U.S. GOVERNMENT PRINTING OFFICE

63–103CC WASHINGTON : 2000

THE TRUTH IN TELEPHONE BILLING ACT OF

1999 AND THE REST OF THE TRUTH IN

TELEPHONE BILLING ACT OF 1999

HEARING

BEFORE THE

SUBCOMMITTEE ON TELECOMMUNICATIONS,

TRADE, AND CONSUMER PROTECTION

OF THE

COMMITTEE ON COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

ON

H.R. 3001 and H.R. 3022

MARCH 9, 2000

Serial No. 106–127

Printed for the use of the Committee on Commerce

(

(II)

COMMITTEE ON COMMERCE

TOM BLILEY, Virginia, Chairman

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

MICHAEL G. OXLEY, Ohio

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

Vice Chairman

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

BRIAN P. BILBRAY, California

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

TOM A. COBURN, Oklahoma

RICK LAZIO, New York

BARBARA CUBIN, Wyoming

JAMES E. ROGAN, California

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

JOHN D. DINGELL, Michigan

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

RON KLINK, Pennsylvania

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

TOM SAWYER, Ohio

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

JAMES E. DERDERIAN, Chief of Staff

JAMES D. BARNETTE, General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON TELECOMMUNICATIONS, TRADE, AND CONSUMER PROTECTION

W.J. ‘‘BILLY’’ TAUZIN, Louisiana, Chairman

MICHAEL G. OXLEY, Ohio,

Vice Chairman

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

BARBARA CUBIN, Wyoming

JAMES E. ROGAN, California

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

ROBERT L. EHRLICH, Jr., Maryland

TOM BLILEY, Virginia,

(Ex Officio)

EDWARD J. MARKEY, Massachusetts

RICK BOUCHER, Virginia

BART GORDON, Tennessee

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

ELIOT L. ENGEL, New York

ALBERT R. WYNN, Maryland

BILL LUTHER, Minnesota

RON KLINK, Pennsylvania

TOM SAWYER, Ohio

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

JOHN D. DINGELL, Michigan,

(Ex Officio)

(III)

C O N T E N T S

Page

Testimony of:

Breen, Kevin, Vice President, Consumer Operations and Billing, AT&T ... 11

Eisenach, Jeffrey A., President, Progress and Freedom Foundation ........... 14

Hotka, Cathy, Vice President, Information Technology, National Retail

Federation ...................................................................................................... 29

Lassman, Kent, Deputy Director of Technology and Communications,

Citizens for a Sound Economy Foundation ................................................. 32

Moir, Brian R., Partner, Moir & Hardman, on behalf of International

Communications Association ....................................................................... 36

Norquist, Grover G., President, Americans for Tax Reform ......................... 22

Material submitted for the record by:

American Library Association, letter dated March 9, 2000, to Hon. W.J.

Tauzin ............................................................................................................ 49

Neel, Roy, President and CEO, United States Telecom Association, prepared statement of ........................................................................................ 49

(1)

THE TRUTH IN TELEPHONE BILLING ACT OF

1999 AND THE REST OF THE TRUTH IN

TELEPHONE BILLING ACT OF 1999

THURSDAY, MARCH 9, 2000

HOUSE OF REPRESENTATIVES,

COMMITTEE ON COMMERCE,

SUBCOMMITTEE ON TELECOMMUNICATIONS,

TRADE, AND CONSUMER PROTECTION,

Washington, DC.

The subcommittee met, pursuant to notice, at 10:06 a.m. in room

2322, Rayburn House Office Building, Hon. W.J. ‘‘Billy’’ Tauzin

(chairman) presiding.

Members present: Representatives Tauzin, Oxley, Cox, Largent,

Cubin, Bliley (ex officio), Markey, Eshoo, Engel, Wynn, Luther,

Green, and McCarthy.

Staff present: Linda Bloss-Baum, majority counsel; Cliff Riccio,

legislative clerk; and Andy Levin, minority counsel.

Mr. TAUZIN. Good morning, and welcome.

The Chair will recognize himself for an opening statement.

Before the deregulation of the Bell System in 1984, telephone

service was provided by a few companies that were generally subject to public utility taxes. These taxes were typically passed on to

consumers as part of the rates they were charged. These taxes

have always been an accepted expense of the carriers, who paid

them in exchange for the special monopoly status granted to them

by the local authorities.

But we all know that the telecommunications world is much different today than it was in 1984. Thanks to the Telecommunications Act of 1996, in fact, special monopolies have been subject

to special utility taxes and are now competing with new entrants—

in fact, new technologies altogether. However, many taxing authorities continue to levy the same types of taxes that traditionally

were reserved for wire line monopolies on the competitive technologies of today. In fact, so many of these taxes exist today that

it is nearly impossible for consumers to understand who is taxing

their phone service and how much of those charges are dedicated

to Federal, State, and local government programs.

I might add parenthetically that these taxes on the carriers, according to one survey, went up 62 percent in a 12-year period, and

those taxes on carriers end up being real taxes now on the Internet, as the carriers become Internet service providers.

In response to this, I have joined with Chairman Bliley last fall

in introducing H.R. 3011, the Truth in Telephone Billing Act of

2

1999. The bill requires that telecommunications carriers identify

the government programs for which the carrier is being taxed, the

form in which the tax is being assessed, and a separate line item

that identifies the dollar amount of the subscriber’s bill that is

being used by the carrier to pay for the government program.

Today, many municipalities have decided to extend the traditional public utility type taxes to telecommunications services. In

recent years, additional fees have been imposed on consumers’ bills

to fund special public service programs such as 911 emergency

services and hearing impaired services. In some municipalities, the

total amount of monthly service that is attributable to State and

local taxes is as high as 35 percent.

These local fees, of course, are all in addition to the Federal tax

requirements such as the Federal excise tax, the e-rate tax, and the

Federal universal service fund fee. That is even hard to say.

The result is that in some States hundreds of different State and

local taxes and fees apply to the sale of telecommunications services. Consumers, we believe, have the right to know what these

charges are and to understand where a large percentage of their

phone bill is going every month.

Among our panel of esteemed witnesses this morning we have

with us Mr. Jeffrey Eisenach, president of the Progress and Freedom Foundation. His organization has recently released a report

entitled, ‘‘The High Cost of Taxing Telecom.’’ This report finds that

high telecommunications taxes slow the spread of Internet access

and discourage the deployment of broad-band networks needed for

the next generation of Internet growth.

I, of course, am very concerned about this unintended circumstance resulting from telephone taxes. If 10, 20 percent of the

American public will not have access to Internet services because

of the level of telephone taxes, that ought to be a concern to everyone on this panel and everyone in the Congress.

I hope that by educating consumers about the magnitude of these

taxing programs we might be able to simplify the process and

speed the deployment of new technology in the future.

Of course, part of our wish is that, by putting the spotlight on

this huge tax burden being paid by telephone consumers in America, we might just discourage taxing authorities, including the one

in which I am a member, to consider repealing or reversing some

of this taxing policy.

I look forward to the testimony from this fine panel this morning.

I am anxious to hear your thoughts on the bill, 3011, and Mr. Markey’s complementing bill, H.R. 3022, which requires disclosure of

not only the taxes but all the subsidies that are received by consumers on each month’s bill.

I want to thank you for being here and yield to my friend, Mr.

Markey, for an opening statement.

Mr. MARKEY. Thank you.

I want to commend Chairman Tauzin for calling this hearing this

morning on telephone billing issues. I believe that this is a useful

exploration of universal service issues.

Legislation introduced by our esteemed committee colleagues,

Chairman Tauzin and Chairman Bliley, seek to assure that teleVerDate 11-MAY-2000 09:24 Oct 25, 2000 Jkt 010199 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 E:\HEARINGS\63103.TXT pfrm07 PsN: 63103
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communications fees and taxes are adequately listed on consumer

telephone bills.

This legislation is designed to get at one of the critical issues in

telephone billing, which is that some of the universal service fees

simply are not listed on customers’ consumer telephone bills.

This is true most notably of access charges, which are often significant dollar amounts on a consumer’s bill, but do not appear

anywhere listed as a separate fee.

I think most consumers would be shocked to see how much they

pay in access charges, and the legislation introduced by Chairman

Bliley and Chairman Tauzin seeks to remedy that situation.

I have introduced companion legislation called, ‘‘The Rest of the

Truth in Telephone Billing Act of 1999.’’ I offer the Rest of the

Truth to point out that a listing of fees and taxes only provides half

of the story. The other half of the story is the subsidies in the telecommunications marketplace, which I believe need to be made just

as explicit on a consumer’s bill as the fees and taxes, in order to

fully inform consumers of what they do and do not pay for when

they subscribe to telecommunications services.

Mr. Chairman, as most of us are well aware, the telecommunications marketplace is rife with subsidies. In my view, many of

these subsidies are quite noble in intention and help to pay for affordable service for the poor and rural consumers. Other fees are

designed to ensure that kids and schools get access to the skill set

they will need to compete in a post-GATT, post-NAFTA, knowledge-based economy.

Yet, many of these subsidies reflect a historic monopoly marketplace and should be revisited as the marketplace changes. The

truth is that many consumers in America today pay too much to

support a bloated subsidy system that was designed to support inefficient, monopoly provided service.

As efficiencies arrive in the marketplace due to technological

changes and the competitive entry of new providers, I believe that

many subsidized services could be provided at lower cost, and

therefore less subsidy than previously provided.

Providing subsidies sufficient to keep costs low in rural America

and for inner-city poor or to hook up schools and libraries ought to

be done in a manner that reflects the actual cost of providing the

service.

In order to ensure that we give consumers the rest of the truth

in telephone billing, I suggest giving consumers all of that information—what fees and taxes they pay and what subsidies they are receiving or delivering.

If my father in Boston is subsidizing someone in a rural part of

New England, my father should know that each month, and so

should the rural citizen know that he is being subsidized by my father, a retired milkman. He delivered. He was at the retail end of

the milk business. He was not out in the farm, but he certainly is

not someone who has been left the legacy of a great pension because of his work, either.

Consumers should know whether they are paying $8 in fees or

$18 in taxes. They should know whether they are simultaneously

receiving a hitherto implicit subsidy to the tune of $2 or $200.

4

I look forward to working with Chairman Bliley and Chairman

Tauzin on their legislative proposal and to discussions with our

other colleagues, both urban and rural, on how we can better ascertain the true cost, true taxes, true fees, and true subsidies embedded in the telecommunications bills that consumers pay monthly.

Thank you, Mr. Chairman.

Mr. TAUZIN. Thank you, Mr. Markey.

The Chair is now pleased to welcome the author of the legislation, the chairman of our full committee—who, by the way, made

an extraordinary announcement, of course, yesterday. I wanted

first of all to acknowledge that announcement and to wish Mr. Bliley all best wishes for a new career. But I would like to remind you

of something which will save him the trouble of reminding all of

you—he may be leaving, but he is not gone yet. He is still chairman of our committee and he is still going to have an enormous

amount to say about what we do this year, and this is one of those

issues that he has asked me to help him to work this year and to

complete into legislative form.

I want to welcome him and congratulate him for his great years

of service in this Congress and wish him the best with the new announcement, but, more importantly, to thank him for leading on

this issue, as he has led on so many issues in the Commerce Committee, and to deliver his opening statement at this time.

The chairman of the full committee, Mr. Bliley.

Chairman BLILEY. Thank you, Mr. Chairman, and thank you for

those kind words. I also want to thank the ranking member, the

gentleman from Massachusetts, for the many kind words he said

last night in his statement. I would hope that he would make an

appointment down at St. Peter’s to go to confession.

This is an important hearing, and this is an important issue for

this committee. Our joint Truth in Telephone Billing legislation,

H.R. 3011, is based on a simple idea that consumers should know

when their government is taxing them.

I am going to submit my full statement for the record, but this

was brought home to me many years ago, when I served on the city

council in Richmond, and every year, when we needed a few nickels

to bring the budget into balance, we frequently would raise the tax

on telephone and electricity.

Well, finally the telephone company and the electric utility got

smart and went to the State Corporation Commission, which is our

version of the PUC, and said, ‘‘We want this itemized.’’ That was

about 1974. The tax on residential phone service in Richmond by

the city and on electricity has not gone up since.

I had a couple of constituents, as I am sure we all have, stop me

and say, ‘‘I cannot understand this bloody telephone bill, and you

ought to do something about it.’’ And that fueled the idea of putting

this in to just put it on the bill and let the people know. If the people know how much they are paying, the chances of it being increased are extremely remote, I can tell you that.

With that, I yield back and look forward to hearing the testimony

of the witnesses, Mr. Chairman.

Thank you.

[The prepared statement of Hon. Tom Bliley follows:]

5

PREPARED STATEMENT OF HON. TOM BLILEY, CHAIRMAN, COMMITTEE ON COMMERCE

Thank you Mr. Chairman for holding this hearing on what, we all agree, is an

important issue for the telecommunications industry.

Our joint Truth in Telephone Billing legislation, H.R. 3011 is based on a simple

idea that consumers should know when their government is taxing them.

