[Congressional Record (Bound Edition), Volume 150 (2004), Part 6]
[Senate]
[Pages 7730-7733]
[From the U.S. Government Publishing Office, www.gpo.gov]




                           INTERNET TAXATION

  Mr. ALEXANDER. Mr. President, I was just at a luncheon with the 
distinguished chairman of the Commerce Committee, and he wondered where 
I had been in terms of the debate on the Internet tax question. So here 
I am. I am glad to have this opportunity. I know we have been diverted 
to discuss the Energy bill. But I appreciate the leadership creating an 
opportunity to debate these issues.
  As the Senator from New Hampshire knows, who is a member of the 
Commerce Committee, and has a large interest in the fastest-growing 
technology in America, the growth of high-speed Internet access--the 
question of how we approach, in a comprehensive way, the regulation and 
taxation of this new technology--is very important. It is important for 
our economic growth. It is important because, as we do this, we will be 
making, inevitably, major adjustments in terms of the responsibilities 
of State and local governments, and we need to do it right.
  That is why I am encouraged by the fact Senator McCain; Senator 
Stevens; the Commerce Committee; Michael Powell, the Chairman of the 
Federal Communications Commission, all have announced that we need to 
take a new look at the Telecommunications Act of 1996 in light of the 
recent growth of high-speed Internet access.
  I am not happy about the fact we are trying to solve problems that 
ought to be solved comprehensively, for the long term, on a piecemeal 
basis, which is exactly what some are trying to do, by turning a fairly 
innocuous idea--a temporary timeout on State and local taxation of 
Internet access; we are just talking about the connection between my 
computer and AOL or whoever is providing my Internet access; that is 
just a little bitty thing--they have turned that into a debate about 
whether we should give a broad exemption to the entire high-speed 
Internet access industry, and make decisions now about whether State 
and local governments will be able to continue to collect taxes on 
telephone services.
  One of the problems with this debate is that everyone who stands up 
on opposite sides offers different facts and figures and 
interpretations, so a Member of the Senate who is not really studying 
or following this issue closely is easily misled.
  Let me deal with four or five of the misconceptions. First, let me 
talk about what we are talking about. We are talking about high-speed 
Internet access, which was barely known to most Members of Congress 
when the 1996 Telecommunications Act was enacted, not very well known 
in 1998, when we all said--almost all of us said; I said this--let's 
take a temporary timeout. Let's not allow even State and local taxation 
of Internet access until we figure out what it is.
  So we did that for 2 years. We did it then for 3 more years. Now the 
effort is to not just do that permanently but to just say: OK, this is 
a great new invention. Let's just exempt the whole industry from 
taxation.
  High-speed Internet access is now offered in lots of different ways. 
The reason it is so important is because it means that lots of 
different services may come to my home. If I am watching television 
through direct satellite in my home here in the District of Columbia, 
there is a nice young woman who comes on and she advertises that the 
same DirecTV satellite television I have can also supply me with high-
speed Internet access.
  Anywhere I am that I can get DIRECTV, which is most places in the 
world, I can get high-speed Internet access. It seems I get something 
in the mail every day from my telephone company saying they can deliver 
it over the telephone line. That is DSL. I would get something from the 
cable TV, when I had that, that said: We can deliver high-speed 
Internet access to you as well. There are Internet service providers, 
companies who deliver it, such as America Online. Now we are finding 
that high-speed Internet access can be delivered by power companies.
  In other words, there is no problem with making high-speed Internet 
access available to anybody in America who has a telephone wire running 
to their house or business, has an electric wire running to their house 
or business, who can put up a satellite dish or hook into a cable 
television. That covers about everybody. But not everybody has it. More 
Americans have it than in any other country, which I will get to in a 
minute. But this is a new technology. A lot of people have it. In 
Manassas, VA, you can buy it from your electric power company. The same 
people who provide electricity will sell it to you for $25 a month. 
Most cable systems or telephone companies will sell it to you for $30 
or $40 a month. I get things in the mail that offer it on an 
introductory basis for $10 or $15 a month.
