u'' instead of ``y-o-u,'' but 
this is what life is about. With the touch of a button, we can 
contact them to find out how they are, find out how they are 
doing and then they ask us for more money. I was thinking we 
might be able to establish a filter for that.
    The innovations and expansion of communications have helped 
us become a more productive society and fueled our ability to 
lead the global economy. We should be finding ways to encourage 
innovation, not block it with excessive and discriminatory 
taxes. Higher taxes ensure that we will see less of the taxed 
service. Taxing telecommunications services stymies 
technological process by creating disincentives to purchase 
these services.
    Communication taxes have been applied piecemeal by local 
State and Federal Government over a long period of time, and 
many of these taxes were created while we still had essentially 
one company running communications in America. We now have 
competition from wireless, cable and others, but we still have 
not moved away from a complex tax system, even though we have a 
dynamic competitive industry.
    Taxes on communications services are a jumble. The tax 
rates on communications are about at the point where these 
taxes are approaching the level of ``sin'' taxes. We want to 
encourage people to use communications, and we want all people 
to be able, not move the cost beyond what the poor amongst us 
can afford. The taxes fees and surcharges on a phone bill 
include: Relay center surcharges public right-of-way fees, 
gross receipts taxes, 911 fees, universal service funds, cost 
recovery surcharges, State sales tax, local sales tax and 
additional local taxes.
    It is easy to understand what some of these taxes fund such 
as the 911 fees, but other fees are not comprehensible such as 
the cost recovery surcharge found on the Virginia Verizon bill.
    In 2004, the regressive rate of State and local taxation on 
telecommunications services was 14.17 percent. States and 
localities have acknowledged there is a problem and that we 
need to reform. Today, we'll discuss this problem and what can 
be done to limit excessive taxation on telecommunications 
services and providers. This is just the beginning of the 
discussion. I expect future hearings on this issue, and I look 
forward to the testimony of the panel.
    Now without objection, the Chair will be authorized to 
recess the Committee at any point. Hearing none, so ordered.
    I further ask unanimous consent that Members have 5 
legislative days to submit written statements and statements by 
interested parties for inclusion in today's record. Without 
objection, so ordered.
    [The prepared statement of Mr. Cannon follows:]
 Prepared Statement of the Honorable Chris Cannon, a Representative in 
    Congress from the State of Utah, and Chairman, Subcommittee on 
                   Commercial and Administrative Law
    Good afternoon ladies and gentlemen; this hearing of the 
Subcommittee on Commercial and Administrative Law will now come to 
order.
    Every month we all receive at least one bill from a 
telecommunications company, and some receive more, I know I do. These 
bills are for our home phone, cell phone, cable, DSL, cable internet, 
and other services. Whenever I look at my bill, the one thing I keep 
thinking is: How much do I have to pay in taxes, just to be able to 
communicate with others?
    In our increasingly mobile society, communications services hold us 
together. These services allow us to keep in touch with our families 
while we are away from home. They allow us to communicate with our kids 
when they leave home. With the touch of a button, we can contact them 
to find out how they are, find out what they are doing and for them to 
ask us for more money. Maybe we could establish a filter for this use!
    The innovations and expansion of communications have helped us 
become a more productive society and fueled our country's ability to 
lead the global economy. We should be finding ways to encourage 
innovation, not block it with excessive and discriminatory taxes. 
Higher taxes ensure that we will see less of the taxed service. Taxing 
telecommunications services stymies technological progress by creating 
disincentives to purchase these services.
    Communication taxes have been applied piecemeal by local, state, 
and federal government over a long period of time. Many of these taxes 
were created when we still had essentially one company running 
telecommunications in America. We now have competition from wireless, 
cable and others, but we still have not moved away from a complex tax 
system even though we have a dynamic and competitive industry.
    Taxes on communications services are a jumble. The tax rates on 
communications are about at the point where these taxes approach the 
level of ``sin'' taxes. We want to encourage the use of communications 
by ALL people, not move the cost beyond what the poor amongst us can 
afford.
    The taxes, fees and surcharges, on a phone bill include: relay 
center surcharges, public right-of-way fees, gross receipts taxes, 911 
fees, universal service funds, cost recovery surcharges, state sales 
tax, local sales tax and additional local taxes. It is easy to 
understand what some of these taxes fund, such as the 911 fees. But 
other fees are not comprehensible such as the cost recovery surcharge 
found on a Virginia Verizon bill.
    In 2004 the regressive rate of state and local taxation on 
telecommunications services was 14.17 percent. States and localities 
have acknowledged there is a problem and that we need reform. Today, we 
will discuss this problem and what has been done to limit excessive 
taxation on telecommunications services and providers.
    This is just the beginning of the discussion. I expect future 
hearings on this issue, and I look forward to the testimony of the 
panel.
    Without objection, the Chair will be authorized to recess the 
committee at any point. Hearing none, so ordered.
    I further ask unanimous consent that Members have 5 legislative 
days to submit written statements and statements by interested parties 
for inclusion in today's record. Without objection, so orderd.
    I now yield to Mr. Watt, the Ranking Member of the Subcommittee, 
for an opening statement.
    Are there any Members wishing to make opening remarks?

    Mr. Cannon. I'd now like to recognize Mr. Watt, the Ranking 
Member of the Subcommittee, for an opening statement.
    Mr. Watt. Thank you, Mr. Chairman. Today's hearing and 
mark-up consider tax policies of significant importance to the 
effect that industries and also to the States and local 
governments that levy taxes and rely on revenues from those 
taxes. At the hearing on H.R. 1396, which we understand are 
marking up today one of the witnesses testified ``it is 
axiomatic that if had Congress intervenes in State and local 
taxation in a manner that establishes a favored group of 
taxpayers, then other taxpayers who feel that they are in the 
same position will come forward seeking the same favorite 
treatment.''
    Against the backdrop of any Federal legislation seeking to 
curtail or limit the States' taxing authority, are structural 
issues of federalism and constitutional considerations 
including due process, commerce clause, and equal protection. 
There are also very basic bread and butter issues: Funding of 
schools, revitalizing post hurricane devastated areas and 
paving streets. Things of that kind.
    That said, I think that it is important that we take a 
serious look at the current state of State and Federal and 
local tax structures and the way they affect the 
telecommunications industry and the consumer. I believe the 
change is necessary in this area. I am also respectful of State 
sovereignty and hope that this and subsequent hearings will 
enlighten us on what role Congress can constructively make in 
assuring that the principles of tax efficiency, competitive 
neutrality and tax equity on which all stakeholders seem to 
agree are reflected in concrete policies and practices.
    One of my particular concerns about the discriminatory 
application of State and local taxes on the telecommunications 
industry is the disproportion of burdens such taxes may have on 
low fixed and middle income families and communities of color. 
As Chair of the Congressional Black Caucus, I have endeavored 
to support legislative initiatives that close the disparities 
that exist in various facets of American life. 
Telecommunications is no different. Indeed, in light of the 
pervasiveness and rapidity of technological advances, I believe 
that ensuring policies that promote growth, competition and 
access are fundamental to citizens of all economic background.
    Understand that we will hear from additional stakeholders 
at subsequent hearings. For example, a U.S. conference of 
mayors and other local entities not represented here today may 
have another variations on these issues and certainly a 
different perspective. And because I have always wanted to hear 
all the perspectives, I will certainly be supporting additional 
hearings so that everybody can express themselves.
    Thank you again, Mr. Chairman, for convening the hearing. I 
look forward to additional hearings on this issue and thank the 
witnesses in advance for their testimony, and I yield back the 
balance of my time.
    Mr. Cannon. Thank you. I always appreciate your thoughtful 
comments. I want to apologize for the background communications 
while you are speaking. Just for the convenience of witnesses, 
we have a camera that is associated with whoever thinks he's 
going to be the first witness, and I am not sure who that is. 
Is that you, Mr. Rauschenberger? Okay. Great.
    Then, actually, for odd reasons we are going to introduce 
Mr. Mackey first and then we'll move across the dais. We'll 
start with you as the first witness.
    Scott Mackey is an economist and partner at Kimbell Sherman 
Ellis. He's worked with the States and major wireless 
telecommunications companies in their efforts to conform to the 
Mobile Telecommunications Sourcing Act. Mr. Mackey has been the 
chief economist for the National Council State Legislatures and 
represented NCSL on the Steering Committee on the NTA 
Telecommunications and Electronic Commerce Tax Project.
    Mr. Mackey earned his undergraduate degree in economics 
from Middlebury College and his MBA from the University of 
Colorado. Mr. Mackey, thank you for your appearance here today. 
We look forward to your testimony.
    Our next witness is David Quam, the Director of the Office 
of the State and Federal Relations for the National Governors 
Association. He works closely with the governors of Washington 
D.C. Representatives and the NGA's standing committees.
    Prior to joining the NGA, Mr. Quam was the Director of 
International Affairs and General Counsel for the International 
Anti-Counterfeiting Coalition, Inc. He was also Majority 
Counsel for the U.S. Senate Subcommittee on the Constitution, 
Federalism and Property Rights for the Committee on the 
Judiciary.
    And Mr. Quam received his undergraduate degree from Duke 
University and his J.D. from Vanderbilt University, and we 
appreciate you coming to testify today.
    Our next witness is Stephen Kranz, Tax Counsel for the 
Council on State Taxation. He's responsible for following and 
responding to State tax developments around the country for 
COST. Mr. Kranz is a regular contributor to COST's publications 
and COST's State Study and Report on Telecommunications 
Taxation. He's also a frequent speaker on State and local tax 
topics around the country.
    Prior to joining COST, Mr. Kranz established the Office of 
the Chief Counsel while working at the District of Columbia's 
Office of Tax and Revenue. He spent 6 years as a trial attorney 
in the Honors Program of the United States Department of 
Justice, Tax Division and he is the current chair of the 
District of Columbia Bar's State and Local Tax Committee. And 
Mr. Kranz, welcome. We appreciate your time.
    Our final witness is, or in this case, the first witness 
today is Senator Steven Rauschenberger. Senator Rauschenberger 
was elected to the Illinois Senate in 1992. He is now the 
assistant Republican leader and specializes in eliminating 
State and local discriminatory tax schemes, as well as 
immigration, Medicaid, and welfare reform.
    Would you like to come to Utah? Take some of the arrows for 
the next few days?
    He is President of the National Counsel of State 
Legislatures through August of this year and previously served 
as co-chair of NCSL's Executive Committee Taskforce on State 
and Local Taxation of Telecommunications and Electronic 
Commerce.
    During his time in office, Senator Rauschenberger has been 
an advocate in the interests of taxpayers.
    Senator Rauschenberger, we thank you for coming here to 
Washington to discuss these issues with us today. It is nice to 
see you today and appreciate your involvement in the topic, 
which is very important. I extend to each of you my warm 
regards and appreciation for your willingness to participate in 
today's hearing. In light of the fact that your written 
statements will be included in the hearing record, I request 
that you limit your oral remarks to about 5 minutes.
    We have a lighting system that starts with a green light 
that goes for 4 minutes, then it turns yellow and at 5 minutes 
it turns red. It is my habit to tap my pencil just to get a 
little bit of attention at that point. Sometimes we have a lot 
of people in these hearings, maybe people who are still 
wandering back from votes. When that's the case, we try to keep 
it more tightly at 5 minutes because everybody needs a chance 
to ask questions, but this is not a fixed thing, unless people 
ask questions that I don't like then I get tougher with the 
gavel. That's not true, we have never had a problem with that, 
I don't think.
    On the other hand, we would like to explore a bit in 
discussion and with questions, and so to finish up your 
thoughts, we'll move on. And after you've presented your 
remarks I will, based upon the time of arrival of Members of 
the Committee will be offered the opportunity to ask questions.
    Now, pursuant to the Chairman of the Judiciary Committee, I 
need to ask you to stand and raise your right hand and take the 
oath.
    [Witnesses sworn.]
    Mr. Cannon. The record should reflect that all of the 
witnesses answered in the affirmative.
    You may be seated.
    And then we are going to start with you, Mr. 
Rauschenberger; is that not correct? You are recognized for 5 
minutes.