Taxes for telecommunications services have sky rocketed over the past several

years. Thanks to the growth of the industry, telecommunications carriers are now

a ‘‘cash cow’’ for politicians and regulators. Consumers ought to be aware of the

level and degree of this taxation on their monthly bill.

The E-Rate or ‘‘Gore Tax’’ is only one example of what has become a widespread

problem not only at the Federal level but at state and local levels as well. We can

debate the merits of the E-RATE, and other such spending programs all day. But

regardless of whether these programs are worthy of tax-payer dollars, I say consumers have the right to know what they are paying for in their monthly bill. Our

Truth in Telephone Billing Act of 1999 would ensure that consumers see these

charges plainly on their phone bills every month.

The legislation would require carriers to identify who sets the tax: where the

money goes, the assessment, and how much of the bill is being used by the carrier

to pay for the government program.

This is better than today’s system. Today, governments levy the tax on telecommunications service providers. The providers, in turn, pass the cost on to American consumers in the form of higher rates. The tax is buried in rates.

I know this because, last year, the Committee on Commerce conducted a thorough

investigation of the Federal Communications Commission (FCC’s) implementation of

the Gore Tax. We found that the FCC put pressure on the Nation’s largest long distance carriers (on whom the Gore Tax is levied) to withhold information from their

subscribers about the true cost of the Gore Tax.

Congress has enacted similar legislation dealing with taxation of cable services.

As part of the 1992 Cable Act, I included a provision in the law that permits cable

operators to place a line item on consumers’ monthly bills that identifies the portion

of the bill that is attributed to ‘‘franchise fees’’ that cities and counties typically extract from cable operators as the ‘‘price’’ for offering service. Again, while we may

differ on the merits of a spending program, consumers are entitled to know when

they’re being taxed, and for what purpose.

I want to thank the witnesses for appearing before the Subcommittee today on

this important issue. I look forward to your testimony on this important issue for

all American consumers.

Mr. TAUZIN. I thank my friend.

The Chair now yields to the gentlelady from California, Ms.

Eshoo, for an opening statement.

Ms. ESHOO. Thank you, Mr. Chairman.

I want to start out this morning by following up on your introduction of our chairman, Mr. Bliley. I think it is sad news, and I

was really quite rocked when I heard it in California.

Mr. Bliley, I want you to know that you will be missed here enormously. You still have a ways to go before you walk out, but I just

cannot help but think of your very first meeting as the chairman

of the full committee, when you quoted from St. Francis. I felt privileged to be joining a committee that had you as the chairman and

your starting out that way. You know that I have a great deal of

respect and regard for you. You have been fair and tough, but I

think that we have gotten a lot done together, and I look forward

to working with you for the rest of this Congress.

I really feel that I have made a friend. Whether you are in the

Congress or back in Richmond, I know that our paths will cross,

and I want you to know that you always have a friend in me and

I wish you godspeed.

I am glad that we are having this hearing. I think that the testimony today is intended to provide consumers with greater detail in

the billing information they receive. The legislation I think atVerDate 11-MAY-2000 09:24 Oct 25, 2000 Jkt 010199 PO 00000 Frm 00009 Fmt 6633 Sfmt 6602 E:\HEARINGS\63103.TXT pfrm07 PsN: 63103
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tempts to accomplish this goal by listing every tax, as well as subsidies, included in a customer’s bill.

I commend you, Mr. Chairman, and the other sponsors of the legislation, for seeking to improve the accuracy of billing for the consumer.

I believe in the simple goal that consumers have a right to know

what they are paying for when they pay their telephone bill. I also

think we should apply some common sense to these efforts.

Most consumers review with great interest, as I do—when I got

into my apartment very late last night, my telephone bill was

awaiting me, and I went right to the extra sheets to see how the

total amount of the bill had been calculated. So I think they have

a great interest in the calls that they make and the charges that

are listed in their monthly bill, but I do not think that they quite

understand the confusing and complicated explanations of surcharges and other regulatory information they receive.

I just, on my long distance bill, for 3 months been trying to, with

telephone calls to the Congressional liaison of AT&T, figure out

what the extra bill was that I was paying. It went to my California

address.

So I think that there is something to be done about the complicated and confusing information that we need to take into account, but I also do not think that we need accountants to decipher

them.

So the goal of the legislation to educate the consumer on the

taxes they are paying when they receive their phone bills is an important goal.

Those of us who support public policies like the e-rate or ensuring that 911 service is available to every citizen must be willing to

explain to our constituents why we support legislation that made

the services possible. I did that when I voted for the Telecommunications Act, and I am proud of that vote.

Consumers should be made aware of the costs and benefits of the

program, but it should also be done in a way that avoids confusion

and even more cost to the consumer.

I compliment you, Mr. Chairman, on your goal of increasing the

accuracy of billing information, and I hope in achieving that goal

we can avoid a Federal mandate that turns a telephone bill into

a telephone book and forces the consumer to have an assist from

their CPA.

I think that we need to marry these goals. We need to be very

clear about how we accomplish one and avoid the other.

I look forward to hearing the witnesses today, and I thank you

again, Mr. Chairman, for the hearing.

Mr. Bliley, let us make optimum use of the days that are left in

this Congress, and I pledge to you that I will with you.

Mr. TAUZIN. I thank the gentlelady. I suggest to you I know the

chairman will.

The Chair is now pleased to recognize the vice chairman of the

subcommittee, Mr. Oxley.

Mr. OXLEY. Thank you, Mr. Chairman.

Let me also express my gratitude and support for the chairman

and wish him well in his retirement.

7

As I stated in my statement yesterday, Mr. Chairman, with his

announcement, I will miss the exchange of bow tie and funeral

home jokes versus golf and basketball jokes that we have shared

over the years. We thank him for his leadership, and we want

to——

Mr. TAUZIN. Would the gentleman yield?

Mr. OXLEY. I would be glad to yield.

Mr. TAUZIN. I just want to remind you, the chairman has told me

he has renewed his embalmer’s license. I wonder if you could get

on a basketball team.

Mr. OXLEY. Well, anyway, let me just point out that this tax that

we are interested in has been a hidden tax and it has been with

consumers for a long time. As a matter of fact, staff tells me that

the 3 percent Federal excise tax was originally enacted in 1897 to

fund the Spanish American War. The gentleman from California

and I were discussing it—it probably makes that the most expensive war in history, as it continues to draw money from the ratepayers.

Currently, telecommunications carriers have no obligation to reveal to consumers what these taxes are, and our bill would certainly improve that.

I wish we could make more progress on the actual issue of the

e-rate and other taxes. By enacting the e-rate, the FCC clearly

stretched Congressional intent far beyond any reasonable limit of

the language in the 1996 Telecommunications Act, and, as a conferee on that important piece of legislation, I can tell you that it

clearly was not the intent, that the FCC has pushed well beyond

the intentions of the Conference Committee. It set a goal far beyond its means and then stuck consumers with the tab, which they

continue to pay.

If we can at least shed a little light on the telephone bill, that

is an improvement I am happy to make, and so I thank the sponsor

of the bill and look forward to a spirited debate from our panel.

Thank you.

Mr. TAUZIN. I thank the gentleman.

The gentleman, Mr. Luther, is recognized.

Mr. LUTHER. Thank you, Mr. Chairman. And I thank you for

holding this hearing. I think there is some excellent information we

can gain on this particular issue.

It seems to me—and I really address this to the panelists—that

the bills that we are talking about talk about disclosure, and, obviously, disclosure is one step, but beyond that we should, it seems

to me, be talking about how do we disclose the information in a

meaningful way that is understandable to consumers; because to

just disclose and then feel like we have accomplished it by having

a bill, as other members here have said, that looks like a telephone

book or looks like a bill where there are all these numbers and different acronyms and whatever—that really does not get to the

heart, I think, of what consumers are asking for.

I get complaints. I am sure many other members here get complaints from consumers who are simply unable to grasp what is

going on with their telephone bills today. And I think we are talking about a couple thousand telecommunications companies operating in our country.

8

So it seems to me our challenge extends beyond disclosure. Disclosure is one step, but then, beyond that, how can this be put in

an understandable form so that the average person can understand

what this bill is about? Then they will be empowered to do something. Short of that, I do not think the average consumer is going

to feel empowered unless they can actually understand this and

then take action based on what they have learned.

So that is the point I simply wanted to make, and I thank you

very much again for the hearing and I look forward to the testimony.

Mr. TAUZIN. I thank the gentleman for his statement.

The Chair recognizes the gentleman, Mr. Cox, for an opening

statement.

Mr. COX. Thank you, Mr. Chairman.

I am pleased that we are holding this hearing today on the need

to improve disclosure to consumers about the taxes that governments impose on telephone service, and I support Chairman Bliley’s Truth in Telephone Billing Act, H.R. 3011, which will require

explicit disclosure to consumers of the many hidden taxes and

cross-subsidies that are now embedded in our phone bills.

I routinely get letters from constituents complaining about this,

and I would just like to share a few of them with you, because they

make the point so well.

Maurice from Laguna Hills wrote, ‘‘If you want to do something

about taxes, start with our monthly phone bills. As you can see, on

my most recent bill my phone charges are $9.87 and my taxes are

$6.19. This amounts to a 62.7 percent tax on my phone bill. I suggest you read your phone bill line-by-line some day. Even Cunard

cannot figure his out.’’

Sam from Newport Beach writes, ‘‘The Pacific Bell phone bill includes what I refer to as a ‘penalty charge’ for having more than

one phone line per residence. As I read it, these taxes have nothing

to do with access but are just a burden to my pocketbook. All these

confusing and gray words are camouflaged for additional charges.’’

Ron from Alisoviejo writes, ‘‘Why does the network access for

interstate calling tax represent such an outrageous amount, 34 percent? Why are additional telephones in the household singled out

for a higher tax, 54 percent?’’

Ken from Irvine writes, ‘‘Recently I had a second telephone line

installed for Internet access. That line is used for nothing else, not

even local calls. All Pacific Bell charges came to $11.75 a month,

but my bill was $17.92 due to taxes, and a $6.06 a month charge

imposed by the Federal Communications Commission. This one tax,

a tax not even imposed by Congress, accounts for 51.6 percent of

my bill.’’

I am hopeful that today’s hearing will provide us with the impetus to mark up not just the Truth in Telephone Billing Act, to

make it easier for Americans like Maurice, Sam, Ron, and Ken to

understand how government contributes to high phone bills, but

also legislation to reduce or repeal the taxes that they are complaining about.

Today, telephone use is the most heavily taxed service in America, and, except for tobacco, it is the most heavily taxed good or

service in America. The tobacco taxes are intended as a penalty for

9

smoking. We should not be punishing telecommuters and people

who use the Internet at the same time that we are complaining

about the digital divide.

In addition to the FCC-regulated taxes and fees we are talking

about today, the Federal Government also imposes a 3 percent excise tax on telephone service. As my colleague, Mike Oxley, pointed

out, this tax was put in place originally in the 19th century to finance the Spanish-American War, making that the most expensive

war in American history.

It is time that we bring an end to this war, that we end the tax,

and we declare victory. The tax currently costs consumers nearly $6 billion a year. By

the time one adds in State and local telephone and sales taxes,

telephone use is taxed at an average rate of 18 percent, according

to a study by the Committee on State Taxation. And that does not

even include all the hidden taxes and cross subsidies that we will

be looking at today.

Telephone taxes are also among the most regressive taxes on the

books. This is a point of rare agreement between Congress’ Joint

Committee on Taxation and the Treasury Department’s Office of

Tax Analysis. Everybody agrees on this. Poor people are disproportionately hurt by these taxes.

To make matters worse, telecommunication taxes are growing

higher still. This is what has happened just in the last 3 years. The

FCC pushed through the famous e-rate, or I should say the ‘‘infamous Gore tax,’’ which is costing consumers $2.25 billion this year.

Congress did not approve that tax.

The FCC also required every household with a second phone line to pay the local phone company an additional tax of $1.50 a month,

even though the actual costs of maintaining a second phone line

are virtually nil.

The collection burdens, alone, act as a significant barrier to entry

for new competitors. The chairman of the National Governor’s Association, Governor Mike Levitt, recently reported that a telephone

company that wants to do business nationwide has to ‘‘maintain information on 310 separate State and local taxes that are applied

to 687 tax bases.’’ That can translate into as many as 50,000 tax

returns a year. That is why he calls this a ‘‘horse and buggy tax

system that is unsuited to the exploding telecommunications market.’’

Repealing the 3 percent Federal telephone tax, dismantling the

rest of our obsolete system of telephone taxes, will significantly reduce the cost of local and long distance service, it will remove barriers to more vigorous competition, it will facilitate the deployment

of broad-band Internet services, and it will reduce the cost of ecommerce for U.S. firms that do business on line.

I look forward to the hearing. I look forward to the testimony of

our witnesses. And I look forward not only to enacting the bill we

are having a hearing on today, but the repeal of these onerous

taxes, Mr. Chairman.