  What we are debating is whether State and local governments can apply 
the sales taxes they usually apply to such transactions and whether 
they can apply the business taxes they usually apply to such business 
activities. The tax we are talking about that Tennessee, New Hampshire, 
or Texas might charge might be $1 a month or $2 a month. That is what 
all the fuss is about. If that were all we were talking about, it 
really would not be worth very much of the Senate's time except the 
legislation that we are being offered would do much more than is 
advertised.
  Let me begin by suggesting what it will do or what it could do. I 
don't know why every Governor in America and every mayor in America is 
not sitting in the lobby right now saying to Members of the Senate: Be 
careful about what you are doing because the way we read the latest 
proposal by the distinguished chairman of the Commerce Committee, 
Senator McCain, and certainly the way we read the legislation that came 
over from the House

[[Page 7731]]

that is expected to be put into conference with whatever we produce, 
you put at risk the money State and local governments collect today 
from taxing telephone services.
  If you are sitting at home listening, you might say: Hooray, I don't 
want to pay those taxes. Well, fine. So we take those taxes off. In 
Texas, if we take off the taxes Texas collects on telephone services, 
it is $1.7 billion a year. So if the bill passes in the form it passed 
the House or in the form it is now written in the Senate, we might as 
well call this the Texas new income tax law of 2004 or the Nashville 
higher local property tax law of 2004. Because you cannot put at risk 
billions of dollars of State and local revenues and expect those 
governments to continue to fully fund universities, schools, parks, 
roads, and the other things they are expected to do.
  One might say, well, let them just cut the size of government. I 
could be facetious about this, although I don't want to be because it 
is so serious. Here is a serious analogy. I just had lunch with the 
president of one of the largest car companies in the world. We were 
talking about hybrid cars, the cars that have an electric engine in 
them and an internal combustion engine in them. They are reported, 
according to Toyota Corporation, to get 50 miles a gallon. That is 
pretty good. Gasoline is at record prices. The Middle East is in 
turmoil. We are getting 65 percent of our oil from around the world, 
and our air is dirty. So as a Senator, I think it would be a great idea 
to encourage people to use hybrid cars.
  Why don't I propose a Federal law that stops Tennessee, New 
Hampshire, Texas, and California from charging a State tax on the sale 
of hybrid cars? That would clean the air. That is a good thing. Let's 
do it. You might say: That sounds good, but it sounds odd, too, because 
you are a Federal legislator. Why would you pass a hybrid car act about 
State laws? If you have an expensive idea, why don't you do it 
yourself?
  The Senator from Virginia and the Senator from Arizona have said it 
is not the intention of their legislation to keep States from 
continuing to tax telephone calls, telephone services, even if the 
calls are made over the Internet. That is what was said. But that is 
not what the language of the bill does. I don't think the Senate should 
take any chance that in the State of California we would pass a law on 
such a simple item as exempting Internet access from taxation and have 
the unintended effect of costing State and local governments up to $10 
billion a year in revenues they now collect on telephone calls--not all 
telephone services, just telephone calls.
  In Florida, it is $1 billion a year. So you might call this act, as 
it is now written, the Florida income tax act of 2004, the Tennessee 
income tax act of 2004, the Texas income tax act of 2004, because I 
don't know what other revenue base is left if that much of a sales tax 
is taken away.
  You might ask: Why are you saying it would be taken away? Let's 
assume I am right about the way the law is written. Here is what 
happens. I will use the hybrid car analogy. We might set up a two-tier 
tax system for cars. Buy a hybrid car in Nashville and you will pay 
zero of the Tennessee sales tax. Buy a regular car in Nashville and you 
will pay 6, 7 percent on the cost of the car, I believe up to a 
ceiling. So we will have two tiers. That is what is going to happen 
with telephone calls.