   STATEMENT OF STEVEN RAUSCHENBERGER, ASSISTANT REPUBLICAN 
LEADER, ILLINOIS SENATE, AND PRESIDENT, NATIONAL CONFERENCE OF 
              STATE LEGISLATURES, SPRINGFIELD, IL

    Mr. Rauschenberger. Good afternoon, Chairman Cannon, and 
Ranking Member Watt and Members of the Subcommittee on 
Commercial and Administrative Law. I truly appreciate the 
opportunity to be here to testify before you today and I am 
very appreciative of the fact that you are taking up what I 
think is a very important issue to my children, to my 
constituents, and ultimately, to the United States.
    I am State Senator Steve Rauschenberger from Illinois. I am 
President this year of the National Conference of State 
Legislatures. With me today in the audience is State Senator 
Leticia Van de Putte of Texas and NCSL's President-elect. 
Senator Van de Putte and I have made telecommunications tax 
reform one of NCSL's major priorities and I am pleased that she 
could join me here today to see the testimony and see how I did 
in my first testimony before the Judiciary Committee.
    New technology convergence and competition in 
telecommunications makes it critical to simplify and reform 
State and local taxes to ensure a level playing field and to 
enhance economic development and avoid discrimination among 
telecommunications providers.
    For almost 100 years until 1984, telephone service was a 
highly regulated industry in which consumers did not have a 
choice of provider. Phone companies were subject to tax under 
statutes applicable to public utilities, and such taxes in the 
form of gross receipts, franchise and other industry. Specific 
taxes were passed on to customers as part of the regulatory 
rate setting scheme. Many monopoly phone companies had no 
reason to, and normally did not, oppose these taxes. In the 
1990's, many States began efforts to deregulate local markets 
and to open these markets to competition to improve consumer 
choice and, hopefully, lower prices. In the Telecommunications 
Act of 1996, Congress further opened local markets. In most 
States, the deregulation of the industry was not accompanied by 
corresponding elimination, simplification, or restructuring of 
the old monopolistic tax system that's based on silos and 
technology. Innovation and convergence of existing technologies 
are radically expanding what telecommunication services are; 
blurring the distinction between telephone and Internet 
services; between cable wireless and satellite communications; 
between long distance and local service; and, between telephone 
and other forms of communications.
    Many of these new technologies are capable of delivering 
telecommunications or telecommunications-like services. As a 
result, similar services can be delivered by networks that are 
taxed very differently and for a growing number of new 
technologies, these services are free from State and local 
taxation. This uneven governmental treatment at the State and 
local level, while not intentional, has led to competitive 
barriers, discouraged market investment and infrastructure 
development that is crucial to the future and impacted the 
rollout of advance telecommunications service throughout the 
United States.
    Imposing these higher tax burdens on telecommunications 
services provided by some telecommunication providers while 
imposing lower or even no tax burdens on similar services sold 
by nontraditional providers, places governments in the position 
of picking winners and losers in the market place.
    Under the legacies of the former monopolistic structure, 
State and local tax burdens on telecommunications companies and 
their customers are significantly above those imposed in other 
types of industries and service. The Council on State Taxation, 
COST, found that the average rate of State and local taxes for 
telecommunications services was around 14.1 percent, compared 
with only an average of about 6 percent for general business 
taxes.
    No reasonable policy maker can continue to justify this 
discriminatory tax regime on communication services. At a time 
when we talk about how important it is to have everyone 
ubiquitously connected to the network and to have access to 
high speed communications, for us to allow a--a discriminatory 
tax regime is not realistic.
    You need to know that NCSL has been working for almost a 
decade on reforming State telecommunication taxes. The three 
principles that I want to highlight that we believe and have 
pressed hard for are tax efficiency by State and local 
governments; we've pushed hard for competitive neutrality in 
State and local public policy; and, for tax fairness between 
technologies.
    Telecommunications tax reform is much easier said than 
done. States face a tremendous barrier in overcoming inertia, 
in persuading local governments in municipalities to accept the 
risks of a new tax regime which may lower rates but broaden 
their tax base. But if we are going to have the kind of 
advanced deployment of telecommunication services in networks 
that we all believe are the future for the United States, we 
are going to have to take those kind of risks.
    I think the fact that this Subcommittee is taking this 
issue up, helps provide impetus and encourages State and local 
decision makers to stay focused on the task. The threat over 
time that there may be deadlines from the Federal Government 
serves as a stimulus which will help bring State and local 
government decision makers together.
    You know, I've worked thoughtfully and watched the 
telecommunications industry cooperate with my task force for 
nearly a decade as we tried to build consensus and we have had 
some progress. I am going to get into it in questions where 
States had acted on their own.
    But I don't think we have another decade to thoughtfully 
wait for enlightened State public policy makers to find their 
way on their own. So the very fact that you're convening this, 
that you are discussing this, you are making people aware that 
the Congress is concerned about equity and taxation, are making 
sure we send the right kind of messages. I'll be happy to 
answer any questions you have.
    Thank you.
    [The prepared statement of Mr. Rauschenberger follows:]
           Prepared Statement of Senator Steven Rauchenberger




    Mr. Cannon. Thank you, Mr. Rauschenberger. It's always a 
pleasure to hear from you.
    Mr. Kranz.