Thank you.

Mr. TAUZIN. I thank my friend very much.

The Chair is now pleased to recognize the gentlelady from Wyoming, Ms. Cubin, for an opening statement.

10

Ms. CUBIN. Thank you, Mr. Chairman, for holding this important

legislative hearing that will hopefully get to the heart of why consumers’ telephone bills look more like tax statements than utility

bills.

When I purchase a box of cereal at the store, I am charged for

the price of the cereal and maybe sales tax. I do not pay a grocery

store access toll or a local seed growers toll or a flour milling

charge or a tractor fuel tax or a cereal box processing fee. I just

pay for the cereal. It is simple, it is clear, and it is straightforward.

Telephone bills are not simple, they are not clear, they are certainly not straightforward.

Although it seems as if the costs associated with providing telephone service have declined, the average cost to telephone consumers has risen dramatically in the past two decades.

The intent of the 1996 Telecommunications Act was to lower telephone rates, not to increase them. The act was designed to bring

competition to the telephone marketplace, thus driving down the

prices.

Well, we have seen some competition, but my constituents are

asking me why their telephone bills are more now than they were

5 years ago.

A simple answer seems to be that the government has not seen

a tax that it will not levy on the hard-working men and women of

America. The telephone is a luring revenue generator for the Federal Government and for State governments.

Now, we have all talked about how a tax that was assessed to

fund the Spanish-American War is still being assessed. I do believe

that Teddy Roosevelt was a great man and I think he was one of

our finest Presidents, but I think we have held this tax in his

honor long enough, and I, too, would like to completely abolish this

Federal excise tax on telephones, and I have co-sponsored Chairman Tauzin’s bill.

If and when taxes or fees are deemed inappropriate or arcane,

they should always be eliminated. There is no question that phone

bills are confusing. We have to work to make sure that telephone

bills are more customer friendly and work hard toward educating

the American consumer so that they know exactly what they are

paying for and why they are paying for it.

I am glad to support Chairman Bliley’s bill. Again, Mr. Chairman, I thank you for having this hearing.

Mr. TAUZIN. I thank the gentlelady for an excellent opening

statement.

I might point out, as I introduce the panel, that we live in a free

speech society, and yet we have deregulated trucking and abolished

the ICC, and yet we have this amazing regulatory structure over

speaking in America, and taxes, Mr. Cox, that actually exceed the

taxes on tobacco in some local jurisdictions of America. That is

strange.

We are pleased to have a great panel of witnesses this morning,

starting with Mr. Kevin Breen, the vice president, consumer operations and billing at AT&T; Mr. Eisenach, who I referred to before,

with Progress and Freedom Foundation; Cathy Hotka, the vice

president, information technology, of the National Retail Federation; Kent Lassman of the Citizens for a Sound Economy, who has

11

been here often before—and we welcome you again; and Brian

Moir, partner with Moir & Hardman, on behalf of the International

Communications Association; and Mr. Grover Norquist, president

of Americans for Tax Reform, who has often been here to visit with

us on issues common to us.

We thank you all for being here.

We are pleased now to welcome Mr. Breen, the vice president,

consumer operations and billing of AT&T.

Gentlemen and lady, your written statements are part of our

record. I put up with members reading their statements, and I read

my own often, but I do not want you to do that please today. We

have got your written statement. Please kind of conversationally

summarize for us.

We have some beautiful new electronic equipment that is going

to sort of time you, kind of watch it. It will give you a sum-up

warning and a stop warning at 5 minutes, so stick with the 5-

minute rule, if you will.

We will begin with Mr. Breen, with our great appreciation for

your being here, sir.

STATEMENTS OF KEVIN BREEN, VICE PRESIDENT, CONSUMER

OPERATIONS AND BILLING, AT&T; JEFFREY A. EISENACH,

PRESIDENT, PROGRESS AND FREEDOM FOUNDATION; GROVER G. NORQUIST, PRESIDENT, AMERICANS FOR TAX REFORM; CATHY HOTKA, VICE PRESIDENT, INFORMATION

TECHNOLOGY, NATIONAL RETAIL FEDERATION; KENT

LASSMAN, DEPUTY DIRECTOR OF TECHNOLOGY AND COMMUNICATIONS, CITIZENS FOR A SOUND ECONOMY FOUNDATION; AND BRIAN R. MOIR, PARTNER, MOIR & HARDMAN, ON

BEHALF OF INTERNATIONAL COMMUNICATIONS ASSOCIATION

Mr. BREEN. It is an honor to be here today to have this opportunity.

My name is Kevin Breen. I have been in AT&T for over 20 years,

and the last 10 years has been spent performing various and sundry billing-related functions, starting with endeavors to take back

billing responsibilities from the local exchange carriers into AT&T;

managing within-network recording, where the actual capturing of

the data from the switch is done, which ultimately ends up on a

consumer’s bill; and then, for the past 4 years, I have presided over

billing operations for consumers. What that essentially entails is

everything from getting a message onto the proper invoice, betting

the invoice sent to the consumer, handling the processing of the

payment, and then the actual updating of the account.

Several of the points I want to make, or highlights, if you will,

is to emphasize that AT&T has a vested interest of its own volition

to make sure that we are offering consumers the most accurate,

complete, and timely billing experience that is achievable. Competitive forces would dictate that we do no less.

The reality of this is that we put, from an investment standpoint,

tremendous resources, in terms of dollars, some of our very best

people, and leverage our technology to the hilt to ensure that that

can become a reality.

12

This investment ends up manifesting itself in a variety of functions that, when I look at my budget, which let us say is about

$175 million to support consumer billing operations, about a third

of that is directed toward preventative and corrective actions to enhance that billing experience.

We have capabilities to actually monitor the end-to-end billing

process. When there are problems that occur, we go to great

lengths to make sure, down at the individual account level, that

the proper steps are taken to make sure that that customer has the

highest confidence that AT&T is looking to be straightforward and

forthright with them in terms of their billing experience, and that,

in fact, we will go the extra mile to make sure they have a positive

feeling about what we are doing.

The truth is today that a largest portion of the customer inquiries that we get are due to what I am going to call the ‘‘confusion

factor,’’ or an uncertainty that is associated with the complexity of

the billing. I think you have heard some of the comments made

earlier today which would substantiate that.

The fact of the matter is that that places great burden on our

costs, from an infrastructure standpoint, and ends up cycling back

to represent higher pressures in the overall cost that a consumer

would be charged.

The question then on the table is: what could be done? What are

some of the highlights? They are captured in my testimony, but I

want to make sure that they come forward.

No. 1 is to be real clear about what problem we are trying to

solve. I think, as a matter of fact, that most consumers would agree

that being able to clearly and simplistically understand what is on

their bill, giving them that reasonable assurance when they open

that envelope that the charges are there makes sense, that they

were, in fact, actually incurred by them is of our foremost concern.

Some of the ways that we can do that, I believe, are to get behind support of things like the Coalition for Affordable Long Distance and local, make sure that we have a highly competitive local

marketplace to ensure that companies like ours are putting the

very best foot forward that they have toward that consumer experience. I think the repeal of the Federal excise tax has been talked

about here. Certainly, that works toward giving the consumer confidence that they know what they are paying for.

And then, finally, I think it is to have the recognition that natural competitive forces are the primary thing that causes me to do

what I do in the course of my day-to-day execution of responsibilities.

The reality is, for AT&T to stay in business as a viable telecommunications company makes it imperative that we maintain

that above-board, very honest, open relationship with our customers, where they, at the end of the day, say, ‘‘The brand of AT&T

represents a trustworthy brand, the quality that we get from this

company is first cabin, and it is a company we want to continue

to do business with.’’ Thank you.

[The prepared statement of Kevin Breen follows:]

13

PREPARED STATEMENT OF KEVIN BREEN, VICE PRESIDENT, AT&T CONSUMER BILLING

OPERATIONS

Thank you for the opportunity to speak about customer billing and customer care

operations. AT&T strongly supports the principle that consumers are entitled to receive accurate billing information from carriers about the communications services

they offer. After all, the ability of consumers to make informed purchasing decisions

is the foundation of a competitive marketplace. Because consumers depend on such

information, AT&T goes to great lengths—and incurs significant expense—to provide clear information to customers and also to respond promptly and accurately to

customer inquiries. We believe that AT&T’s billing practices consistently meet, or

exceed, common industry standards.

In a nutshell, AT&T’s policy is to provide every reasonable assurance that its customers can determine (1) if the AT&T services listed on their bills are the ones they

have requested, and (2) if the charges for those services are consistent with their

service arrangement. This policy, which AT&T takes very seriously, is not merely

consistent with sound legal principles. It also makes good business sense. Good billing practices are essential to create consumer trust and loyalty, both of which are

critical to maintaining AT&T’s reputation and brand name. At the same time, providing consumers with clear information helps to avoid the costs required to handle

individual customer inquiries and complaints, which are typically at least several

dollars per call. The best consumer billing practices really are best for the industry.

As a result, AT&T and other responsible carriers take great care to assure that

their customers have the information they need to make informed decisions. AT&T

over the past year has provided billing notices and inserts to tens of millions of customers that describe line item charges and the reasons for them. Customers with

questions about AT&T’s billing phrases usually had their questions clarified through

discussions with AT&T customer care representatives. Overall, AT&T spent millions

of dollars to educate its customers on these matters. And our work isn’t done. AT&T

constantly conducts consumer research to assure that our billing services keep pace

with consumers’ needs.

Given this context, the ‘‘confusion cost’’ involved in changing terminology to mandated language would substantially outweigh any benefits of retooling descriptions

on consumer bills. There is also a very real financial cost involved in changing complex billing systems. Industry members have demonstrated to the FCC that billing

system changes are neither simple nor cheap, and they can take significant time to

implement. For example, Ameritech managed to cut corners when they reformatted

their bills recently because the carrier intentionally left legacy software and hardware systems intact. Even so, the project cost $8 million and took 18 months to complete. In an effort to ensure optimal responsiveness to changing conditions in the

highly competitive long-distance marketplace, AT&T tries to maintain a relatively

flexible bill format. Nonetheless, many changes and/or new requirements to the bill,

which appear inconsequential on the surface, necessitate alterations of a more systemic nature. This subsequently requires long and costly lead times to accommodate

necessary design, development, testing and implementation related activities. It is

not uncommon for more ‘‘permanent’’ oriented changes to necessitate lengthy intervals ranging from several months to over a year. Imposing additional systems costs

would be bad news for consumers, who ultimately bear the cost of regulation.

Existing market forces already provide reputable carriers with powerful incentives

to provide their customers with clear information. Billing provides a great opportunity for local competitors to differentiate themselves from the capabilities offered

by incumbent local exchange carriers. ALTS, an association of facilities-based local

competitors, filed comments at the FCC opposing extensive new billing rules, noting

that they ‘‘would tend to mandate mediocrity in billing rather than superior billing

practices.’’ We agree.

In fact, a number of sound practices are common in the industry today. A tollfree number is the easiest and most direct way for consumers to reach vendors, including telecommunications carriers. If a toll-free number is provided, consumers

may raise a question, register a complaint, or obtain information (such as an address) that may be needed to pursue matters that the customer wants to follow up

in writing. Reputable carriers and consumers should not be forced to implement or

pay for cumbersome billing system changes because of the questionable practices of

a small number of bad actors.

Promulgating new billing regulations would be an unnecessary use of the FCC’s

limited resources, which are much better spent on assuring that access rates are

cost-based and that universal service supports are fairly and equitably developed

and applied. The telecommunications industry has formed a coalition that is, so to

speak, ‘‘bipartisan’’ in nature, having the support both of incumbent local exchange

14

carriers and members of the long distance industry. The Coalition for Affordable

Local and Long Distance Service (CALLS) is promoting a plan that would unify the

SLCs, PICCs, and minute-based carrier common line charges into a single SLC. In

other words, the CALLS plan would thin out the ‘‘alphabet soup’’ and simplify the

bewildering rate structure in place today. If Congress truly wants to help clear up

consumer confusion, I would encourage you to support the CALLS plan.

Another positive step that Congress could take is to repeal the Federal Excise

Tax, which was first introduced as a ‘‘temporary’’ luxury tax in 1898 to fund the

Spanish American War. More than a hundred years have passed, yet consumers still

see the Federal Excise Tax as a line item on their phone bill every month—despite

the fact that the war is long over and phone service is hardly a luxury these days.

Repealing this line item from phone bills would benefit consumers in every part of

the country.

Ultimately, consumers are depending on Congress to ensure that real competition

develops in the local telecommunications markets. Full competition will drive inflated local phone bills closer to cost—just as long distance prices have plummeted

under competitive pressure, price competition in the local markets would be great

news for consumers. Already, in just the past year, we’ve witnessed phenomenal

price breaks for high-speed Internet access. SBC originally charged $89 per month

for their entry-level DSL service—now it’s down to $39 because of competitive pressure. Competitors are working hard to create competition in the local markets, but

we need your help. Strict enforcement of the Telecommunications Act is the best

way to deliver benefits to the consumer pocketbook.