  One of the exciting advantages of this new technology is we will soon 
be making regular telephone calls over the Internet, not over the 
telephone wires. They will be using telephone wires but not in the same 
way. It is a different technology. It is still a telephone call but a 
different way of doing it, just as with a hybrid car. Calls, as they 
move to the Internet, will be free of State and local taxation. That is 
what adds up to about $10 billion a year in State and local revenues.
  That won't happen overnight. The Congressional Budget Office has 
informed us that within the next 5 years, State and local governments 
will lose $3 billion of revenue. I think it will come faster than that. 
Most people who look at VOIP, voice over Internet protocol, believe it 
will and hope it does. I hope it does. I think it is a great advance. 
But I disagree that on this bill, we should decide the question of 
whether State and local governments must stop taxing telephone services 
and start raising property taxes, or sales taxes on food, or institute 
a new income tax to make up for all or part of the revenue you lose.
  I would much rather see the Senate Commerce Committee, over the next 
year or two, consider legislation such as that by the distinguished 
Presiding Officer, which straight out says--if I am stating it 
correctly--that with this new protocol, it should be free of taxation. 
We ought to talk about that. It ought not be snuck into a bill.
  I urge the chairman of the committee and Senator Allen to accept 
plain English language--just take it and change their bill. They asked 
what suggestions we have. I have given this to them several times. Just 
say that nothing in this legislation precludes States from collecting 
taxes they are collecting on telephone services, including telephone 
calls made over the Internet. Save that question for another day. I 
have heard that is their intention. That is not what it says.
  In Alabama, that is worth up to $213 million a year; in Alaska, it is 
$18 million a year; in Arizona, it is $308 million a year; California 
collects $1.5 billion a year. So that is a huge cost to State and local 
governments. It is 5 percent of the Tennessee State budget, to give you 
an example. Senator Feinstein says there are more than 100 cities and 
counties in California that estimate they could lose from 5 to 15 
percent of their revenue. So that is one of the four issues that could 
be easily corrected.
  Another question that has come up quite a bit lately is the idea that 
suddenly we need more Government subsidy for high-speed Internet access 
because the United States is falling behind.
  Well, my view on that is I don't think it is true that we do. But if 
it is true, Congress ought to pay the bill and not send it to State and 
local governments. Just as we think hybrid cars are great and we want 
to give them a subsidy--that is called picking and choosing winners in 
the economic marketplace, which I thought conservatives were not 
supposed to do. If we want to do that for hybrid cars, we should take 
it out of our budget and not tell Governors and mayors to take it out 
of property taxes or take it out of the classrooms to do it. If we want 
to give an advantage to high-speed Internet access, we should pay for 
it. But we ought not to pass this bill because we think we are behind 
in high-speed Internet access. There is no real evidence of that.
  For example, in 2002, the United States had the highest number of 
Internet subscribers in the world, nearly 20 million. Eighty-eight 
percent of all ZIP codes have at least one high-speed subscriber; 29 
percent of all ZIP codes have access to five or more providers. The Pew 
analysis recently showed that a quarter of Americans have high-speed 
Internet access in their home and half have it at their workplace.
  Consumers are adopting broadband, high-speed Internet access, at a 
record pace, not a slow pace. There is no emergency in terms of people 
not using this. They are adopting broadband technology at a faster pace 
than CD players. High-speed Internet access is coming in at a faster 
pace than cell phones, color TVs, and VCRs during their development. 
That is according to a report from the Department of Commerce in 2002. 
Cellular phones took 6 years from their introduction to reach 7\1/2\ 
million subscribers. High-speed Internet reached that in 3\1/2\ years.
  High-speed Internet service providers are increasing their investment 
in broadband services. For example, between 1996 and 2001, the four 
largest phone companies increased their investment in broadband 
technologies by 64 percent and cable companies by 68 percent.
  In short, the Congressional Budget Office told us, the Senate, in 
December 2003 that the broadband market is

[[Page 7732]]

booming. In its report to us in December of 2003, ``Does the 
Residential Broadband Market Need Fixing?'' the CBO analysis also 
concluded that ``Nothing in the performance of the residential 
broadband market suggests that Federal subsidies for it will produce 
large economic gains.''