STATEMENT OF STEPHEN P.B. KRANZ, TAX COUNSEL, COUNCIL ON STATE 
                        TAXATION (COST)

    Mr. Kranz. Thank you, Mr. Chairman, for the invitation to 
participate in today's hearing.
    As you said during the introductory remarks, my name is 
Steve Kranz. I am Tax Counsel with the Council on State 
Taxation, also known as COST. COST is a trade association that 
represents about 600 of the Nation's largest taxpayers, 
including companies from every industry segment and 
particularly those companies in the telecom and cable and 
technology arena which have been asked, and, in fact, forced by 
State and local laws to collect the taxes that we are 
discussing today.
    COST's mission is to preserve and promote equitable and 
nondiscriminatory taxation, and as the 2004 State study and 
report on telecommunications taxation, which COST prepared, 
points out telecommunications and communications taxation is 
anything but. In fact, it is inequitable and discriminatory.
    We have forced a square peg of a monopoly form of tax 
administration, left over from the days of telecom regulation, 
into the round hole of free market telecom service providers. 
The result is a system that's broken and in desperate need of 
repair.
    COST has studied and commented on the tax structure facing 
telecommunications providers since 1999, has put on a number of 
those studies and can describe the landscape in really 2 words: 
Oppressively burdensome. We have a system of telecom taxation 
that violates every tenet of good tax policy, creates an 
untenable burden for telecom providers and more importantly for 
their customers. We ask telecom companies to collect tax from 
their customers under a set of rules that are so complicated no 
one can do the job correctly. We ask companies to collect tax 
from their customer at rates that make one think the product 
they're selling should be kept behind the counter of a 
convenience store and only sold to customers who are over the 
age of 18.
    While a small number of States have made progress, as State 
Senator Rauschenberger has indicated, by improving their 
particular tax systems, the overall burden, as you see by 
looking at the 1999, the current study, has not significantly 
changed. In fact, the overall tax rate that is imposed by State 
and local governments continues to increase.
    Telecom customers are taxed at a rate more than double the 
rate on goods sold by a normal or general business. Second, the 
accounting burden that's imposed by State and local tax 
authorities is astounding. Companies are required to file 
almost 50,000 tax returns a year if they do business 
nationwide.
    Looking in further detail at the results of the telecom 
study. In 2004, as I said, the rate that was imposed on telecom 
services was double that was imposed on goods sold at a K-Mart. 
The average rate on telecom was over 14 percent, while the 
average rate on sales of goods was about 6 percent. This 
difference is something you can see in many of the States 
across this country. Eighteen States have rates on 
telecommunications in excess of 15 percent. Nine of those 
States tax telecom services at rates exceeding 20 percent.
    Turning to the accounting burden that is created by this 
system. I mentioned 50,000 tax returns a day. That's a big 
number. And if you break it down, it is over 190--I am sorry--
50,000 and tax returns per year broken down is over 190 tax 
returns per business day, almost one every 2\1/2\ minutes. I 
don't know how much time it takes you to do your tax return or 
whether you do it, but it takes a long time to prepare tax 
returns and these companies are required to spend phenomenal 
resources filing those returns on a daily basis.
    On a State-by-State level, when you look at the study, 18 
States require companies to file more than a thousand tax 
returns per year. Of those, 6 States require more than 3,000 
tax returns per year. Looking at your phone bill, as you said 
Mr. Chairman, you can see the complexity on its face. In 
Maryland, for example, there are 7 separate line items, 
different taxes that are imposed. In Washington State, there 
are 10 separate line items of tax imposed, and in New York, 
there are 12. Each of these line items requires a company to 
calculate, collect and remit tax information and dollars from 
consumers on a monthly basis.
    In conclusion, while the phone bill gives you a snapshot, 
the 50-State study gives you a thorough picture of the 
complexity of the issue that exists out there. The difference 
in rates that is imposed on telecom companies and the 
administrative and accounting burden that results from the 
various impositions.
    Mr. Chairman, and Members of the Subcommittee, thank you 
again for giving me the opportunity to testify. I hope that you 
provide--that you find the information and the COST study 
useful as you consider this difficult problem. And I'd be happy 
to respond to any questions that you'd have.
    Mr. Cannon. Thank you, Mr. Kranz.
    [The prepared statement of Mr. Kranz follows:]
               Prepared Statement of Stephen P. B. Kranz



    Mr. Cannon. We want to acknowledge the presence of Mr. 
Coble from North Carolina and the gentlelady from Florida, Ms. 
Wasserman Shultz, who have joined us for the hearing.
    And Mr. Quam, you are recognized for 5 minutes.

STATEMENT OF DAVID QUAM, DIRECTOR, OFFICE OF STATE AND FEDERAL 
   RELATIONS, NATIONAL GOVERNORS ASSOCIATION, WASHINGTON, DC

    Mr. Quam. Thank you, Chairman Cannon, Ranking Member Watt, 
Members of the Committee. My name is David Quam. I am the 
Director of Federal Relations for the National Governors' 
Association and greatly appreciate the opportunity to testify 
here today.
    Telecommunications tax reform has been a major issue for 
the governors over the past year. As I am sure we'll discuss, 
the NGA was essential in trying to pull together industry and 
State and local officials together last year to have a 
discussion about what could be done regarding the status of 
State and local taxes on telecommunications, and really, it's a 
communications issue. Not just telecommunications, but all the 
different communications mediums which are now competing 
against one another.
    I'll talk a little bit about those reforms, but first, 
there are four main points that I'd like to get across to the 
Committee today. First and foremost is that issues and 
responsibility for State and local taxations should be left to 
State and local officials. Ultimately, this is about State and 
local revenues, and State and local taxes and governors and 
State legislatures are very concerned with both those revenues 
and control of those tax systems.
    Second, an acknowledgement that changes do need to be made. 
Communications technology has evolved far beyond the existing 
State tax systems and a failure to act on behalf of States will 
only create increasing disparities among competitors and 
threaten long term revenues for State and local governments.
    Third, States are working to reform their taxes. Perhaps 
not at the speed that some in industry would like, but States 
are working very actively to try to modernize their tax 
systems, reduce administrative burden, and, in some cases, 
reduce rates.
    Finally, that Congress can best support State tax 
modernization by ultimately avoiding Federal action that will 
restrict the ability of States to craft meaningful reforms. 
Again, this gets back to the principle of federalism because 
we're talking about State and local taxes. Reforms and 
solutions really need to come from State and local governments.
    The discussions that NGA hosted were quite comprehensive, 
and, I should say, quite difficult.
    NGA and members of the big seven organizations, including 
NCSL, the National League of Cities, the Conference of Mayors, 
the Association of Counties, and others, joined together with 
representatives from the telecommunications industry, from the 
Internet industry, and cable and satellite television. All of 
the major players who are currently involved in 
communications--in the communications industry to try to 
discuss what could be done. First, what are the problems 
associated with State and local taxation. Second what are the 
principles for reforms for the different groups and, third, 
could consensus be developed to create some sort of solution 
that could be enacted by State and local governments.
    A couple of key points became clear during those 
discussions. First, of course, that the current system of 
taxation is complex and does not completely reflect today's 
market for communications services. Several State taxation 
systems continue to tax communications based on the technology 
used to provide them rather than the service. It is these silos 
that often create disparities between new competitors in the 
market place.
    Second, industry regards certain, if not most, State and 
local tax practices and requirements as barriers to their 
ability to compete in an ever-increasing competitive market 
place. This is best summed up by one of the participants who 
said, ``in my estimation the real problem here is that there 
are 49 too many States.'' I think that's summed up where 
industry was coming from with regard to State and local 
taxation.
    Another industry observation from a non-telecom: ``Nobody 
wants to be a telecommunication company.'' If you look at the 
tax burden and some of the regulatory burdens, anybody out side 
of that rubric would like to remain out there.
    Third, every one wants to preserve their own competitive 
advantage. If a statute allows you a business model that gives 
you a competitive advantage over another member, you are going 
to want to preserve the status quo. These are all obstacles for 
reform. From the State standpoint, local and State officials 
are committed to competition and encouraging innovation. There 
is no governor that wouldn't want more broadband access in 
their State. However, State sovereignty also has to mean 
something, and at its core, that is the ability to structure 
State and local revenue systems, regulate businesses and 
protect and promote the public interest.
    And finally, for State and local governments, revenues do 
matter. Any reform that simply shifts cost to States away from 
States is going the create more problems than it ultimately 
solves. And so anything that is just a simple tax cut without 
more comprehensive reforms, creates difficulties.
    As I said before, States are working to reform their 
systems. The COST study, which we've heard about, cites 
simplification reform in Florida, Illinois, Ohio, Tennessee, 
and Utah as having decreased the number of tax returns that a 
telecommunications provider must file by over 18,000.
    More recent reforms in Missouri and Virginia have gone even 
further. Virginia is a particularly interesting example--having 
just passed, it will take effect this year. The back story on 
Virginia's new tax, one that combined several different 
communications industries to broaden the base and lower the 
rate, is that it involved all levels of government negotiations 
between the governors office, State and local government, and 
different industry groups.
    Finally, States have also supported wide ranging 
telecommunications tax reforms as part of the streamlined sales 
and use tax agreement. This is the State-based voluntary 
agreement. Under that agreement, States are required to adopt 
uniformed definitions in administrative rules in return for 
collecting taxes from revoked vendors that volunteered to 
participate in the agreement. The governing board recently 
adopted new definitions that will require States participating 
to adopt those definitions into their State laws for purposes 
of sales tax. So there is considerable reform going on at the 
State level.
    When State and local government went into the discussions 
that we held with industry. And I should say that ultimately 
they did not prove fruitful because of some of the conflicts we 
had between revenue neutrality and competitive neutrality.
    There were several different principles that were important 
to State and local government. First and foremost, reform 
should be technology neutral focusing on the service rather 
than the technology used to provide the service. Second, reform 
should be revenue neutral, hence one of the problems during our 
discussions. That's debated over 20 billion annually 
telecommunications taxes not only support general revenues, but 
are often allocated at the local level to pay for specific 
purposes ranging from education to improving public safety 
systems.
    The potential to significantly reduce State and local tax 
revenues is one of the primary difficulties with simply 
subscribing to a request that telecommunications industry be 
treated just like a general business. As the COST study 
asserts, and assuming the numbers are correct, and Steve, I'll 
give you the benefit of the doubt--the telecom tax rate stands 
at 14.17 percent compared to only 6.12 percent for general 
business. Mandating a reduction on telecommunications rates to 
those of general business with the effort required of 51 
percent increase.
    Third, the Federal Government should not pre-empt State and 
local taxing authority. Fourth, the role of State and local 
government in serving public interest obligations must be 
maintained in any sort of reforms. And fifth, reform can not 
happen over night.
    The complexity of State and local tax systems does not lend 
itself to an immediate or one-size-fits-all solution. Reform 
should incorporate the interest of all affected parties and 
allow for sufficient transition time to fully implement 
comprehensive reform.
    I'll be happy to take any questions from the Committee.
    [The prepared statement of Mr. Quam follows:]
                    Prepared Statement of David Quam
    Chairman Cannon, Ranking Member Watt, distinguished members of the 
committee, my name is David Quam and I am the Director of Federal 
Relations for the National Governors Association (NGA). I appreciate 
the opportunity to appear before you today on behalf of NGA to discuss 
issues related to the taxation of communications services at the state 
and local level.
                                overview
    Last year NGA embarked on an ambitious effort to develop consensus 
between representatives of the communications industry and state and 
local officials regarding the future of state and local taxation of 
communications services. For over eight months participants 
representing the wireline and wireless telecommunications sectors, 
cable and satellite television and state and local governments met to 
examine the issues raised by the current systems of taxation, formulate 
principles for reform, and if possible, craft a consensus for promoting 
changes that could benefit industry, government and consumers.
    Through those discussions several points became clear:

          The current system of taxation is complex and does 
        not completely reflect today's market for communications 
        services.

          Industry views certain state and local tax practices 
        and requirements as barriers to their ability to compete in an 
        increasingly competitive marketplace.

          State and local government officials are committed to 
        encouraging innovation and deployment of communications 
        services while also protecting the public interest and 
        providing for the needs of their citizens.

    The last two points proved the most difficult to reconcile. From 
the industry perspective, the days of monopoly service have given way 
to a competitive and evolving marketplace. Traditional state and local 
tax laws, which are generally based on the technology used to deliver 
communications services, distort the marketplace by disproportionately 
favoring one industry over another. The solution proposed by the 
telecommunication industry was to end specific telecommunications taxes 
and treat telecommunications service providers like a ``general 
business.''
    In contrast, state and local officials recognized the need to 
modernize existing tax laws, but stressed that reform also must reflect 
government's responsibility to protect the public interest and remain 
cognizant of the need for state and local governments to balance their 
budgets and structure their revenue systems.
    In the end, these competing interests prevented consensus, but they 
also made it clear that the complexity of state and local tax systems 
requires that long-term comprehensive solutions evolve from states--not 
the federal government. The ability of states to structure their 
revenue systems is a core element of sovereignty that must be respected 
by the federal government. Congress therefore can best support state 
tax modernization by avoiding federal action that will restrict the 
ability of states to craft meaningful reforms.
                               background
    In 2000, NGA's Center for Best Practices issued a paper calling for 
Governors and state legislators to ``reexamine the state and local tax 
treatment of the telecommunications industry.'' (``Telecommunications 
Tax Policies: Implication for the Digital Age,'' NGA Center for Best 
Practices, 2000). The report concluded that existing state and local 
tax systems were ill-suited for the modern telecommunications 
marketplace, stating:

        ``[S]tate and local telecommunications tax systems are not 
        competitively neutral. In many cases, the current tax structure 
        favors some segments of the industry over others. In other 
        instances, the tax burden on the telecommunications industry is 
        greater than that of other industries. In either case, 
        telecommunications companies are not competing on a level 
        playing field. The current tax system forces these companies to 
        compete not only on the basis of economic factors, but also on 
        the basis of the tax differential among them.''

    The report went on to recommend that state policymakers review 
their state telecommunications taxes with goals of increasing tax 
efficiency, competitive neutrality, tax equity and administrative 
simplicity. Importantly, however, the report recognized that many of 
its reforms are not revenue neutral and that the fiscal impacts of any 
changes on state and local government ``need to be a major focus of any 
proposals.''
                  state telecommunications tax reforms
    Since 2000, several states have taken up the mantel of 
telecommunications tax reform. As noted in the Council on State 
Taxation's 2004 State Study and Report on Telecommunications Taxation 
(COST Study), simplification reforms in Florida, Illinois, Ohio, 
Tennessee and Utah decreased the number of tax returns that a 
telecommunications provider must file by 18,610. More recent reforms in 
Missouri and Virginia have gone even further. The Missouri law, which 
will take effect Aug. 28, 2006, expands the municipal tax base by 
making it clear that providers of cell phone and other wireless 
telecommunications are subject to the same tax as wired 
telecommunications. In return, the state (rather than municipalities) 
will collect the tax and apply a new 5 percent ceiling to all 
municipalities by 2010.
    Virginia's new communications tax law is even more comprehensive, 
streamlining existing state and local taxes into a statewide, flat-rate 
structure and eliminating local cable-franchising fees. Beginning 
January 1, 2007, the commonwealth will collect the tax and disburse 
rebates to municipalities on a share basis reportedly equal to what 
they now gather from the existing tax structure. In addition, a 
statewide rights-of-way use fee will be applied to all cable-TV service 
lines in the same way it is currently applied on all local exchange 
telephone lines. Supporters of the law maintain the new measure will 
raise approximately the same amount of revenue that municipal 
authorities now receive from local taxes and franchise fees. The 
standardized rate is distributed evenly among communication services 
resulting in reductions in the monthly phone bill for most residential 
customers.
    States have also supported wide-ranging telecommunications tax 
reforms as part of the Streamlined Sales and Use Tax Agreement. Under 
the Agreement, states are required to adopt uniform definitions and 
administrative rules in return for collecting sales taxes from remote 
vendors that volunteer to participate in the Agreement. The Governing 
Board (the governing body for the Agreement) recently adopted uniform 
definitions for telecommunications services that will require changes 
to the tax laws of the Agreement's member states. The benefits of the 
Streamlined Agreement--central collection; uniform definitions, 
customer remedy procedures and sourcing rules; and notification of and 
limitations on local rate and boundary changes--represent critical 
reforms that will significantly reduce complexities and ease providers' 
administrative requirements.
                           opening a dialogue
    While states worked individually to modernize their tax systems, it 
was the debate over how to best extend the federal Internet access tax 
moratorium that underscored the need for states and local governments 
to work with communications providers to address state tax issues.
    A key part of the extension debate was how to level the perceived 
tax disparities between telecommunication and cable broadband offerings 
and address the rise of new Internet-based services such as Voice-over-
Internet-Protocol. Those industry sectors not subject to the moratorium 
argued for their inclusion to promote competitive neutrality. Those 
subject to the moratorium argued to preserve their exempt status; and 
those outside the moratorium fought to prevent the transfer of any 
additional tax responsibility to their industry. The debate illustrated 
the difficulties states face in modernizing their tax systems to make 
them competitively neutral: industry sectors that stand to gain from 
reform support state efforts; industries with an existing competitive 
advantage due to state or federal restrictions fight to maintain the 
status quo.
    Following passage of the extension, NGA called for an open a 
dialogue between state and local elected officials and industry 
representatives to examine current taxation practices, compare 
principles and priorities for reform, and determine whether any 
consensus exists for modernizing state and local communications taxes.
    State and local government associations worked together to develop 
key principles to help guide discussions with industry. First, reforms 
should be technology neutral, focusing on the service provided rather 
than the technology used to provide the service. Such a change would 
decrease discriminatory tax treatment between competing service 
providers and allow for greater certainty for new entrants.
    Second, reforms should be revenue neutral for state and local 
governments. Estimated at over $20 billion annually, telecommunications 
taxes not only support general revenues, but are often allocated at the 
local level to pay for specific purposes ranging from education to 
improving public safety systems. The potential to significantly reduce 
state and local revenues is one of the primary difficulties with simply 
subscribing to the demand of the telecommunications industry to be 
taxed like ``general business.'' The COST study asserts that the 
average effective rate of state and local transaction taxes for 
telecommunications services is 14.17%, compared to only 6.12% for 
general business. Mandating a reduction of telecommunications rates to 
those of general businesses would therefore require a 51% decrease in 
state and local tax rates. Actual revenue losses would likely exceed 
the $6.987 billion difference estimated in a November 2001 study 
prepared by Ernst & Young LLP for the Telecommunications State and 
Local Tax Coalition.
    Third, the federal government should not preempt state and local 
taxing authority. Governments at the federal, state and local level 
have long recognized that communications services play a unique and 
critical role in modern society that may require different regulatory 
and tax treatment from those imposed on general businesses. 
Furthermore, state and local jurisdictions are generally required to 
balance their budgets. A federally mandated reduction of more than $7 
billion in telecommunications tax revenue would require spending cuts 
or revenue increases to cover the loss. The ability of states to 
structure their revenue systems to fund government services is a core 
element of state sovereignty that should not be undermined by federal 
authorities.
    Fourth, the role of state and local government in preserving public 
interest obligations should be maintained. The responsibility of 
managing public-rights-of-way, funding public safety infrastructure, 
providing consumer protection and promoting universal service are 
critical state and local functions. Reforms to state and local tax 
systems should not undermine government's ability to carry out its 
responsibilities to protect the public interest.
    Fifth, reform cannot happen overnight. The complexity of state and 
local tax systems does not lend itself to an immediate or one-size-
fits-all solution. Reform should incorporate the interests of all 
affected parties and allow for sufficient transition time to fully 
implement comprehensive reforms.
                               conclusion
    A modern communications infrastructure that provides high-quality, 
reliable, and affordable communications services is essential to the 
economic competitiveness of states and the nation. Recent technological 
advancements in communications services are fundamentally changing the 
manner and means by which consumers communicate with one another. These 
changes have led to the development of new services, greater 
competition and increased consumer choice. Technological advancements 
also pose challenges for states, which generally tax communications 
services based on the technology used to provide the service rather 
than the service itself. Left unchanged, these laws will create 
inequities between competing service providers and diminish state 
communication tax bases as new technologies evolve beyond existing 
laws.
    Although NGA's efforts to develop consensus recommendations for 
reform were not immediately successful, Governors continue to support 
state efforts to modernize their tax systems in a manner that promotes 
innovation and competition, encourages investment, preserves state 
authority, provides necessary resources and advance the public 
interest.