To sum up, AT&T believes that the marketplace demands integrity from reputable carriers. It is in our best interest to provide consumers with the clearest information possible about the programs that they are supporting. The long distance

industry provides ample proof that consumers, if given the chance, will indeed use

available information to decide between carriers. Accurate billing gives consumers

the ability to make informed choices, which is essential in a competitive marketplace. And most would agree that competition delivers the greatest consumer benefits.

Thank you.

Mr. TAUZIN. Thank you.

We have a vote on the floor. I think we will have an opportunity

for one more witness before we will temporarily recess the hearing.

Mr. Eisenach?

STATEMENT OF JEFFREY A. EISENACH

Mr. EISENACH. Mr. Chairman, members of the subcommittee,

thank you so much for having me here. It is an honor. I will summarize my testimony.

As Mr. Tauzin indicated, we are doing a good bit of work on the

issue of telecommunications taxes at the Progress and Freedom

Foundation.

It might be useful for me to indicate how we got into that process.

I had the great pleasure and joy of being married 2 years ago,

and my wife moved into my home in Oakton, Virginia, and soon

thereafter I came home from work, and she had been busily having

phone lines installed in her home office. She has the pleasure of

being able to work from home.

And so, as I walked into her office, I found my new wife sitting

there in a state of some agitation and irritation, and I said,

‘‘Honey, what is the matter?’’ And she showed me the phone bills

that she just started receiving on these two new lines.

As we attempted to sort out what was on those phone bills, it

emerged that the taxes accounted for more than 20 percent of the

phone bill—over $12, I think, a month—on her two lines. She found

this a source of great irritation.

15

And I said, ‘‘Honey—’’ being a newly wed husband—‘‘let me see

what I can do about that.’’ Since then, I have had the opportunity

to speak to the National Governor’s Association, to testify before

the Advisory Commission on Electronic Commerce, to now testify

before this subcommittee, and I am doing my best to help my wife

with the problem that she identified, and I can say we are very

happily married today, maybe, in part, as a result of my efforts.

But, having said that, here we are 2 years later, and I must say

to you that, while we have a much better understanding of the nature and extent and level of telecommunications taxes, I still could

not do what I could not do that day, which is sit with my wife and

go through the items on our telephone bill line by line and sort

them out in any comprehensible fashion.

Now, telecommunications taxes are extremely high. Just to make

three quick points, if the current level of telecommunications taxes

in the United States were applied to broad-band services, DSL

services, cable modem services from the cable company, which they

may or may not be, depending on where you are, and if I were to

go to the store and buy my daughter a $600 personal computer,

which I can do today, and if I were to want my 12-year-old daughter to have access to the Internet through a broad-band line, I

would hook her up to a DSL line. And if I were to do so, I would

pay more in taxes on that line during the 3-year life of the computer than I paid for the computer. I would pay more in telecommunications taxes on the phone line to hook me up to the

Internet than for the computer, itself.

Now, in a world where getting 12-year-old daughters hooked up

to the Internet is a major and legitimate public policy goal, why

our first response would be to levy, in effect, a 100 percent marginal tax rate on the ability to do that I find a little bit mystifying.

But it is not just the level of taxes that matters, it is the complexity of taxes. In my testimony I talk a good bit about the source

of that complexity.

Simply put, a lot of the complexity, most of the complexity, results from the fact that telecommunications, despite the Telecommunications Act, remains as regulated, arguably more-heavily

regulated, today as it was in 1996 when we passed the Telecommunications Act. Indeed, telecommunications prices are essentially nothing but a patchwork of cross-subsidies mandated by government regulation.

Add on to that taxes from franchise fees to the taxes, Mr. Cox,

that you mentioned—over 300 separate State and local taxes applied on 700 different tax bases, over 55,000 tax returns filed by

a single national telecommunications provider. In my home State

of Virginia, nearly 4,500 tax returns are filed per year for any company hoping to do business in the State.

It brings to mind a quotation from Appeals Court Judge Learned

Hand, who said, in looking at the income tax, ‘‘In my own case, the

words of such an act as the income tax, for example, merely dance

before my eyes in a meaningless procession. Cross-reference to

cross-reference, exception upon exception, couched in abstract

terms that offer no handle to seize hold of, leave in my mind only

a confused sense of some vitally important but—’’ and I think this

is particularly apt—‘‘successfully concealed report which it is my

16

1The Progress & Freedom Foundation was founded in 1993 to study the digital revolution and

its implications for public policy. A 501[(c)(3) research and educational organization under the

Internal Revenue Code, PFF is funded entirely by private contributions and accepts no government contracts or funding of any kind. More information on PFF is available at its Web site,

at www.pff.org. 2 A major new study by the Committee on State Taxation (COST) provides a wealth of data

on state and local taxation of telecommunications services. See Committee on State Taxation,

50-State Study and Report on Telecommunications Taxation (Washington, DC: Committee on

State Taxation, 1999). This study will make possible far more sophisticated analyses of telecommunications taxes than have been possible in the past.

duty to extract but which is within my power, if at all, only after

the most inordinate expenditure of time.’’

I thought that was particularly appropriate in thinking about all

of our efforts, as has been talked about here, to understand our

telecommunications bills. It is practically impossible.

I think the bills before the committee represent good faith efforts

to move in the right direction. I think there are clearly things that

can be done to improve the transparency of telephone bills. But I

also think, as some people have suggested, that a certain amount

of reasonableness needs to be applied to the workability and ability

of a billing process to fully inform consumers of what is an unreasonably complex pricing process mandated by government.

Thank you.

[The prepared statement of Jeffrey A. Eisenach follows:]

PREPARED STATEMENT OF JEFFREY A. EISENACH, PRESIDENT, PROGRESS AND

FREEDOM FOUNDATION

Mr. Chairman and Members of the Subcommittee, it is an honor to appear before

you today to discuss H.R. 3011, the Truth in Billing Act of 1999 and H.R. 3022, the

Rest of the Truth in Billing Act of 1999.

Before continuing, I should note that while I serve as President of The Progress

& Freedom Foundation, a non-partisan research and educational institution,1 and

also on the faculty of the George Mason University Law School, the views I express

are my own and do not necessarily represent those of the Foundation, its board or

other staff; nor those of George Mason University. However, my testimony is based

in large part on research now underway at The Progress & Freedom Foundation to

examine the nature, extent and consequences of taxes on telecommunications services.

H.R. 3011 and H.R. 3022 represent efforts to make it easier for consumers to understand what they are paying for telecommunications services. Both of the bills

correctly identify the main source of complexity in telecommunications billing, and

hence of confusion among consumers, as the extremely complex array of taxes, fees

and cross-subsidies imposed on telecommunications services by government. My testimony this morning focuses on the nature of these taxes, fees and cross-subsidies.

Telecommunications Taxes in the U.S.

Telecommunications services in the United States are subject to an almost incomprehensible array of taxes at the local, state and Federal levels. Indeed, there are

so many taxing entities levying so many taxes, fees and other charges that there

literally is no comprehensive data source from which a complete listing can be obtained. Nevertheless, it is possible to paint a fairly accurate picture of the overall

level of telecommunications taxes.2

Federal Taxes: The Federal taxes on telecommunications are of three main types.

First, the Federal government levies a three-percent excise tax on all telecommunications services. Second, it imposes fees on telecommunications carriers that are

used to subsidize the provision of telecommunications services, wiring and computer-related equipment at schools, libraries and rural health care centers. Third,

it oversees a complex ‘‘universal service’’ system designed to lower the costs of telecommunications services below costs for some consumers while raising them above

costs for others.

The Federal telecommunications excise tax (FET) adds three percent to the cost

of every telecommunications bill. It covers both long distance and local telephone

service for both residential and business customers. Revenues from the tax are

treated as general revenues. The FET is projected to raise about $6 billion in FY

17

4See Federal Communications Commission, In re: Federal-State Board on Universal Service:

Twelfth Order on Reconsideration in CC Docket No. 96-45 (May 27, 1999). See also Dissenting

Statement of Commissioner Harold Furchtgott-Roth (August 5, 1999). The FCC has gone to

great lengths to ensure that the charges associated with the e-rate are not seen by the public

as taxes. [See, for example, In re: First report and Order and Further Notice of Proposed Rulemaking, Truth-in-Billing and Billing Format; CC Docket 98-170 (May 11, 1999). In this ‘‘truth

in billing’’ proceeding, the FCC effectively prohibited long distance carriers which pay into the

fund from including on their bills a line showing the portion being passed through to consumers.] All documents available at www.fcc.gov. 5The e-rate program has been roundly criticized by academic economists. See, for example,

Jerry Hausman, Taxation by Telecommunications Regulation: The Economics of the E-Rate,

(Washington: The AEI Press, 1998).

2000. As shown below, this makes it the third largest general revenue excise tax

in the U.S. budget, just behind alcohol and tobacco.

Table One: General Fund Excise Taxes 3

Product Revenue

(FY 1998, millions)

Share of On-Budget

Federal Revenue

Alcohol ......................................................................................................................... $7,215 0.53%

Tobacco ........................................................................................................................ $5,657 0.44%

Telecommunications .................................................................................................... $4,910 0.38%

3 Beginning in 1998, revenues from the excise tax on motor fuels were removed from general revenues and dedicated virtually entirely to

the highway trust fund. At nearly $40 billion, the tax on motor fuels is far and away the largest Federal excise tax in terms of revenue

raised. Source: Office of Management and Budget, Budget of the United States: Historical Tables (Washington: Government Printing Office,

1999).

Source: Office of Management and Budget

The second major tax on telecommunications services is the tax levied on telecommunications carriers to support the Federal Communications Commission’s ‘‘erate’’ program. In May 1999, the FCC voted to raise the annual amount of this tax

by approximately $1 billion to $2.25 billion annually.4 These taxes are passed

through by telecommunications carriers as part of their universal service charges

to individual customers.5 Under the FCC’s so-called ‘‘truth in billing’’ rule, of course,

phone companies are prohibited from identifying the e-rate fee as a ‘‘tax.’’

The third major category of Federal taxes levied on telecommunications services

resides in the system of charges and fees access charges associated with ′′universal

service.′′ While a comprehensive analysis of this system is beyond the scope of this

testimony, it includes both explicit cross-subsidies, typically identified as ‘‘universal

service charges,’’ and implicit cross-subsidies that are incorporated in the access fees

local service companies charge long-distance companies for use of the local loop.

Finally, the Federal government oversees the pricing rules that require telephone

companies to charge ‘‘subscriber line charges’’ (a different amount for the second line

than for the first) and number portability charges. These items are essentially discrete components of the price of local telephone service, distinguished from the remainder of the bill by regulatory fiat.

State and Local Taxes: While Federal taxes on telecommunications services are

both high and complex, state and local taxes are both much larger and far more

complex.

As shown in Table Two below, there are approximately 37 different types of taxes

levied on telecommunications services by state and local governments in the United

States. These include excise taxes, franchise fees, right of way charges, gross receipts taxes, license fees, 911 fees, public utility taxes and even special levies for

programs such as poison control centers. In some cases these taxes apply to local

telephone services only; in others they extend across state borders and apply to long

distance services as well. Wireless services are often taxed differently from landline

services, and telecommunications services offered by non-traditional carriers such as

competitive local exchange carriers (CLECs) may in practice be taxed differently

from the same services when offered by traditional carriers.

Table Two: State and Local Telecommunications Taxes

State Local/Municipal

• Franchise Taxes • Franchise Taxes

• Sales & Use Taxes • Sales & Use Taxes

• Telecommunications Excise Taxes • Local 911 Tax

• Gross Receipts Taxes • Excise Taxes

18

6See Jeffrey A. Eisenach, ‘‘The High Cost of Taxing Telecom,’’ Progress on Point 6.6 (September 1999).

Table Two: State and Local Telecommunications Taxes—Continued

State Local/Municipal

• License Fees • Telecommunications Taxes

• Utility Taxes, Utility User Taxes, PUC Fees • Gross Receipts Taxes

• Rental/Lease Taxes • License Fees

• Utility Sales Taxes • Utility Taxes

• Business & Occupation Taxes • Access Line Tax

• Infrastructure Maintenance Fees • Rental/Lease Taxes

• 911 Fees, Emergency Operation Charges, 911 Database Charges,

911 Equalization Surcharge

• Telephone Relay Surcharge/Universal Lifeline

Surcharge

• Intrastate Surcharge • Public Service Taxes

• High Cost Fund Surcharge • Utility Users Tax

• Relay Service, Communications Devices Surcharges, Universal Access Charges• Infrastructure Maintenance Fees

• Access Line Charges • Right-of-Way Charges

• Infrastructure Fund Reimbursement • 911 Fees

• Poison Control Surcharge (TX) • Business & Occupation Taxes

• Public Utility Commission Fees • Teleconnect Fund

• Universal Service Charges, Universal Lifeline Telecommunications

Surcharge

Source: AT&T, The Progress & Freedom Foundation

A recent study by the Committee on State Taxation (COST) found that, taking

into account all of the various state and local taxes on telecommunications in the

United States, there are over 300 separate state and local taxes and fees applied

to almost 700 different tax bases. Altogether, the COST study finds that a telecommunications provider operating throughout the U.S. would have to file over

55,000 tax returns annually. In just one state, my home state of Virginia, a statewide telecommunications company files 4,341 tax returns each year.