  This is CBO. ``Nothing in the performance of the residential 
broadband market suggests that Federal subsidies for it will produce 
large economic gains.''
  So, then, why are we coming with a bill that would give more big 
subsidies? I have reviewed the fact that, because of the language in 
the latest proposal by the chairman of the Commerce Committee, up to 
$10 billion of State and local tax collections on telephone companies 
are at risk. If you take that away, that is a subsidy to a company.
  You can subsidize a company in one of two ways. You can give it some 
money or you can say you don't have to pay taxes like everybody else 
does. That is a flatout subsidy. That is not the only subsidy. I 
mentioned to the distinguished chairman, the Senator from Arizona, that 
it seems to me that insofar as my research indicates, high-speed 
Internet access is a lot like ethanol. It is hard to find anything that 
has more subsidy. According to the Congressional Research Service, the 
Congressional Budget Office identified three programs totaling $4.8 
billion in subsidy, a Federal subsidy for promoting the adoption of 
high-speed Internet access. They are already in place--$4.8 billion of 
Federal subsidy for high-speed Internet access.
  Established in 1996, the Telecommunications Act provided subsidies 
for schools and libraries, subsidies for rural health care providers. 
The Farm Security and Rural Investment Act of 2002 authorizes $20 
million per year for loans and grants.
  Then I have the Alliance for Public Technologies' report on all of 
the State and local broadband policy experiments in the State. In 
virtually every State in America, there is a spending of taxpayer 
dollars to encourage the spread of high-speed Internet access.
  Yesterday, I used the example of Texas. Texas set up a fund in 1995 
to spend $1.5 billion over 10 years to provide telecommunications 
access to public schools, hospitals, libraries, and institutions of 
higher education. Almost every State is doing it. So let's take how 
this works as an example.
  If this bill passes--and if I am reading the McCain proposal right 
and it affects telephones the way I believe it does--this is what 
happens in Texas to broadband. They are spending $1.5 billion already 
to encourage the spread of broadband in public institutions. Texas also 
has a law put in by President Bush when he was Governor in 1999; I 
think it is a good law. By the way, I think we ought to adopt that. I 
think it is exactly the way to encourage permanently the growth of 
high-speed Internet access, if that is what we want to do.
  Texas, in 1999, said it is the law of Texas that the first $25 is 
exempt of everything to pay for Internet access. So that would save you 
maybe $1 or $2 a month. That is what the tax would be in Texas on high-
speed Internet access. You can get it anywhere from $20, to $40, or 
$50, depending on who sells it to you. The prices are coming down 
because of the competition.
  So you have $1.5 billion in Texas at least to encourage it. You have 
an exemption for every single person in Texas who wants to sign up. The 
first $25 is already exempt.
  Now here we come with our bill. What does it do? It does a lot more 
than exempt Texans from tax on Internet access. First, I believe it 
puts at risk up to $1 billion of revenues in sales taxes the State 
collects today on telephone services. That is one.
  Second, it stops Texas from collecting business taxes on telephone 
companies it normally would collect on any company that does business 
in the State. The definition of the latest proposal by the 
distinguished Senator from Arizona says we are not just talking about 
the hookup, Internet access between the end user and the provider, we 
are talking about the whole industry. We are talking about that, that, 
that, and that--in other words, all the way through.
  Let's go back to the example of the hybrid cars. It would be like 
passing a Federal law saying you cannot collect the State tax in 
Arizona or Tennessee on the sale of a hybrid car because it is a great 
new invention. Not only that, you cannot collect a sales tax--if you 
are an auto parts supplier in Tennessee--you can't collect a tax there. 
And if they brought steel to the auto parts supplier, you cannot 
collect a tax there.