    Mr. Cannon. Thank you. We've got a bill for a vote. We have 
a couple of votes, but I think we have time, Mr. Mackey, for 
your testimony and we will come back and do questioning 
afterward.

 STATEMENT OF SCOTT R. MACKEY, ECONOMIST AND PARTNER, KIMBELL 
               SHERMAN ELLIS LLP, MONTPELIER, VT

    Mr. Mackey. Thank you, Mr. Chairman, Representative Watt, 
and Members of the Committee. As you said in your introduction, 
Mr. Chairman, I have looked at this issue from both sides now. 
I've worked with the wireless industry for the last 5 years, 
specifically trying to address the discriminatory and excessive 
State and local tax burdens, and also, when I was at NCSL I was 
working on it too. I think--seeing it from both sides--it is 
clear that the problem, as defined on both sides, is the same. 
Everyone acknowledges there is a problem, and of course, the 
stumbling block is how to solve it.
    I am going to focus on something that you, Mr. Chairman, 
and Representative Watt mentioned in your opening statements, 
which is the economic impact of some of these taxes. I'm going 
to talk specifically in my short time about consumers and about 
the overall economy, because these taxes and the tax systems 
that we've allowed to sort of become institutionalized really 
have impacts that--broadly on the national economy and on 
consumers that don't get a lot of attention but perhaps really 
should.
    On the first point concerning consumers. Everybody in the 
State and local world knows that consumption taxes are 
regressive, and I think what you see with telecommunication 
taxes is you have a layering effect of one regressive tax on 
top of another regressive tax on top of another, you know, 
where you have multiple taxes at the State and local level all 
being layered on the consumer. And as a result, you have sort 
of a very regressive tax system on our people on fixed incomes 
and our low income households. When you have average effective 
rates of 15 percent--as has been talked about in the COST 
study--obviously a tax on telecommunications and other 
communications services is going to have a much bigger impact 
on somebody with a lower income than a higher income.
    A troubling trend recently is some jurisdictions actually 
imposing flat rate taxes. For instance, in the City of 
Baltimore, where the city imposed a $3.50 per line tax on 
wireless and wireline phone lines. Well, obviously, at $3.50 as 
a percentage of a $25 cheapest plan you can get is a lot higher 
than $3.50 on a $100 plan. And the impact can be even magnified 
in households where you have families--at least in the wireless 
side, for instance, you have, you know, buy your first phone 
and sign up for a second or third line for only $10 more a 
month. Well, the marginal rate on some of those second and 
third lines is 40 percent if you are only paying $10 more and 
you are adding $3.50 in tax plus 5 percent tax.
    So we really have a situation where the regressive nature 
of these consumption taxes is really, really magnified in the 
area of communication services tax.
    Now consumers are burdened, but consumers are also wage 
earners. They're also out there trying to earn a living. And 
the other point I wanted to make is the economic impact of 
these communication services taxes really affect the whole 
economy because, as others speakers have alluded to, we've 
moved from a monopoly structure where there wasn't choice, 
there wasn't competition for consumers. Taxes were buried in 
the bills and essentially taxes didn't matter. You were buying 
plain vanilla communication services and the tax that you pay 
really wasn't going to affect what you were buying. Now we are 
in a situation where consumers have choices of providers, 
choices of technology. And they're really--more and more of 
their dollars are being spent not so much on plain vanilla 
communication services, but on other things: downloads and 
things like that.
    So what you are seeing is consumers are a lot more price 
sensitive today than they were in the monopoly era. And when 
you impose taxes of 15 percent and as high as 20 percent and 
more in some States, what you have is a real impact on 
consumers' purchasing choices. One study that looked only at 
wireless, but a lot of it, I think, is true for other 
communication services as well, found that every 1 percent 
increase in the price is going to reduce consumer demand by 
between 1.1 and 1.3 percent. So you can imagine a system where 
you have tax burdens that are 9 percent--7 to 9 percent higher 
than what you buy at the store. That's going to translate into 
a 10 to 12 percent reduction--in consumer expenditures on 
communications.
    So what does that mean to the economy? Well, obviously the 
communications companies--wireless, wireline, cable--are 
investing huge amounts of money to push advanced communications 
network broadband out to more consumers so they can compete 
with each other and get into everybody's business. And 
obviously this benefits consumers because the more competition 
there is, you are going be able to get a better deal. And what 
we are finding is that these taxes that have an impact on how 
much revenue, you know, cash flow from operations--that these 
companies have available to invest back in their networks. And 
these are not insignificant amounts of money. In the wireless 
side, it's 20 billion a year. I am sure it is higher, even 
higher in cable and wireline telecom as well. And this is how 
these advance communications networks are going to be built: by 
the private sector investing money to get these services out 
there.
    Now, the reason this is important is because study after 
study has showed that there are huge productivity benefits to 
the U.S. economy when we can get these networks out there and 
get businesses and consumers and everybody using them to be 
more productive. In fact, a study that was recently done by 
Ovum and Indepen found that 80 percent of the productivity 
gains in the year 2004 were estimated to come from information 
technology and communications.
    So obviously, the more money that companies have to invest 
in networks, there is going to be more productivity benefits 
that are going to accrue to everybody. And when we talk about 
the revenue concern that the local governments have, those are 
real concerns. But there is also the possibility that we can 
create a bigger pie and have people spend more on services if 
we didn't have some of these discriminatory taxes that are 
going to result in more tax revenues coming in for everybody, 
higher incomes, and all of the positive things that we saw in 
the '90's with the Internet and the growth of e-commerce.
    So these taxes do matter to the economy. And you know, to 
the extent that these tax structures are retarding investment 
in advanced communication services, that's a problem.
    And I'll just sum up with a simple maxim that if you want 
more of something, subsidize it, if you want less of something, 
tax it. And unfortunately, we are taxing our way to slower 
broadband deployment, less investment by the private sector in 
advanced communication services. And we're doing that at a time 
when State and local governments and their economic development 
people are very serious about wanting to get this out there. On 
the one hand, we have these tax structures that are retarding 
investments and in some areas we actually have subsidization 
going on to try to get more of it.
    These taxes really do have an impact directly on the 
consumer as a purchaser, but also the overall economy and 
affect it that way. So it is a very important issue, and it is 
great that this Committee is looking at it because of these 
national implications of what we are doing, and I know you have 
a vote. I look forward to the question period, and I thank you.
    [The prepared statement of Mr. Mackey follows:]
                 Prepared Statement of Scott R. Mackey