Are Phone Taxes Too High?

While the main focus of my testimony is on the complexity of telecommunications

prices, including taxes, it should be noted that consumers may well be frustrated

not just by the complexity of all of the various taxes and fees, but also by their level.

Not counting universal service charges, access charges, subscriber line charges or

number portability charges (that is, counting only funds that go to the government

to fund government programs), the average tax rate on residential telecommunications services in the U.S. is over 18 percent. Federal taxes account for roughly

four percent of this total, while local and state taxes account for 14 percent. In some

localities, taxes account for over one third of a typical telephone bill. (See Attachment One.)

The research now underway at The Progress & Freedom Foundation suggests that

these levels of taxation are excessive when judged by generally agreed upon standards of tax analysis.6

Is Truth in Billing an Achievable Goal?

Given the complexity of the system described above, it is worth considering

whether truth in billing is an obtainable goal—that is, whether it is possible in any

global sense to provide consumers with sufficient information for them to fully understand what is on their phone bills. The unfortunate but obvious answer is that

it is not. This does not mean, however, that we should not try to create as much

transparency as possible. As I understand it, H.R. 3011 would represent a step in

the right direction. H.R. 3022, while its objectives are laudable, would appear to be

a step too far.

Before commenting further on the two bills, let me discuss briefly why global

transparency does not seem to me to be an achievable goal. Simply put, while the

transition to a competitive environment initiated by the Telecommunications Act of

1996 is well underway, the telecommunications business remains very heavily regulated—more regulated, arguably, than in 1996 when the Act was passed. From the

subscriber line charge (higher for second lines than for first lines) to the geographically averaged rates mandated by state regulatory commissions, from access charges

(levied on traditional long distance service but not IP service) to ‘‘life-line’’ services

for low-income consumers, from the Federal universal service fund (subsidizing

19

7Scott Palladino and Stacy Mazer, Telecommunications Tax Policies: Implications for the Digital Age (Washington, DC: National Governors’ Association, 2000). 8 Rep. Thomas Bliley, Congressional Record, October 5, 1999, p. E2027. 9 Jeffrey L. Yablon, ‘‘As Certain as Death—Quotations About Taxes (Expanded 2000 Edition),’’

Tax Notes, January 10, 2000.

rural and high cost areas) to the TELRIC pricing scheme (intended by the FCC as

a subsidy for new entrants), telecommunications prices are essentially nothing but

a patchwork of cross subsidies mandated by government regulation.

Taxes only complicate the picture further. As the National Governors’ Association

points out in a report released last month, ‘‘Taxes imposed on telecommunications

are a remnant of the days when the industry was a regulated monopoly.’’ 7 Indeed,

tax policy has not kept up with either the move towards competition nor with technological change.

For example, broadband services offered by cable companies appear generally to

be subject to cable franchise fees levied by local governments. Similar services offered through the telephone company infrastructure are, of course, not subject to

cable franchise fees, but may or may not be subject to telecommunications taxes,

depending on who is offering the service and what other services (e.g. Internet access) are bundled with it. Such inconsistencies represent discrimination in favor of

some companies (and their consumers) and against others.

As Mr. Bliley accurately pointed out in his remarks last October upon introducing

H.R. 3011, ‘‘rather than make the case for more government spending directly to

the people, governments instead levy the tax on telecommunications service providers...[R]egulators then pressure the service provider to bury the tax in its

rates.’’ 8 The result of this process is the extraordinarily complex set of local and

state taxes discussed above.

Again, changing technology is exacerbating the problem: Last week, for example,

CTIA President Tom Wheeler testified on legislation in the Senate that would provide for ‘‘uniform sourcing’’ on taxes applied to cellular telecommunications services

by state and local government. In his testimony, he pointed out that, during the

course of a trip from Baltimore, MD to Philadelphia, PA, a cell phone user passes

through 12 different taxing jurisdictions, each with its own rates and rules—rates

and rules which are not only complex but may well be inconsistent.

With all this in mind, imagine trying to provide today’s telecommunications consumers with a ‘‘global’’ understanding of their phone bills. It brings to mind what

Supreme Court Justice Learned Hand once said of the Income Tax:

In my own case, the words of such an act as the Income Tax, for example,

merely dance before my eyes in a meaningless procession; cross-reference to

cross-reference, exception upon exception—couched in abstract terms that offer

no handle to seize hold of—leave in my mind only a confused sense of some vitally important, but successfully concealed, purport, which it is my duty to extract, but which is within my power, if at all, only after the most inordinate

expenditure of time.9

In short, we have created a system which is complex beyond the ability of even

the experts to understand. Only by reducing the complexity of the system can we

hope to achieve the ultimate objective of more comprehensible telecommunications

prices.

We can begin this process by adopting incremental reforms that reduce complexity. At the Federal level, some proposals now under consideration would represent important moves in the direction of greater simplicity:

• implementing the so-called ‘‘CALLS’’ proposal, which would simplify access fees,

the Subscriber Line Charge, and the universal service system,

• adopting the uniform sourcing legislation mentioned earlier,

• repealing the Federal Excise Tax on telecommunications services.

States should also be looking at incremental reforms, including simplifying their

own universal service programs and following the recommendations of the National

Governors’ Association report referenced above to consider tax reduction and simplification.

Ultimately, however, complexity is an unavoidable consequence of a regulatory

system designed for the very purpose of driving prices away from the levels that

would be set in the marketplace. Thus, simplification of telecommunications pricing

will come only with thoroughgoing deregulation of the telecommunications marketplace.

Truth In Billing: What Can Be Done

In the meantime, as I indicated earlier, public policy can and should pursue a

more limited goal. Specifically, it should attempt to provide consumers with as much

20

information as is practicable about the nature and level of telecommunications taxes

and fees.

Insofar as it requires telecommunications providers to identify and accurately describe specific assessments levied under Sec. 254 of the Telecommunications Act,

H.R. 3011 would appear to achieve this goal. To the extent the bill goes beyond Sec.

254, to include ‘‘any other governmental mechanism, fund, tax or program,’’ I would

hope the Subcommittee would take into account some of the discussion above with

respect to whether such a requirement would be workable in practice.

H.R. 3022 goes still further than H.R. 3011, essentially requiring receiving carriers to identify not just the payments side of the equation, but also any offsetting

subsidies. While the idea may seem—as the name of the bill implies—to simply require the telling of ‘‘the rest of the story,’’ in fact the two sides of the story are fundamentally different.

As a general matter, taxes are levied for the purpose of providing ‘‘public goods,’’

which is to say goods that would be underprovided by the marketplace because of

economic externalities or insufficiently defined property rights. In the case of universal service programs, for example, it is generally agreed that there are ‘‘network

externalities’’ associated with universal access to telephone services. With respect to

the schools and libraries program, an argument can be made that there is a strong

public goods element to having a well educated population, and that access to the

Internet is an important aspect of achieving that goal.

In both cases, the benefits associated with these programs accrue to the public

at large, as well as to individual citizens. By their very nature, these benefits are

impossible to measure and difficult to estimate. Furthermore, any estimates would

be subject to the same type of controversy that typically accompanies benefits estimates for other government programs—e.g., environmental programs—and there

would be considerable debate, and certainly no ultimate consensus, over the correct

numbers to put on individual bills. The costs, by contrast, are both known and easily assigned. We can observe directly the precise amount of tax collections and the

persons from whom they are collected.

Summary

To the extent that the bills now before this Subcommittee would force telecommunications carriers to provide consumers with information about specific, easily-identified taxes, they would contribute significantly to a better public understanding of the tax component of telecommunications prices. H.R. 3011, as it relates

specifically to programs under Sec. 254 of the Telecommunications Act, would represent a positive step towards the goal of greater transparency and better informed

consumers in the telecommunications marketplace.

21

22

Mr. TAUZIN. I thank you.

For our remaining four witnesses, I will ask that you bear with

us. We have, if I am correct, about 4 minutes left in the vote on

the rule, which will be followed then by a vote on the journal, and

if the vote is held open, as I expect it will be, probably the earliest

members could get back here would be about 10 minutes after. So,

to be on the safe side, why don’t we adjourn until 11:10. The hearing will reconvene at that time.

Thank you.

[Brief recess.]

Mr. TAUZIN. The meeting will come back to order.

I will skip over our next witness to Mr. Norquist, who has a

flight to get to.

Mr. Norquist?

STATEMENT OF GROVER G. NORQUIST

Mr. NORQUIST. Thank you very much, Mr. Chairman.

I will not read my testimony.

Americans for Tax Reform receives no government money, Federal, State, or local.

I serve on the Commission for Electronic Commerce, and people

think that that 19-member commission that has its final meeting

in Dallas is supposed to decide whether or not we should tax the

Internet. One of the first things we discovered with the testimony

that we had was that the component parts of the Internet are extremely heavily taxed now. So it is not a question of should we tax

electronic commerce and the Internet, but, given how heavily taxed

it is now, should we perhaps be reducing taxes there.

We have seen the average of 14 percent excise tax on telecommunications by States, the 3 percent Spanish-American War

tax that people talk about, the Gore tax that is laid down on top

of that, and then some politicians have the nerve to talk about a

digital divide that some poor people cannot afford access to the

Internet because their telephones and telecommunications are so

heavily taxed they are priced out of the market.

So step one on the digital divide is to reduce these taxes, and I

want to endorse the legislation that Mr. Tauzin and Mr. Bliley are

putting forward to make it clear to taxpayers and to people who

are taxpayers, because they use phones, exactly what they are paying.

If you do not have visibility, if it is not transparent, people get

mad at the phone company when the price of their phone service

goes up and they do not understand that State, local, and sometimes Federal Government are piling these things on.

One of the reasons the American economy does better than other

economies and our business community gets the investment it does

is we have transparency. You can look at AT&T and you can know

what is there. You go to some other countries, and they have very

big companies. You have no idea what is really inside those. You

have got a black box for company books.

Too often, taxpayers see a black box when they are trying to understand what they are paying for and who. Over time, politicians

have loved to put taxes, State and local, in particular, on government monopolies, and the local monopolies, whether they are power

23

plants or phone companies, have not fought them because they just

passed it on, but those have really piled on to the point where, both

in power generation and in telecommunications, taxes have gotten

excessive on those fields.

I would urge, as a taxpayer advocate, that we enact this legislation, Truth in Billing, so that people understand what is there, but

not just for telecommunications. I think you should consider similar efforts on power companies, because State and local governments—I am told that some States forbid the power companies

from letting their consumers know that they are not just paying for

the power generation but they are also paying for State and local

add-ons, taxpayer add-ons. I think that is a time when State and

local governments are deliberately obscuring their part of the tax

burden to consumers for the Federal Government to step in.

One other thought is the four-R law, which forbids—and this has

come up at the Electronic Commerce Commission—the four-R law

stops State and local governments from passing discriminatory

taxes on railroads, pipelines, and other things that are part of the

national grid. Both with power generation and with telecommunications, those are now part of a national grid, now that we are in

the process of deregulating and undoing the mistakes 100 years

ago of deciding that these should be government-run monopolies.

I think it would pay to have a Federal law which says, just as

a railroad cannot find—you run a railroad from Chicago to L.A.

Utah cannot have a 1 percent property tax on all business property

but 10 percent on the rail road line.

We have now State and local governments that have one tax rate

for goods and services but a higher one for power plant generation,

both in property tax and on sales and excise taxes, and on telecommunication.

I think those are options.

I would urge the committee to consider sunsetting the Gore tax,

the e-rate tax. If we cannot repeal it, let us say, okay, you wanted

$10 billion. At the end of $10 billion we are going to audit, which

you did, but, also, it ends. If we do not sunset the Gore tax, our

great-grandchildren will be paying the Gore tax, just as we are

still, 100 years later, paying that 3 percent Federal excise tax.

I would simply close by saying the Commission on Electronic

Commerce did have a test vote. Of the nineteen members, all but

four were for recommending to Congress abolishing the 3 percent

excise tax. Of those four, there is one Bolshevik from South Dakota

who always votes for tax increases, but the other three were the

Clinton Administration appointees on the Commission from Commerce, USTR, and Treasury. So everybody except the Gore/Clinton

representatives wanted to get rid of that 3 percent telecommunications tax.

Thank you.

[The prepared statement of Grover G. Norquist follows:]

PREPARED STATEMENT OF GROVER G. NORQUIST, PRESIDENT, AMERICANS FOR TAX

REFORM

EXECUTIVE SUMMARY

Americans for Tax Reform endorses the Truth in Telephone Billing Act (H.R.

3011), sponsored by Chairman Tom Bliley (R-VA) and Rep. Billy Tauzin (R-LA).