  None of us like to pay taxes, but when we lower State and local taxes 
here, we are inevitably raising State and local taxes there. Lowering 
taxes in this amount of money by direction from Washington, DC, 
inevitably makes this the Higher Sales Tax Act of 2004, the Higher 
Local Property Tax Act of 2004 because every mayor and every Governor 
is going to be scrambling to figure out: We lost all this revenue 
because the Congress in its wisdom had the idea to give a big subsidy 
to the high-speed Internet access business, and we are going to have to 
find a way to pay for the schools, to keep from raising tuition so 
much, to pay for health care, and to open the parks. So we are going to 
have to close them, cut them back, or raise the sales tax on food and 
raise the property tax. That is why we usually leave those matters to 
mayors and Governors and do not do it from here.
  We are all for home ownership, but we do not pass a Federal law to 
lower property taxes. We all want our corporations to stay in the 
United States, and we do not want them to have high local taxes any 
more than high Federal taxes, but we do not pass a Federal law lowering 
the local corporate income tax.
  That is why I am perplexed by this bill. The idea that by adding a 
subsidy we would encourage the use of high-speed Internet access when 
it is already, according to the New York Times last week, the fastest 
growing technology in America, when already it is being accepted more 
rapidly than VCR and all these other innovations I do not agree with. 
The idea that it needs more taxpayer support I do not agree with.
  Let's throw that item completely out the window and say if we do 
believe it needs a subsidy, then why do we send the bill to State and 
local governments? We promised not to do that. Mr. President, 300 
Republicans stood over on the steps of the Capitol in late September 
1994 and said: No money, no mandates. If we break our promise, throw us 
out.
  I thought we were the party on this side of the aisle of no Federal 
unfunded mandates. That was a big movement back then. Everybody got 
fired up about it. I heard it. I was running around the country trying 
to offer myself for higher office, which the people rejected. I know 
the great Contract with America was no more unfunded mandates. I 
remember Senator Dole saying when he was majority leader the first act 
on the part of the Senate was no more unfunded mandates. In fact, this 
unfunded mandate might be so large that according to CBO's letter to 
us, they cannot calculate how much it will be, although they know it is 
enough to make it an unfunded Federal mandate.
  Why would we do that? Why don't we do what Texas did? Texas did a 
very direct thing. They said the first $25 you pay every month is 
exempt from State and local taxes. It could be $30, it could be $35, it 
could be $40. Then we won't have any argument about definition. We 
would not have to worry about whether we were subsidizing companies 
instead of consumers, and we would actually be giving a benefit to the 
individual American--maybe there will be 100 million of them 1 day--who 
subscribe to high-speed Internet access, and we say no State and local 
taxes at all, none on you.
  The States have asked us to do that, and we have not done it. I don't 
know why. That also is an unfunded mandate, but it is not much money. 
The way we are doing it is a lot of money. It is at least hundreds of 
millions of State dollars a year, and the way this latest bill is 
written, it could be billions a year of State and local revenues.

[[Page 7733]]

  I thought the National Governors Association letter was thoughtful 
and respectful and acknowledged the hard work all sides have done on 
this issue. That is why it is such a hard issue, maybe, because it 
ought to be easy. It ought to be a small amount of money and a fairly 
simple issue. But it has been written into a complex issue with the 
possibility that it might run a Mack truck through State and local 
budgets.
  The National Governors Association yesterday suggested the proposal 
by the Senator from Arizona falls short of their hope of balancing the 
interests of State sovereignty and State responsibility with the desire 
for keeping high-speed Internet access free of excessive taxation. They 
talked about the specific issues I suggested in my letter to the 
chairman earlier this week and that formed the basis for amendments I 
have filed.
  One, the definition. Instead of using the definition of the original 
moratorium in 1998, the one we all agreed to in 1998 and 2000, instead 
of saying let's do that permanently or do that again, they have cooked 
up a new definition. This definition is the one that runs the risk of 
costing State and local governments so much. That is one.
  Second, the language--and this may be inadvertent and if it is, maybe 
I can ask the Senator from Arizona if there is a way we can agree on 
how to fix it. If we agree we do not intend to keep States from 
continuing to collect State and local taxes on telephone services, even 
telephone calls made over the Internet, then we ought to get that issue 
off the table, and surely we can find somebody who can write that in a 
sentence to which we can all agree.