    Mr. Cannon. We will recess for about 20 minutes. Long 
enough to go over and vote. Then when I get back, we'll 
restart. So we will be recessed for a bit. Thank you.
    [Recess.]
    Mr. Cannon. The Subcommittee will come to order. All this 
technology going on here. Modern communications are fixed to 
the floor and worse, we have noise from the floor.
    I think--Steve, do you want to stay for a question?
    Thank you. We have another briefing going on elsewhere, so 
I think we'll do questions. I'll ask you questions and we will 
be a little less formal here, but I'd like to get up to that 
briefing as well.
    I apologize for that, the interruption. That's sort of what 
happens in Committee. But we had some really interesting 
discussion, and what I'd like to do is just get comments from 
the various perspectives on this issue. Historically, the 
richest guys in town were the guys who had the telephones first 
and they got to call each other and the maids got to call the 
maids in other houses. You had somebody who actually physically 
pulled the plug and put it in so you connect to the circuit. 
And so we taxed people pretty heavily on telecommunications 
because it was a luxury.
    The world has changed around us now. We don't--not only do 
we not have plugs, but we don't have circuits any more. We have 
the Internet and communication on the Internet.
    I am wondering if given the regressive nature, and 
certainly you'll testify on this, but I'd like to focus on the 
regressive nature of the tax as telecommunications has become 
so common. Is that not something that ought to concern us 
significantly. We'll start Steve, with you and go down the 
panel.
    Mr. Rauschenberger. Absolutely it should. The aggressive 
nature of telecommunications taxes is a problem. Because the 
rate's high. Because consumption tends to, on traditional phone 
lines, tends to be more concentrated in less affluent socio-
economic groups. And the other thing that we didn't touch on 
but I think has been stated--the concept emerging since the 
'20's and the '30's, the 1920's and 1930's in the United States 
of a ubiquitous network where everybody's connected. The value 
of the network is, in large measure, because everybody is on 
it. I mean having a phone system that only connects half of the 
Members of Congress is less valuable to everybody. So these 
extraordinarily high taxes also discourages some people from 
being on the network.
    Mr. Cannon. Thank you. That's a remarkably important 
insight and I appreciate that. I don't mean to interrupt, 
particularly, but if you could add to the commentary. You 
might, in particular, want to talk about this. It seems to me 
the wonderful thing about America is we have upward mobility. 
The ideas of Americans that we have is that rights come from 
God, individuals delegate those rights to Government, and we 
protect those rights through the rule of law. And in that 
environment, it doesn't matter who your poppi was, you know. It 
doesn't matter where you were born or the color of your skin. 
What matters is your initiative and your intellect and other 
talents.
    And so in America, we have this upward mobility that's 
created by a system. No other country--I mean, there's been 
stories about China for instance, where they would seek out the 
smartest kids in the country, bring them into the bureaucracy 
and the bureaucracy is what actually maintained and developed 
upward mobility but it was very, very limited. Whereas in 
America, any kid can fail his test here and there and not do 
well, but finally get some initiative and make something out of 
himself.
    It seems to me that telecommunications is like a key factor 
in letting that kid get an education, assert himself, connect 
himself and move up. And am I missing something here but isn't 
that an important part of it?
    Mr. Rauschenberger. I would agree. I would again say the 
danger we have in not dealing with this traditional silo tax 
and regulatory scheme and simply avoiding doing it because it's 
uncomfortable. It causes us to rethink how we do municipal 
taxation or rethink how we do State taxation. There's no long-
term benefit to the United States or to any municipality or 
State not reforming these.
    So that's why--if you are going to have a network of 
exchange of information, if intellectual property is going to 
be one of the cornerstones of my children and your children, 
and the United States has to build on as we compete in an ever-
increasing flattened world. We need to make sure our networks 
are ubiquitous, that they're low costs, that they're broad 
based and they're well distributed, and our tax policy today 
does not--you know, I believe in the sovereign States.
    I am a States' rights person. We need to work with the 
municipalities and the States to make sure we do this right. 
But we do need leadership on some issues from Congress to help 
set time frames.
    Mr. Cannon. And when you talk about a ubiquitous network 
what you're talking about there is not only the whole system 
where you better but the ability of kids or individuals to 
emerge in the system. The record should reflect that Senator 
Rauschenberger is nodding his head in the affirmative on that. 
Thank you.
    Mr. Kranz, or Mr. Quam----
    Mr. Quam. I'd be happy to take that. I think you definitely 
hit on an issue I think everybody here recognizes in that we 
have a legacy problem that our tax laws are not keeping up with 
some of the technological evolutions that we've seen. Some of 
which have been evolutionary, if not revolutionary, just in the 
last 6 years. The Internet, in particular, is now the 
cornerstone in communications. This is no longer just wireline 
and pack switches and that type of thing. And so States do need 
to reform and take a look at the regressivity of some of the 
taxes and the entire tax system as a whole. However, one of the 
things I pointed out in my testimony--one of the things that 
was critical during our discussions, was bringing everybody to 
the table.
    Again, this is not telecommunications anymore, this is all 
communication services. You have what has traditionally been 
defined not as telecommunication--telecom now offering telecom 
type services. So if you are talking about reform of the tax 
system, and again, States are really beginning to look at 
reform at the State level where you can broaden the base and 
lower that rate and possibly address some of these legacy 
issues. You need to get rid of some of the restrictions that 
prevent States from being able to broaden that base so that you 
can craft a solution that really works at the State level.
    I go back to the example in Virginia. Again, during that 
process, which took a number of years, they reached out to 
local government groups, all sorts of different industry 
groups. Crafted a bill, established a rate, ran the tax numbers 
to see if the revenues would be sufficient to make 
municipalities whole and get the revenues that the State 
needed, and also meet some of the competitive neutral aspects 
that they were after. When it didn't, they went back out, tried 
to bring, you know, talk to other industries, brought them in 
to the point where you have a very comprehensive bill that 
really could revolutionize State and local tax structures in 
Virginia.
    Now, it's important to note that that model can't be used 
everywhere. Not every State is going to have the options that 
Virginia did as far as moving taxes, increasing them some 
places, lowering them in others. But the dialogue at the State 
level, State and local level, and I would argue at the Federal 
level, has got to be now, not about telecommunications taxes 
but about communications, the entire industry. Ultimately, 
reforms should be future proof, and I want to borrow a phrase 
from one of my friends in telecom that said if we do that 
right, you get to reforms where the next new entrant and the 
next new thing fits seamlessly in there and provides 
opportunities for everybody to use that technology and taxation 
is no longer picking and choosing winners and losers, but it is 
also meeting the needs of State and local government.
    Mr. Mackey. Just briefly, Mr. Chairman. I absolutely agree 
that we ought to be concerned with the regressivity. As you 
mentioned, obviously, the networks are ubiquitous, but you also 
have, you know, the demographics are changing in terms of who's 
using and purchasing a lot of these services, and you alluded 
to it in your opening statement about the kids doing the text 
messages back and forth and you having to try to keep up with 
your kids doing it.
    I mean, we have got a lot of young people, a lot of people 
on fixed incomes staying connected through this technology in a 
lot of different ways, not just through voice. So it's 
absolutely important and critical that we look at it. So I 
would agree 100 percent.
    One other thing, if I can tie it back to something I said 
earlier, to the extent that--and this relates to the prices 
that folks pay for communications services. To the extent that 
we have tax policies that slow the emergence of competing 
networks so that we have one provided by a cable company and 
one provided by a landline company and one provided by a 
wireless company, and others all able to provide broadband, to 
the extent we slow that, consumers are denied the benefits of 
competition, which are also going to lower the price that 
consumers have to pay for those services.
    So there's the impact of the regressive taxes and slowing 
of investments that's going to bring lower prices for everybody 
as well.
    Mr. Cannon. Thank you. I have another couple of questions, 
but my time has expired.
    Mr. Watt.
    Mr. Watt. Mr. Chairman, I always like these hearings 
because we spend all that time arguing about things that I 
think everybody already agrees on. Taxes are too high, taxes 
shouldn't be regressive, taxes are unfair, State to State is 
inconsistent. I think pretty much everybody on the panel said 
that in one way or another.
    The point I am wrestling with, I don't even disagree with 
any of that, is how the Federal Government gets there from here 
and what our standing is to be setting a standard. And so I 
guess my devil's advocate question, not to try to get to a 
different conclusion than you all--I mean, Senator 
Rauschenberger said that we need to do something to provide 
incentives to, quote, enlighten State public policymakers. 
Recognizing that there are some enlightened State public 
policymakers, the problem is it sounds to me like they are all 
moving in the direction and all of a sudden the Federal 
Government is getting ready to do something preemptive, or runs 
that risk.
    So I am trying to figure out how we don't stifle those 
enlightened State public policymakers, but don't overstep our 
bounds at the same time, because if you accept the notion that 
interstate commerce--and this is one of those--
telecommunications, I guess, is interstate commerce--but if you 
accept the notion that the Federal Government can preempt, and 
the next step is going to be no taxes on telecommunications, I 
don't know how you get off that slippery slope. I don't know 
how you get from the notion that you can do this on interstate 
telecommunications, but there is still some intrastate, and I'm 
not sure what authority we have as Congress to do this.
    So I'm going to encourage you all--I'm going to stop 
talking and encourage you all to have a discussion about some 
of the things that we need to be focusing on, not the things 
that we all agree on. Everybody will tell you taxes are too 
high, but I'm sure Senator Rauschenberger is not going to tell 
you that the State doesn't have the authority to set its own 
tax structure, and I'm sure the local government is not going 
to tell you that we've got to at least have some revenue coming 
from somewhere if we're going to provide local services. And at 
some point we've got to come to grips with who has 
responsibility and authority to make these assessments, and you 