24

1 Neither Americans for Tax Reform nor the witness, Grover Norquist, has received and federal grant or subgrant or any federal contract or subcontract, during the current fiscal year or

either of the two preceding fiscal years.

That legislation would require every telephone bill in the country to indicate clearly

exactly what taxes are being assessed on the consumer’s bill.

For our democracy to work, voters must know exactly what taxes they are paying

and under whose authority. In other words, taxes must be as transparent as possible. Only then can voters decide whether the taxes are worthwhile and know who

to hold accountable. Taxes buried in the charges for telephone service or otherwise

hidden are consequently subversive of democracy.

The proposed bill would eliminate this problem for telephone taxes. It would ensure that each taxpayer is given full information regarding the taxes assessed on

his or her telephone bill each month. Telephone customers would know what they

are paying and why, and then they can take appropriate action at election time.

Total taxes on phone bills are excessive. About 50% of what the consumer pays

in phone bills ends up going to the government in various taxes. At a minimum,

the FCC’s e-tax, the federal excise tax, and Universal Service Charges should be

eliminated, reducing phone bills for average workers by around 25%.

Finally, ATR opposes H.R. 3022, The Rest of the Truth in Telephone Billing Act

of 1999, sponsored by Rep. Ed Markey (D-MA), as it does not make clear that the

government subsidy that some phone users receive are provided at the expense of

other workers.

As President of Americans for Tax Reform,1 I heartily endorse the Truth in Telephone Billing Act (H.R.3011), sponsored by Chairman Tom Bliley (R-VA) and Rep.

W.J. Billy Tauzin (R-LA). That legislation would require every telephone bill in the

country to indicate clearly exactly what taxes are being assessed on the consumer’s

bill.

In particular, the legislation would require each telephone bill to name each tax

assessed on the bill, the government authority that requires the tax to be assessed,

the dollar amount the consumer must pay for each tax, and the method of calculating the tax, whether a flat fee for each line or subscriber, or a percentage of total

charges, or some other basis.

For our democracy to work, voters must know exactly what taxes they are paying

and under whose authority. In other words, taxes must be as transparent as possible. Only then can voters decide whether the taxes are worthwhile and know who

to hold accountable. Taxes buried in the charges for telephone service or otherwise

hidden are consequently subversive of democracy. Such taxes abuse working people

who are busy struggling to maintain their homes and raise their families.

The proposed Truth in Telephone Billing Act would eliminate this problem for

telephone taxes. It would ensure that each taxpayer is given full information regarding the taxes assessed on his or her telephone bill each month. As a result, telephone bills would no longer be the confused jumble of hidden and poorly labeled

taxes they are today. Telephone customers would know what they are paying and

why, and then they can take appropriate action at election time.

Among the numerous fees and assessments on their phone bills voters will learn

more about is the outrageous e-tax. The Federal Communications Commission

(FCC) imposed this tax on phone bills without Congressional authority. The Telecommunications Act of 1996 gave the FCC authority to set discounted rates for

Internet access and other services to schools and libraries. But instead of these discounts, the FCC imposed the e-tax on phone bills across the nation to raise money

to subsidize such Internet services. The tax raises monthly phone bills by about 5%,

imposing a total $2.4 billion annual burden on phone users. The FCC can only be

expected to raise this illegitimate tax more in the future.

The funds raised by the tax are provided to a government controlled corporation,

the Universal Services Administering Corporation (USAC), which gives grants to

schools and libraries to fund Internet access. It took over 2 years after passage of

the 1996 Telecommunications Act for schools to get any money under this system.

A major portion of the funds are now siphoned off to help finance the USAC bureaucracy dispensing the grants.

This bureaucracy and the e-tax it administers are redundant and unnecessary, as

well as ineffective. Since 1995, Federal funding for education technology has increased by 2,300%, even apart from the e-tax. More than 20 distinct federal programs, and countless state and local programs, help finance upgraded technology to

schools and libraries. As a result, 78% of all schools were connected to the Internet

by 1997, with an average of one computer for every 8 students.

In addition to the e-tax, all Americans today pay a federal telephone excise tax

equal to 3% of their monthly telephone bill. Congress first adopted the telephone

25

excise tax in 1898 to help finance the Spanish-American war. The war ended within

a year or so. One hundred years later, the telephone excise tax is still with us.

The tax is an object lesson in how supposedly temporary government programs

and taxes, once adopted, never end. For the telephone excise tax has been continued

for 100 years now on one temporary excuse after another.

The tax was actually phased out after the Spanish-American War, but was reimposed on long distance calls in 1914, and then fully reinstated to help finance World

War I. It was brought back to bolster government revenues during the Great Depression, and then to help pay for World War II and the Korean War.

In 1966, the tax was increased from 3% of telephone bills to 10% to help pay for

the Vietnam war. After the war it was phased down to 3%, and then extended repeatedly in the 1980s to help cover the deficit. Now the deficit is long gone and the

budget is in surplus, but the telephone tax is still with us.

The tax was originally adopted as a luxury tax on the rich, as only higher income

people had phones 100 years ago. Today, the tax is a regressive burden on low income workers, as it amounts to a much larger share of the meager incomes of the

poor than of the rich. Another lesson: taxes first adopted on the rich always end

up being paid by the middle class, where the real money is. Often, even the poor

end up paying. The telephone excise tax imposes a total burden on the public of $5-$6 billion per

year. It is one part of the oppressive overall tax burden, which costs the average

family more than food, clothing, and shelter combined. Taxes overall take 40% of

national income, which is far too high. There is no justification for the telephone

excise tax and it should be repealed, as part of a broader, overall tax reduction program.

Still another phone tax burden results from the Universal Service Program.

Under this program, universal service charges are assessed on the phone bills of

most people so that fees can be reduced below cost for others. Higher phone bills

are charged in particular to lower cost service areas in the highly concentrated

northeastern U.S. and in urban areas.

Universal service charges cost most people more than the 3% telephone excise tax. These charges amount to a $7 billion per year Federal tax today, increasing to over

$13 billion in 2003. State required universal service charges add another $17 billion

in redistributed fees, for a total current universal service charge burden of $24 billion today, rising to over $30 billion in a few years. This tax could grow even more

rapidly in the future if it is used to finance more advanced telecommunications services over phone lines, such as video services and Internet access.

These universal service charges amount to a huge hidden tax that often charges

poor urban dwellers to subsidize prosperous rural dwellers. As Stephen Entin of the

Institute for Research on the Economics of Taxation says, ‘‘A widow in urban New

York City or Boston scraping by on Social Security pays a federal line fee that helps

to subsidize below-cost phone services to ski chalets in Aspen or Vail.’’

The Universal Service Charges should be abolished and any necessary subsidies

for the poor to pay for phone service should be provided through the welfare system.

This along with elimination of the telephone excise tax and the e-tax would reduce

most phone bills by around 25%.

But these are not nearly all the taxes that are effectively paid through the average worker’s phone bill. Overall, consumers also pay on their phone bills state and

local sales taxes, a state gross receipts surcharge, a franchise charge, a charge for

Interstate Toll Access, Emergency 911 charges, and a county manhole fee.

But that’s just for starters. Out of the remaining amount the consumer pays for

phone service, the phone company must pay federal income taxes, state income

taxes, federal payroll taxes, unemployment insurance taxes, workmen’s compensation taxes, state franchise taxes, local property taxes, and any local income taxes.

Altogether this means that about 50% of what the consumer pays in phone bills

ends up going to the government in various taxes. This is excessive overreaching

by overly burdensome government.

Finally, I oppose H.R. 3022, The Rest of the Truth in Telephone Billing Act of

1999, sponsored by Rep. Ed Markey (D-Mass.), in its current form. That legislation

would also require the phone bill to state any subsidy the phone user receives from

any government program and the amount of such subsidy effectively reducing the

phone user’s bill. The problem with this required statement is that it is out-of-context and effectively misleading. For it does not make clear that the government subsidy is provided by the phone user at the expense of other workers.

Consequently, the Markey proposal should require that the bill also tell the phone

user that any such subsidy was harnessed by taxes on their neighbors and other

workers. Then voters would be in a position to make a complete judgment on the

issue.

26

Mr. TAUZIN. There are no other members here, and, with your indulgence, I want to do something in order to accommodate Grover.

Let me recognize myself right now just to maybe throw a few questions at you, Grover, before you are required to leave.

Without telling me, obviously you have to have a meeting and

you have to take votes on it, which you do.

Mr. NORQUIST. Sure.

Mr. TAUZIN. We have heard talk that one of the options of the

Commission might be, in fact, to settle the issue of the State and

local’s ability to tax sales on the Internet, conditioned upon their

willingness to reduce the level of taxation on the lines, on the carriers, the Internet. Is that at all on the table with the Commission?

Mr. NORQUIST. It is on the table and it is pushed very hard by

some of the pro-tax representatives on the Commission. There are

a block of commissioners who are pro-taxpayer. I am the consumer

representative on the Commission, but the chairman, Governor Gilmore, has made it very clear that he will vote against any Commission recommendation, and I also would vote against any Commission recommendation which said, ‘‘If you do X, then we automatically overturn the commerce clause and the Quill decision and say

that States and local governments can raise taxes.’’

Mr. TAUZIN. But that is on the table? It is something that people

are pushing?

Mr. NORQUIST. It is being pushed by Governor Levitt of Utah.

Mr. TAUZIN. Will the Commission give to the Nation and to the

Congress a clear understanding of the discriminatory features of

telecommunications taxes as among the telecommunications providers?

Mr. NORQUIST. I think there will be a majority vote for a majority position. I do not believe there will be a two-thirds vote.

Mr. TAUZIN. Yes.

Mr. NORQUIST. There will be a majority vote that outlines and

recommends abolishing some of these taxes, sunsetting the Gore

tax, abolishing the 3 percent telecommunications. Perhaps——

Mr. TAUZIN. What I am asking is: will the report give us—I

mean, what we are doing in Truth in Billing is trying to give consumers an understanding of what taxes——

Mr. NORQUIST. Yes.

Mr. TAUZIN. [continuing] apply to what phone services, but one

of the things that would be extremely helpful for us in understanding your recommendations is to have a clear understanding of

which set of taxes applies to which one of the telecommunications

carriers so that we can have an understanding of the discriminatory effects of taxation as they all go to the Internet.

I mean, one of the concerns we have in looking at Internet taxation is the concern that, as all of the carriers move toward a converging pattern of digital broad-band informational flows, which

contain voice and video and data all in one stream, they are all

doing the same business eventually, and that they all need to be

taxed very differently, and therefore some consumers will end up

paying discriminatory taxes because of the carrier they choose.

We are, obviously, interested in that. I am wondering if the commission is going to do any work at all in identifying those differences for us.

27

Mr. NORQUIST. That has been highlighted in some of the testimony before the Commission, and yes, that will come forward.

There will be an effort by the Commission to recommend to State

and local governments that they harmonize some of their conflicting and discriminatory taxes, and that, at the end of, say, 5

years, we can revisit the question of Quill and the commerce

clause, but there will not be an automatic, ‘‘Once 5 years is over,

the commerce clause gets thrown away.’’

The commerce clause was a good idea when it was put in and

it remains a good idea, despite some State and local political leaders who would like to wish the commerce clause was not there.

Mr. TAUZIN. Finally, the question I want to ask you is: we obviously have watched e-commerce grow.

Mr. NORQUIST. Yes.

Mr. TAUZIN. We have begun to hear the concerns of local taxing

authorities about the loss of their base. The local sheriff back

home, Harry Lee, called me the other day. He was buying a $1,400

piece of equipment at a store. Right before he bought it, somebody

said, ‘‘You had better check on the Internet.’’ He went on the Internet and found he could get it for $400 cheaper because most of

taxes he was not going to pay.

And it dawned on him, you know—he is the sales tax collection

agency—that his law enforcement abilities are going to be reduced

if more and more people did what he did, and he called me to tell

me about it.

I wonder, is the Commission beginning to hear those kinds of stories, too? And are you going to speak to that when you speak in

your final report?

Mr. NORQUIST. Yes. Absolutely. It will address both that, and

also the interesting concern a lot of the State and local elected officials who feel that, as people use the Internet more, they will not

get as much sales taxes, one of the questions commissioners have

asked these elected representatives is: every business in America

is expected to become more efficient and more cost-effective because

of the Internet. Why do we hear from State and local governments

only that the Internet is not going to be a reason for you to spend

less, but for you to raise taxes? And at some point it seems to me

that we ought to expect State and local governments to become

more productive and, therefore, less expensive to taxpayers because

of these new technological tools.

Not everything that happens in the world is an argument for a

tax increase, despite the fact that some State and local politicians

seem to think it is.

Mr. TAUZIN. Finally, Mr. Norquist, you do not need to do it now,

but I would appreciate your comments on the Upton bill. Fred

Upton, as you know, has filed a bill dealing with the charges or

fees for Internet access. We are going to probably take up a hearing

on March 23. Since it relates to the work you are doing on the

Commission and to this hearing, it would be interesting to also

have your comments on that for the record.