  Then there is the term. I applaud the leadership of those Senators on 
the Commerce Committee who want to address this issue. I think if we go 
4 years, which is better than permanent, but if we go 3 or 4 years, we 
run the risk of freezing into the law provisions that will be much 
harder for the Commerce Committee and the full Senate to change. Then 
there is the question of the so-called grandfather act which allows 
States already collecting taxes to keep doing that.
  Those are all the issues we have here. One is the definition, one is 
telephone, one is term, and one is grandfather. That is tantalizingly 
close, it would seem to me, but the one that makes the most difference 
is the definition, which means for the first time, States will not be 
allowed to apply business taxes to the high-speed Internet industry in 
the same way they normally would other businesses for the first time. 
They are not collecting these taxes.
  The other issue is the language, we believe, in the latest draft and 
certainly the language in the House bill runs the substantial risk of 
over time costing the States up to $10 billion a year in sales taxes, 
and the House bill another $7 billion in business taxes now collected 
on telephone services.
  I do not want to overstate that point. That is not going to happen 
tomorrow. It is going to gradually happen as telephone calls are made 
over the Internet.
  So that would be my hope since we have narrowed it down to that, and 
one of them may not be an issue at all, but that is pretty close. I do 
not know much more that I can say about it except--well, I can say a 
whole lot more about it. I have stacks of stuff and I will be glad to 
stick around and talk about it if anybody wants to. I do have the 
hearing I am expected to chair at 3, but I would say to the 
distinguished chairman from Arizona that I hope he understands I am not 
persisting in this just for the purpose of being obstinate. I feel very 
deeply, from my background as Governor, that it is important for us to 
respect the ability of State and local governments to fund their 
programs.
  Since I left the Governor's office in Tennessee in 1987, Federal 
funding for education has gone from 50 cents out of every dollar to 40 
cents. Most of that has gone to higher education. Our chances for job 
growth and a high standard of living depend to a great extent on the 
ability of State and local governments to properly fund colleges and 
universities and create schools our children can attend.
  Any time we take away resources from State and local governments, 
that does not sound like the Republican Party. President Reagan was 
giving resources to State and local governments. President Eisenhower 
was giving resources to State and local governments. Last year, we sent 
a welfare check to State and local governments of $20 billion, and this 
year we are talking about taking back up to at least $10 billion a 
year. That is my objection.
  We could have a separate debate about whether the subsidy is 
warranted and, if it is, well, we could pay for it from here. But 
surely we would not send the bill to State and local governments.
  The PRESIDING OFFICER. The Senator from Arizona.
  Mr. McCAIN. Mr. President, I look forward to discussions with the 
Senator from Tennessee and the Senator from Delaware. As they know, we 
have a meeting with Secretary Rumsfeld in 407 in about 20 minutes, and 
we are going to go back on the bill at 4. I would be glad to have 
discussions. Meanwhile, I hope there would be some amendments proposed 
by the opponents of the legislation, and we could dispose of them as we 
did yesterday with the Senator from Texas, who came forward with an 
amendment and we debated it. Unfortunately, neither the Senator from 
Tennessee, nor the Senator from Delaware, nor the Senator from Ohio 
have chosen to do so.
  Usually, I like to do business by amendments, debates, and votes. 
That is the way we usually like to move forward legislatively.
  I look forward to that opportunity and also engaging in any 
discussions which the Senator would like. I want to assure him I am 
very confident in the sincerity of his views on this issue and his 
commitment to the issue. I understand his background as a very 
successful Governor of the great State of Tennessee which gives him a 
perspective for which I am greatly appreciative.
  We are still in morning business?
  The PRESIDING OFFICER. The Senator is correct.
  Mr. McCAIN. I ask unanimous consent that I be allowed to finish my 
statement, which I hope will be done by 2:55. If not, I ask unanimous 
consent to finish my complete statement.
  The PRESIDING OFFICER. Without objection, it is so ordered.

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