all keep talking about providing incentives, or speeding up, 
but I haven't heard anybody say where you think we ought to get 
off, because once the Federal Government gets on, we don't have 
much of a history of getting off of anything.
    That's my question. Whoever wants to answer it.
    Mr. Rauschenberger. Congressman, thank you for asking that 
question. Two quick observations. Enlightened legislators, 
State legislators, is not the same as military intelligence. 
Sometimes it really does exist. I think State public policy is 
moving in the right direction, but so are the glaciers in 
Greenland.
    I think at risk here is the speed that we need to 
understand that we operate today 16th- and 17th-century 
Governmental models which served the public well----
    Mr. Watt. The States are operating under those same models. 
The Federal Government is still operating under some of those 
same models, too. So that doesn't answer my question.
    Mr. Rauschenberger. Which is why public policy falls 
behind.
    I would make three recommendations to you. First of all, I 
think preemption is a dangerous place to go, but if the Federal 
Government or the Congress were to consider putting out there a 
set of guidelines and recommendations to States, much like they 
did with the Mobile Sourcing Act where there was a requirement 
that States over a period of time act to modernize their 
sourcing rules or they lost the ability to levy those taxes. In 
the end, we had 50-State compliance because people had time to 
react to it. It set an agenda for State legislators.
    I would also recommend that as this Committee looks at it, 
you need to consider defining communication services broadly 
enough that State legislatures can broadly tax all 
communications services at a lower rate rather than focusing on 
some technologies. The concept that Voice Over Internet 
Protocol or Internet speech ought to somehow be treated 
differently than wireline communications is not something I 
think is in the public's best interest in the long run.
    I think also I would recommend, whatever you do, that you 
allow sufficient time frame, keeping in mind that some State 
legislatures still only meet every other year. I would argue 4 
to 6 years at the minimum, is the shortest time period to 
mandate to work with the States to modernize because some 
legislatures don't meet often enough.
    The last thing I would urge you to consider in this short 
laundry list is the understanding that States are going to have 
a difficult time mitigating the impact on local governments. So 
giving States resources to work with; for example, I have 
always believed that the best opportunity to actually get 
telecommunication tax reform done at the States, is 
simultaneous with modernization of State sales taxes in the 
streamline bill where there's resources from the modernization 
of the sales tax occurring simultaneous with the loss of 
revenue in telecommunications. So we can improve both those tax 
systems.
    Mr. Kranz. Mr. Chairman, Representative Watt, I think if 
you take the problems we've described and break them down into 
two separate pieces, the tax rate burden and the discrimination 
that occurs there and the administrative or, as I call it, the 
accounting burden, those two problems can be solved with very 
different solutions. And the rate burden, the discrimination, 
there are models out there, the 4R Acts that Congress passed, 
preventing States from discriminating against transportation 
companies in their taxing positions. There's a markup later 
this afternoon on a bill that would prevent States from 
discriminating in natural gas pipelines.
    That's the kind of Federal solution that could be crafted 
here, and my job isn't to advocate any solution. Our study is 
intended to discuss the lay of the land out there.
    On the administrative or accounting burden, a solution 
could be fashioned at the Federal level similar to what State 
Senator Rauschenberger mentioned in the streamline bill. There 
Congress can provide a carrot incentivizing the States to get 
to a simpler world.
    Those are possibilities that I think should be considered. 
I know that our friends at the State level don't want Federal 
solutions to these problems, but I do agree that the icebergs 
in Greenland are moving faster.
    Mr. Quam. Mr. Watt, I am going to, surprise, surprise, 
disagree with some of my panelists. Having the Federal 
Government somehow proscribe a solution here or preempt the 
States in coming out and asking for that as a potential 
solution seems to be saying, please help States--please save us 
from ourselves.
    The last time I checked, States and local officials, they 
answer to voters, and they are subject to elections, and they 
are making those decisions. That's ultimately where State and 
local tax decisions need to remain.
    In my testimony I mentioned that one of the biggest things 
Congress could do in this field, because States are reforming 
taxes, is support modernization by just avoiding Federal action 
that will restrict the ability of States to craft meaningful 
reforms.
    I get back to one of the best ways to ultimately allow 
States to reduce rates, if that is an ultimate goal, is to be 
able to broaden the base and create some tax equity and some 
competitive neutrality among competitors. I think that is a 
worthy goal, but a goal that has to be pursued at States.
    Finally, I think Senator Rauschenberger is right on the 
mark with regard to streamlined. The streamlined bill has been 
a remarkable effort by States on a volunteer basis to modernize 
sales tax systems, to address an incredibly complex systems of 
sales tax laws, find agreement and work together in a sovereign 
way, because it's States making State decisions and working 
together and ultimately having the Federal Government support 
that effort and partner with States I think will be a large 
step forward with regard to taxes and promoting that type of 
simplification, administrative simplifications.
    Mr. Mackey. Mr. Chairman, Mr. Watt, just briefly. The 
problem is I think if we just say just leave it to the States, 
I mean, we have a history of about 10 years where everyone has 
said there is a problem, and we've had, as others have said, 
very little movement.
    I absolutely agree that the federalism issues are very 
tricky, and you guys are drawing that line, but, I mean, 
Congress is uniquely, I hope, positioned to look at the broader 
economic issues of balancing federalism between the national 
economy and some of the impacts that some of these taxes are 
having on our ability as a Nation to compete globally and to 
get the networks out as quickly as possible. That is a 
difficult balancing act. Certainly if this were an easy thing 
for States to do, more would have done it.
    I guess the problem from the communications industry side 
is just that it's difficult and frustrating when everyone 
agrees that there's a problem, and there is not much action or 
no action, or, I guess, one State moves to fix it.
    That's the dilemma that we face, and we're glad that you 
guys are having this hearing so we can talk about some of these 
issues, and you can weigh where you come out on that balancing 
act.
    Mr. Cannon. Thank you. Without objection, we'll go to a 
second round of questioning.
    Mr. Watt just asked pretty much my second question that I 
wanted to talk about. Let me refine it now a little bit, 
because I am highly reluctant to preempt States. On the other 
hand, there are some issues that really cry out in our 
constitutional environment for Federal national policy.
    I think, Mr. Mackey, you talked about the value of the 
network, in fact, several talked about the value of the 
network, being more valuable as more people get involved, and 
to the degree that that network becomes a huge national asset. 
And, in fact frankly, the foundation for the wealth not only of 
America, but for the rest of the world, it seems to me that 
that cries out for national policy in a world where any given 
State can distort that network fairly substantially.
    Does anyone want to comment on that with particularity? If 
you say it, it's better in the record than if I say it.
    Mr. Rauschenberger. Let me say again, whether you are 
talking about the first intercontinental rail system, the 
movement toward standard gauges for railroads in America, or 
the National Highway System where States surrendered small 
parts of their State sovereignty--we all agreed lane width 
would be 13\1/2\ feet, yellow paint would separate oncoming 
lanes of traffic--those networks have always had more value 
because there was consistency and leadership at the Federal 
level. No governor and no mayor is in a position not to see 
from 30,000 feet the value and the importance of being part of 
a ubiquitous, seamless network.
    For Congress to set a 6- or an 8-year reasonable deadline 
requiring States and local governments to reform and bring 
their tax system into compliance so they don't discriminate 
against a particular type of technology does not seem to me to 
be overly intrusive. I don't think any of us are suggesting 
here that we manage the network from the Federal Congress.
    We're talking about what everybody agrees is clearly a 
discriminatory taxing system that's affecting this network, 
which we all agree has value. I think your point is on target.
    Mr. Quam. Mr. Chairman, I see a fundamental difference 
between sort of highways and railroads and the role they played 
and the network they served when they were being built and what 
we look at today. You're absolutely right, the value of network 
is absolutely proportional to the number of people on it, no 
question about it.
    No one would say, however, that the wireless industry has 
somehow not been successful in the last 10 years when you look 
at the number of subscribers. No one would argue that some of 
the large Bell companies who are investing in fiberoptics and 
broadband and aggressively going out there aren't competing and 
competing well and competing at the highest levels. The COPE 
Act itself is about establishing market-based reforms to 
increase that competition.
    When you're talking about the railroads and the highways 
and a national presence, that was needed in some sense just to 
get the roads built, just to get them across the States. We 
have networks in place right now; I can go buy a roaming plan, 
and my phone will work anywhere in the United States. That's a 
pretty robust network.
    The question becomes, Mr. Watt, I think you said yourself, 
the commerce clause gives Congress very wide authority, and 
arguably communications is interstate, and we give Congress 
wide authority to come and interfere with State and local 
taxation. However, the question has got to be should Congress 
interfere with that. I think the 10th amendment ultimately 
means that's got to be a very high bar to cross.
    Mr. Watt. I think the question is where you draw the line.
    Mr. Quam. I think that's absolutely right.
    Mr. Watt. That's really the question. What you're doing is 
making the case for a Federal taxing system. That's probably 
more understandable than the argument you're making. I don't 
see--I don't see a compelling Federal argument to provide an 
incentive to do this in 6 years. I see a more competitive, 
compelling argument that the Federal Government could take it 
over completely and say don't tax it. That's what we did with 
the Internet. 
    But you're on a slippery slope, and I'm just suggesting 
that you need to be careful, and even there I don't know how 
you say to a State and local government you can't tax local 
phone calls, local communication. That's not----
    Mr. Cannon. That's my next question. You're asking exactly 
the questions that I think need to be asked, but can I just add 
a little bit? We have already decided not to tax the Internet, 
and we are talking about being neutral to technology. So, how 
do we tax telecommunication systems when you have a system that 