Mr. NORQUIST. We had one other test vote, and I pushed these,

and then they decided they did not want to have a formal vote in

San Francisco, but I pushed the one. It was my resolution to say,

28

‘‘Let us get rid of the 3 percent telecommunications tax’’—15 yes,

4 no.

I put one forward suggesting a permanent Federal ban on taxation on Internet access, and that one even the Gore/Clinton people

voted for. That was unanimous.

Mr. TAUZIN. Good.

Let me announce to the committee what I have done here.

We have not received all the testimony of the panel yet, but we

were told Mr. Norquist has to catch a 12 noon flight, and so I wanted to accommodate him, so let me ask if there are any members

who would like to ask Mr. Norquist any questions before he has to

leave us.

Mr. Green?

Mr. GREEN. Mr. Chairman, just one before he leaves.

Having served 20 years in the legislature with Texas, sales tax

is the basic form of revenue, at least for Texas. In fact, we fought

against the income tax because we had the sales tax. If we do not

address that, we will see reductions in sales tax collections not only

for the State, but also for our local governments. That is the frustration I think I have.

I do not want to tax the Internet, because I want to let it grow,

but I also see the problem of local legislators and local officials.

I think the city of New Orleans has, counting State taxes, about

a 9 percent sales tax. Some States have used the sales tax in place

of the income tax.

My concern is that if we see a reduction in that, then you will

push States like Texas who have no income tax to go to some type

of income tax. Has that been addressed?

Mr. NORQUIST. It has been discussed. We have also been reminded that all of these concerns were raised when catalog sales

began to grow 40 and 50 years ago, and all of the scenarios that

some State and local politicians spun out back then, that everybody

would buy everything by catalog, turned out not to be the case. In

fact, most of the growth of Internet electronic commerce sales is at

the expense of catalog sales, so it has zero impact on State and

local revenues, and that which is not out of catalogs is businessto-business.

So the lost revenue—it is not lost, it is in the hands of consumers

and taxpayers—but lost revenue in some people’s eyes is actually

this year may be $180 million, which is one-tenth of 1 percent of

sales tax revenue. Sales tax revenue in all States is increasing—

tax revenue in all States and localities is increasing.

The idea that they are short of cash is not accurate, but, as I

mentioned just before you got here, those of us on the Commission

have asked some of these political leaders who said the Internet is

a reason to raise taxes, our question is: why, when everyone in the

business community has expected that the Internet will reduce

their costs and reduce their prices and make them more effective,

is nobody at State and local level making that case and showing

those kind of productivity increases that could lead to tax reductions.

Mr. GREEN. I think you can see productivity increases, and you

are right, the tax reductions—again, in Texas, our Governor has

talked about the tax cuts that were done last session.

29

Mr. NORQUIST. Fine tax cuts.

Mr. GREEN. Yes. But my concern, though, was that if we do see—

you know, this could be astronomically different than catalog sales,

but I am glad to hear that the catalog sales—the sales on Internet

are taking away from catalog, because we fought that battle before

I got here in Congress. Of course, that is an issue that our State

comptroller, no matter which party they are, talk about the loss of

revenue to catalog sales if they do not have that nexus in the State.

Mr. NORQUIST. The good news is that it is really not having that

big an effect, and it will not have that big of an effect, even as

Internet sales increase, largely because it is business-to-business,

which either is taxed or is not taxed outside of Quill. It just is not

having that problem.

Mr. GREEN. Thank you, Mr. Chairman.

Mr. TAUZIN. Thank you, Mr. Green.

Anyone else?

[No response.]

Mr. TAUZIN. Mr. Norquist, thank you. I know you have to make

that flight. You are welcome to take off any time you need to, sir.

Mr. NORQUIST. Okay. Absolutely. Thank you.

Mr. TAUZIN. Thank you.

We will now go to Cathy Hotka of the National Retail Federation

here in Washington, DC.

Cathy, present your testimony, please.

STATEMENT OF CATHY HOTKA

Ms. HOTKA. Thank you very much, Mr. Chairman and members

of the committee. The National Retail Federation appreciates the

opportunity to be here today.

In case you do not know us, we are the largest trade association

representing retailers, and we represent all kinds of retailers—very

large ones and very small ones.

We have a Telecommunications Committee, which has on it 60

of the telecommunications managers for the country’s largest retailers. To prepare for this meeting today, I phoned a number of

them. I did not have much notice. I could not make a date with

them. I had to simply say, ‘‘Do you have a few minutes to talk to

me?’’ Everyone said, ‘‘Gee, I have got to run,’’ until I told them

what the subject matter was, and suddenly they were not so busy.

They dropped everything they were doing to talk about this, because this is a hot-button item for them.

I want to give you a mental picture.

There is a retailer—and I wish I could tell you who it was—the

regional retailer. They are based in North Carolina. They have

about 100 stores. Each store is about the size of this room. They

use 109 different carriers, so every month the mailman comes with

a canvas bag, dumps the bills out on the desk, and the person that

they have hired to go through the bills—this is their only job—goes

through these bills to see what is correct and what is not correct.

It is a gigantic job. They said it is worse than any other billing job

they have. Many retailers have literally thousands of suppliers.

They use all different utilities. They have got supplies in the Far

East, people who speak different languages. Nothing they do is as

difficult as this.

30

Part of the problem is that the charges that appear on these

bills, in some cases, are applied in different ways. Some of them

are implicit. They are, as they call it, trying to compare apples and

Buicks when it comes to choosing carriers. It is very difficult for

them.

So they have asked us to spread the word that if there is anything that can be done to make these charges easier to explain, it

is going to make their life a lot different and a lot easier.

Now, one of the things that I wanted to mention is, as has come

up this morning that you had mentioned and Mr. Green had mentioned, the Internet is here now. We find it very important that our

brick-and-mortar retailers bring the Internet into their stores and

not rely simply on WATS lines in the store, but to bring broadband into the store, use the advantage of having physical retail

with the Internet.

Frankly, so many of our people are so bamboozled by what they

see on their phone bill, they are not anxious to cozy up to our

friends at the telecommunications carriers and become partners, as

they probably should, to expand their business.

They are so worried about the cost and the complexity that they

just want it to go away. Frankly, retailers are cheap. They are

going to look at anything they can which is going to impact their

bottom line. And, while telecommunication rates have decreased—

thanks, in some part, to the Telecommunications Act of 1996—the

bills have increased. They have not decreased.

So I think, if we are going to move the country ahead and ensure

that the information age reaches retailers, as we would like it to

do, certainly your bill would do a great deal to accomplish that, and

if we can help you in any way we would like to offer our services.

Mr. TAUZIN. Thank you very much. We will take you up on it.

Ms. HOTKA. Great.

[The prepared statement of Cathy Hotka follows:]

PREPARED STATEMENT OF CATHY HOTKA, VICE PRESIDENT, INFORMATION

TECHNOLOGY, NATIONAL RETAIL FEDERATION

Chairman Tauzin, Members of the Subcommittee, the National Retail Federation

appreciates your invitation to appear before you today to discuss telephone billing.

This is a subject of great interest to our members, both large and small.

The National Retail Federation (NRF) is the world’s largest retail trade association with membership that comprises all retail formats and channels of distribution

including department, specialty, discount, catalog, Internet and independent stores.

NRF members represent an industry that encompasses more than 1.4 million U.S.

retail establishments, employs more than 20 million people—about 1 in 5 American

workers—and registered 1999 sales of $3 trillion. NRF’s international members operate stores in more than 50 nations. In its role as the retail industry’s umbrella

group, NRF also represents 32 national and 50 state associations in the U.S. as well

as 36 international associations representing retailers abroad.

Mr. Chairman, telecommunications managers from America’s retail companies are

anxious to complain about their bills from communications providers. While service

from these companies is generally extremely good, bills are unintelligible, they’re incorrect, they show federally-mandated surcharges applied in different ways, they

present simple line items differently, and they show discounts in a way that makes

them almost impossible to understand. One of these managers complained to me

that the bills he receives are as complex as the tax forms he and his wife must negotiate each spring. And while the subject of today’s hearings is surcharges and the

manner in which they are collected, when taken in the context of companies’ overall

dissatisfaction with the billing process, the problem is particularly severe.

While most analysts acknowledge that rates for long distance and data services

are falling, bills generally are not. These charges, whether explicit or implicit, raise

31

the bottom line of the bill. And the manner in which they are presented on that

bill can make it very difficult for customers to shop for carriers in a cost-effective

way.

There are some key reasons why retailers are hit particularly hard when phone

bills are hard to understand.

Line item surcharges are presented in language that lay people don’t understand.

They’re not explained in the one-syllable words that customers need. Even very

large companies, experienced telecommunications managers from America’s top ten

retailers, are hard pressed to explain what these charges are; they just know that

they’re there.

Many retailers have hired analysts or outsourcers to handle their telephone bills.

These analysts do not simply pay these bills—they check them for accuracy and duplication, determine whether discount formulas have been applied, and keep track

of anticipated billing amounts to check for toll fraud. Retailers do not have to do

this for their gas bills or electric bills or bills from suppliers in Singapore and Malaysia. Only telecommunications bills are this complex, and generally this incorrect.

The expense that this incurs to retailers should not be underestimated. One chain

of about ten furniture stores has someone on staff full time to check phone bills.

Telephone bills are complex before these surcharges are added. This is particularly acute for retailers, who must cope not only with telecom use from headquarters, but also from stores. Larger retail companies can find that three or four

of their stores have been slammed each month despite PIC freezes. Store personnel

use dialarounds which raise rates. Carriers present fraudulent contracts for store

telephone volume then demand that they be paid. The potential for mischief is significant. Many retailers find that it’s easier to pay the bill than fight it.

Many companies report that, when they contact carriers for information on billing

problems, particularly with surcharges and how they have been applied, they cannot

get a straight answer. Our telecommunications managers indicate that carriers give

varying stories about what these surcharges are. In some cases they have cut back

staff so severely that customer service to explain these charges is essentially unavailable.

Because the surcharge line items on bills are generally very difficult to understand, their carriers’ account representatives give coy answers when asked about

the charges. Many claim that they don’t know what the charges really are or what

they’re used for. Certainly this fosters an atmosphere of distrust which could be easily remedied.

I don’t have to tell you that the Federal Communications Commission is not adequately staffed to answer a wide variety of billing questions from corporate customers either.

And the FCC’s mandate that carriers make these charges implicit has resulted,

our members believe, in inaccurate bills. Most of NRF’s members we contacted on

this issue believe that their bills are inflated by carriers who apply surcharges in

different ways and who don’t pass along savings that might be realized when rates

are decreased. There’s no doubt but that this increases suspicion among the customer base that there’s a sort of conspiracy between the federal government and

carriers to wrest more money from customers.

The timing of this dispute could not be worse. For the past ten years America’s

businesses have been considering whether to significantly upgrade their telephone

networks. A recent poll of our large-company members revealed that very few had

anything less than POTS lines into their stores. This is troubling because if these

retailers are to survive the onslaught of virtual-only Internet companies, they must

fully integrate the Internet channel into their operations. This means that they

must not only have fully functioning Web commerce sites, but they must integrate

the Web into their stores. Certainly if rates are made to be artificially high through

surcharges, they will not be inclined to take these progressive steps. The imposition

of PICC charges, for instance, hit retailers particularly hard because there are so

many phone lines in each store. The knowledge that each telephone line in the lingerie department, the candy department, the lamp department would incur surcharges did nothing to encourage retailers to upgrade their communications presence in the store. Retailers are particularly bottom-line oriented, and rather than

make essential investments in communications upgrades, many retailers have chosen instead to scale back on investment.

Mr. Chairman, the National Retail Federation supports your effort to bring some

common sense to the process of surcharge imposition. If you are successful, we believe that there will be a ripple effect which may result in communications carriers’

bills becoming not only easier to read but more accurate.

Many thanks for this opportunity to appear before you today.

32

Mr. TAUZIN. Next we will hear from Mr. Lassman with Citizens

for a Sound Economy here in Washington, DC.

Kent, welcome. We will take your testimony, sir.

STATEMENT OF KENT LASSMAN

Mr. LASSMAN. Thank you, Mr. Chairman and members of the

subcommittee. We appreciate the opportunity to join you today.

In 1861, President-elect Lincoln said, ‘‘I am for those means

which will give the greatest good to the greatest number.’’ It is evident that the proponents of the legislation before us today share

in his wisdom. Both pieces of proposed legislation share a common

attribute—namely, public policy should not impede the flow of information so that consumers can make the best decisions possible.

I represent Citizens for a Sound Economy Foundation, and we recruit, educate, train, and mobilize hundreds of thousands of volunteer activists to fight for less government, lower taxes, and more

freedom. As evidence of this grassroots focus, I offer the following

statistic:

Last year we hosted five policy events that focused on telecommunications or technology policy in Washington, DC. In the

same year, we hosted or participated in more than 150 events

around the country that focused on telecommunications or technology policy. Everywhere we go, people are talking about their

telephone bill. They are not too happy. Now, it is our job to educate

your constituents so that they, in turn, can educate you.