we're already agreed on a national level, with some exceptions, 
not to tax?
    There's been some talk, I think that's where you're headed, 
and I'd like to get the opinions of these folks. Should we tax 
the telephone number? Because if you tax a telephone number, 
people will go to URLs, and that will clog a system that people 
have come to enjoy. In other words, if you are going to be 
technologically neutral, don't you need Federal leadership; and 
secondly, don't you need to get away from taxation entirely of 
a system that is fundamental?
    We tax gasoline. We don't tax, except in cases like Utah, 
and they are under the process of thinking about being stupid 
on this point--we don't tax except generally speaking through 
gasoline taxes.
    Doesn't it make some sense to not tax communications 
because that's the only way you are going to be technologically 
neutral; and secondly, don't you need Federal leadership to 
actually do that?
    Mr. Watt. Except you should know for the Chairman it makes 
sense not to tax anything.
    Mr. Cannon. Very little.
    Let's start with Mr. Mackey and move back, because, Steve, 
you may want the last word on this one.
    Mr. Mackey. That's a policy question that people would 
argue about. I think what the industry is seeking on behalf of 
its customers is fairness, and fairness defined as we're not 
seeking to be exempt from all taxes. We feel like the services 
that the communications services industry provides, which, 
after all, are moving more and more away from plain vanilla 
talking on a telephone and more toward a lot of digital goods 
and other types of services that are really no different than 
sometimes what you buy at a store, whether you buy a CD in a 
store or download it onto your phone or onto your computer at 
home--we think that the industry would argue that fairness 
means being taxed like general business. Now, from an economic 
development maybe you can make the argument that the rate 
should be zero. This industry, communications industry, has 
been subject to a discriminatory burden for so long that we 
just want to get to where general business is. And we think 
there are significant economic benefits to the economy of doing 
that that, as I said earlier, will generate some money at local 
governments to help them fill in some of what they think they 
are losing.
    Mr. Cannon. Mr. Mackey, do you know how many users Skype 
has today? Last I heard, it was 28 million, but it's probably 
doubled since then, 30, 40 million. Does anybody know? In other 
words, we have something like 98 million landlines, something 
like 100 million cell phones. Skype is now in the ballpark of 
those. They are not taxed.
    So I appreciate the fact that you're willing to take the 
stripes of the normal tax burden here, but the normal tax 
burden is not going to be normal for a year or 2 longer.
    Mr. Mackey. I'll quickly follow up. To the extent you 
maintain the high rates, you are just driving everyone to the 
type of system you're talking about with them.
    Mr. Cannon. Pushing the envelope a bit because I want some 
feedback, we are rapidly becoming a system where not only is 
the discriminatory tax outrageous, counterproductive, but any 
tax is going to be marginalized by technology. So don't we need 
Federal leadership on probably a quicker scale than you are 
suggesting, Senator Rauschenberger, to deal with this issue so 
America maintains its leadership and expands at a rate 
unencumbered? And, of course, it does create a problem for 
States; I'm not suggesting it does not.
    Mr. Quam. Mr. Chairman, it won't be surprising that I'm 
going to be contrary.
    Mr. Cannon. When you disagree, would you tell me what we do 
about taxing VOIP? I think taxing a phone number is silly. 
That's probably what we do in the Senate with the COPE Act. I 
think it's a stop-gap, and I hope the States think about how we 
get away from that quickly enough so we don't distort the 
system. That's what I'd really like to hear from you. What do 
we do to tax Skype in a way that is not counterproductive to 
the development of the Internet and communications services 
generally?
    Mr. Quam. Right now, and somebody can tell me if I'm wrong, 
I believe Skype is a free service. Some of it is. So it's more 
or less a free service. So forgetting the tax, you also have a 
free service compared to other communications. So there are a 
lot of economic factors involved in why Skype might be growing 
the way it is.
    More importantly, I want to get back to an important key 
point, and this is the hearing and what you're talking about is 
State and local taxation, it's not Federal taxation. The 
Federal Government certainly can and should be a leader with 
regard to Federal tax policy. I don't think the Federal 
Government has to lead when it comes to State and local tax 
policy.
    Mr. Cannon. Would you deal with the issue of the national 
policy toward telecommunications, communications, Internet, all 
the bundle of things? In other words, if you say historically 
we don't have a right to deal with local taxation of particular 
items, well, we have constitutional issues that we've developed 
over a long period of time, but we are not talking in a 
context. Now we're talking about a future in which 
communication can be virtually free, and that means free of 
taxes and in some cases free of even cost other than the access 
to the bandwidth.
    The question in my area is now selling mostly bandwidth and 
other things that go along with bandwidth. That's where they 
view their financial future. And whatever services, whether 
that's telecommunication or television, cable content or video 
conferencing, they just want to get money--in other words, the 
industry is saying we want value for what we provide, we don't 
care what it is that you do.
    So telecommunications, if you take an arbitrary identifier 
like a telephone number, becomes an obstruction to the 
development that might otherwise just happen, and the States 
are in the middle of that, and we're looking at that from a 
national policy view.
    What do we do to distance ourselves in the areas of 
innovation and communication? That's what I think I need to 
hear from you, not that the States have rights, because they 
do. But what do we do as a country so we go in the right 
direction, and what is the most important economic force in the 
world today?
    Mr. Quam. I get back to, again, the point that was made 
when we gathered all of our players for the discussion. That 
was an issue I talked about before, and that is future-
proofing, which is really what you're talking about, the vision 
for the future that will allow for the growth of new 
technologies, new entrants, new paradigms really, and how do 
those match up with Government responsibilities, ultimately.
    The Federal Government certainly has a role in planning 
Federal policy to do that. I don't disagree. Do I have the 
answers? No. I don't think anybody in this room does, but it 
could be one heck of a debate.
    My issue remains that at the end of the day States do have 
rights, States do have responsibilities, States do have public 
interest that they need to enforce, and sovereignty means 
something, and revenues do matter.
    To the extent that the Federal Government interferes with 
those State tax systems, I think that's a very high bar to 
cross. Establishing a national standard with national 
resources, absolutely, that's Congress's prerogative. But when 
you cross into the State line, and I think we can be good 
partners, and States can be innovators and will be innovators 
moving forward.
    Mr. Cannon. Mr. Kranz, you have something to say?
    Mr. Kranz. The communication companies are inevitably in a 
national playing field. Whether they're traditional telecom 
companies, cable companies, the Skype or the Vonage that are 
selling communication services online, they are in a national 
playing field, and I think we've identified--and I hate to use 
the phrase, but we've identified two nonlevel portions of that 
playing field, and one is communication companies competing 
with other communication companies and the disparity in 
treatment there. That requires a solution.
    The bigger problem that is addressed and I think the 
traditional communication companies are very concerned about is 
the difference between tax treatment of communication companies 
and general business, and that's where you have the huge 
disparities in rates and where there is a need for Federal 
solution or Federal guidance that says you can't discriminate, 
States and localities, you can't discriminate against these 
communication companies.
    And as you said, Mr. Chairman, it's no wonder that 
consumers are being driven to other solutions, but you 
eliminate the discrimination that's imposed, and the drive is 
not going to be there.
    Mr. Cannon. Thank you.
    Mr. Rauschenberger. I think we either voluntarily or 
involuntarily at some point surrender some of our freedom for 
the security that government offers. We surrender some of our 
resources for government to spend on common purposes. I think 
tax systems work best if they're simple, broad-based and low-
rate. I would argue the solution that we ultimately need to get 
to for State taxation is a low rate, fair, broad-based 
consumption tax, a modernized sales tax across the States where 
States still have the sovereign right to decide what they want 
to exempt from taxation and the right to set their own rates.
    The solution for telecommunication services, the solution 
for cable services, the solution for the service that we don't 
know about yet is simply to define it into the consumption tax 
base. Make a decision later if you want to exempt it.
    I know we're not supposed to talk about that other bill, 
but really fundamental to solving a lot of these problems is to 
quit treating telecommunications as if it's something 
different. It's not Twinkies, it's the expenditure of funds. We 
ought not to at the State level or the local level charge two 
to two and a half times a tax penalty simply because we've 
historically done it.
    If you think of the tax system in the United States, you 
think of a three-legged milk stool is what I tell people. On 
the one leg, you tax wealth through the property taxes in the 
United States, mostly in the States. You tax productivity 
through income taxes. And the third leg of that stool is sales 
taxes or consumption taxes.
    The solution, I think, in the long run that doesn't 
discriminate between technologies, doesn't pick favorites in 
companies is to move all of those services into the base of the 
consumption tax and make public policymakers who want to argue 
that they shouldn't be in the consumption tax base argue why 
they ought to be exempted or taxed at a higher rate.
    Mr. Cannon. Thank you. I appreciate your time here today. 
This is an issue that I think is remarkably important. I might 
point out that State revenues are at an all-time high in part 
because of the technology boom and in part because of Federal 
tax cuts. Lots of things are happening here.
    This seems to me to be the time States ought to be figuring 
out to rationalize what they're doing. In part, that ought to 
include allowing the driving force, which I think has been the 
Internet, or the network, let's say, more broadly, the 
opportunity for people to enter with a low threshold to get 
over, and that ultimately keeping that threshold low for every 
node on the Internet is probably pretty vital.
    This is a complicated area, we recognize it, and we 
appreciate your input on it, and I suspect we'll have more 
hearings as we pursue the issue. Again, thank you all for 
coming. We are now adjourned.
    We had a markup scheduled, but because of the briefing on 
Iraq, we don't have a quorum, and so we are going to adjourn 
the Committee; not just the hearing, but the full Committee. 
Thank you all.
    [Whereupon, at 5:02 p.m., the Subcommittee was adjourned.]

                                 
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