Fortunately, the proposed legislation provides an initial step

away from both extensive rate regulation and taxation of telecommunications services. As I have outlined in my written statement, I encourage you to seek support from your colleagues on the

Judiciary Committee. They have already held a hearing on a similarly oriented measure, the Taxpayer Defense Act.

The basic problem addressed by all three pieces of legislation is

rooted in administrative or regulatory taxation. The hearing today

amplifies the problem faced by consumers on a daily basis.

Unelected officials use the regulatory process to impose taxes upon

telecommunications services. The Taxpayer Defense Act would

make this process more difficult. The two pieces of legislation before us today, H.R. 3011 and H.R. 3022 would provide consumers

with more information about these taxes through mandates on the

service providers.

Both of these objectives are desirable; however, I urge you to remain steadfast in pursuit of a solution to the root problem. Taxation through regulation must be eliminated, not simply discouraged or made more transparent.

My written statement includes a thorough legislative analysis,

including minor technical amendments, and I would just like to

highlight to you a bit of context for today’s deliberations.

Consider the last time you took your car to a mechanic for an oil

change. Despite the fact that consumers at Al’s Auto Shop might

get a bill that looks very different from consumers at Charlotte’s

Car Shop, there are distinct similarities. The type of service provided, the various new parts installed, and the charges for labor

are all listed.

33

1 CSE Foundation does not receive any funds from the U.S. Government.

As such, we might require telecommunications providers to provide an explanation of the governmentally mandated taxes, fees,

and charges on telecommunications services, just like the services,

parts, and labor are explained for an oil change.

However, because information can be costly, there is a point beyond which the cost of collecting information is greater than the

benefit that it provides.

For example, it might be beneficial to provide information about

regulated access fees to consumers. It would likely be cost prohibitive to distinguish the exact percentage of the access fee that is

cost versus subsidy. This would be like an auto repair shop that

listed the amount of rent and electricity to provide a well-lit garage

in order to do that oil change.

The lesson learned from everyday experience, complaints that we

hear from our activists and your constituents, say that, while price

information is necessary in the marketplace, it is hard to predict

or prescribe the right amount. It is best to let Al and Charlotte and

all the telecommunications providers figure that out on their own.

So, to conclude where we began, with the wisdom of Lincoln, the

means to provide the most information to the greatest number of

consumers is a free market.

Thank you. I look forward to your questions.

[The prepared statement of Kent Lassman follows:]

PREPARED STATEMENT OF KENT LASSMAN, CITIZENS FOR A SOUND ECONOMY

FOUNDATION

‘‘I am for those means which will give the greatest good to the greatest number.’’

—Abraham Lincoln, Cincinnati, Ohio on February 12, 1861

Introduction

Mr. Chairman, and members of the Committee, thank you for the opportunity to

share my views on H.R. 3011 and H.R. 3022—the Truth in Telephone Billing Act,

and the Rest of the Truth in Telephone Billing Act. Both pieces of proposed legislation share a single attribute. Namely, public policy should not impede the flow of

information so that consumers can make the best decisions possible.

This is the most important and defining attribute of the legislation and should

influence your deliberations today. A market process, free of regulatory mandates,

is the best means to give the greatest amount of good information to consumers.

I present these views on behalf of the members of Citizens for a Sound Economy

Foundation (CSE Foundation).1 CSE Foundation recruits, educates, trains, and mobilizes hundreds of thousands of volunteer activists to fight for less government,

lower taxes, and more freedom.

CSE Foundation believes that individual liberty and the freedom to compete expand consumer choices and provide individuals with the greatest control over what

they own and earn. CSE Foundation’s aggressive, real-time campaigns activate a

growing and permanent volunteer grassroots army to show up and demand policy

change.

As evidence of this grassroots focus, I offer the following statistic. In 1999 CSE

Foundation hosted five telecommunications or technology-related policy events in

Washington, D.C. In the same time frame, we hosted or participated in more than

150 events around the country where telecommunications or technology policy was

a primary focus.

History

Extensive regulation of telecommunications services predates the widespread deployment and use of telecommunications services in this country. Taxation and rate

regulation are perhaps two of the most perverse forms of government intervention.

Each should be eliminated to the greatest extent possible. Both serve to limit the

ability of consumers to exchange information efficiently at affordable costs.

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2Kent Lassman, Statement to the Committee on the Judiciary, U.S. House of Representatives,

November 3, 1999, http://www.cse.org/informed/456.html. 3For a brief summary of the federal excise tax, see also http://www.cse.org/informed/361.html.

Fortunately, the proposed legislation provides an initial step away from both extensive rate regulation and taxation of telecommunications services.

In November of last year, I testified before the House Judiciary Committee on

H.R. 2636, the Taxpayer Defense Act.2 The Taxpayer Defense Act would require legislative action before any new administrative tax could be instituted. Like some of

the legislators here today, the supporters of that legislation are prepared to make

policy changes to improve the amount of information available to consumers about

the taxes, fees, charges, and subsidies associated with telecommunications services.

The basic problem addressed by all three pieces of legislation is rooted in administrative—or regulatory—taxation. The hearing today amplifies the problem faced by

consumers on a daily basis: unelected officials use the regulatory process to impose

taxes upon telecommunications services.

As I testified last year, H.R. 2636 would make this practice more difficult. Both

pieces of legislation before us today—H.R. 3011 and H.R. 3022—would provide consumers with more information about these taxes through mandates on service providers. Both of these objectives are desirable. However, I urge you to remain steadfast in pursuit of a solution to the root problem: taxation through regulation should

be eliminated, not simply discouraged or made more transparent.3

Pricing and Information

Information is a costly commodity. This is true in the marketplace for telecommunications services just as it is true of the marketplace for shoes, fresh salmon, or stocks. It is also equally true with regard to information that explains the

price that citizens pay for government services.

Prices play a key role in the transmission of important information about goods

and services. Changes in price signal changes in scarcity and allow consumers to

adjust their use of a product accordingly. And therefore it is no surprise that consumers are best suited to determine which of the competing goods would meet their

demand. It is prices that provide the information necessary to make these choices.

When government policies affect prices—even the price of information—they can

distort the market by altering the prices consumers see in the marketplace. To avoid

such distortions, the government’s impact on price should be clarified wherever possible.

There is widespread agreement that when it comes to government action that cannot be, or simply is not, performed by a private market that a ‘‘price’’ assigned to

that government action increases responsibility and effectiveness of the government

actor. In short, consumers should know what they are paying for, especially when

it comes to government programs.

Therefore, it is reasonable to expect that the information about the cost of government mandates provided to consumers as a result of either H.R. 3011 or H.R. 3022

would have a positive effect. First, it would allow consumers to have more complete

information about the costs associated with telecommunications services. Second, it

would provide a rough proxy for the price of the government taxes, fees, and other

collections levied on telecommunications services.

While the discussion today is focused on telecommunication services and the billing practices of telecommunications providers, it is instructive to look at an analogous situation. Consider the last time that you took your car to a mechanic for an

oil change. Despite the fact that consumers at Al’s Auto Shop might get a bill that

looks very different from a consumer’s bill at Charlotte’s Car Shop, there are distinct similarities. The type of service provided, the various new parts installed, and

charges for labor are all listed.

As such, it might be reasonable to require telecommunications providers to provide an explanation of the governmentally mandated taxes, fees, and charges on

telecommunications services. However, because information can be costly, there is

a point beyond which the cost of collecting information is greater than the benefit

it provides.

For example, it may be beneficial to provide information about regulated access

fees to consumers. It would likely be cost prohibitive to distinguish the exact percentage of the access fee that is a ‘‘cost’’ versus ‘‘subsidy.’’ This would be like an

auto repair shop that listed the amount of rent and electricity necessary to provide

a well-lit garage to perform an oil change. It is more efficient—for the service provider and for the consumer—to provide a reasonable estimate of the costs associated

with the service.

35

4Peter W. Huber, Michael K. Kellogg, and John Thorne, Federal Telecommunications Law,

page 3, 1999, second edition.

A Legislative Analysis

The proposed ‘‘Truth in Billing’’ initiatives are quite similar. The Chairman’s legislation, H.R. 3011, would require telecommunications carriers that contribute to

governmental programs to provide more information to consumers than is currently

made available. This appears to conform to the overarching goal stated at the beginning of this testimony: Public policy should not impede the flow of information so

that consumers can make the best decisions possible. With regard to generating information about federal telecommunications taxes, subsidies, and programs, H.R.

3011 is therefore an improvement upon the status quo.

However, it is not necessary to create new law. In an effort to find a solution to

the problems associated with little or poor billing information, this legislation appears to ignore the fundamental problem that is the relationship between, on one

hand telecommunications services, and on the other hand, federal tax and regulatory policy. Federal taxes and regulation stand in the way of a market process

that would generate clear billing procedures to provide information to consumers.

The ‘‘Rest of the Truth in Telephone Billing Act of 1999,’’ H.R. 3022, is essentially

the same as the Chairman’s legislation, with one important distinction. H.R. 3022

would require carriers to provide subscribers of telecommunications services a separate line-item stating the amount of their bill that is collected for government programs, taxes, fees, and subsidies.

This provision would continue and extend the basic goal mentioned earlier in this

statement. That is, it is a means to provide the greatest amount of information to

consumers as possible. CSE Foundation has argued strenuously in the past, and I

affirm to you today, that individual consumers should know both how much they

contribute to America’s costly subsidy regime and how much individual consumers

benefit from the subsidy regime.

The difference between the two pieces of proposed legislation is that H.R. 3022

is one step closer to a plain reading of section 254(e) of the 1996 Telecommunications Act where universal service support ‘‘should be explicit and sufficient to

achieve the purposes of this section.’’

Therefore, a strict policy analysis of H.R. 3022 would suggest that it is superior

to its counterpart, H.R. 3011. However, absent a small technical amendment, the

legislation would be difficult to implement and probably impossible to pass.

Three words should augment sections (3)(A) and (3)(B) of H.R. 3022. At line 20

of page two and line one of page three the words ‘‘an estimate of’’ would improve

the legislation:

(3)(A) as a separate line-item, an estimate of the dollar amount that is being

attributed to and collected from such subscriber for such governmental mechanism, fund, tax, or program; and

(B) an estimate of the average amount per month by which the subscriber’s

service is reduced by any subsidy identified under paragraph (1)(B).

This change would allow the superior attributes of H.R. 3022 to succeed in spite

of an ongoing and irreconcilable debate over how one fee or another may be the result of a combination of (a) a regulated recoverable cost, and (b) a subsidy.

Conclusion

Information technology is evolving faster than the legal apparatus designed to

regulate telecommunications services. As one prominent authority has concluded,

Television is leaving the air in favor of the wires; the telephone is leaving the

wires in favor of the air. Copper and coax, wired and wireless, terrestrial and

satellite: digital data networks are rapidly emerging as the new universal, universally interconnected standard for the transmission of everything—voice,

data, video, the lot.4

The effect of the 1996 Telecommunications Act and the dynamic, innovative technology marketplace have brought the exciting possibility of competitive forces to all

aspects of the telecommunications marketplace. Yet, significant barriers still remain. First among them are regulated prices, fees, charges, and taxes upon telecommunications services. Consumers would be best served if these policies were

stopped in their tracks and regulators no longer intruded into the price system for

telecommunications services.

A second best alternative is to promote the most efficient means to provide accurate information to consumers about the federal role in telecommunications services.

The legislation considered today would achieve this second best alternative. Where

necessary, an amendment should be made to allow for a reasonable estimate of the

portion of a fee that is in part a subsidy and in part a regulated rate.

36

The Truth in Billing Act and its counterpart the Rest of the Truth in Billing Act

would serve to provide more information to consumers about the price of our government. Senator Wyden has identified at least 28 different programs or federal agencies that provide telecommunications assistance or subsidies. Each of these programs has an economic cost associated with it. To the extent that these costs are

recovered through a consumer’s telephone bill, that information should be made explicit and available.

Will Rogers observed that ‘‘If you ever injected truth into politics you have no politics.’’ Public policy to inject truth into consumers’ telephone bills is a good start toward taking politics out of telecommunications.

Mr. TAUZIN. Thank you very much.

Our next witness will be Mr. Moir.

STATEMENT OF BRIAN R. MOIR

Mr. MOIR. Thank you, Mr. Chairman.

First, let me start—and I am going to close with the same

thing—commending you, Chairman Bliley, and Congressman Markey, for introducing the two bills. If I was to stop now, I would tell

you vote as soon as possible on these bills, but I will say a few

extra things.

I represent, like Cathy, end users. We use telecommunication

and IS as a critical part to compete, both domestically and in the

global marketplace. We have in this country a jewel. We are the

world leader in telecommunications and IS technology. For a long

time, we were also the lowest-priced provider of those areas.

I am sad to say, since we have been successful in trying to bring

down rates in various areas around the United States, that is now

not the case as far as pricing in some areas, particularly in Europe

and in the Far East.

It is unfortunate that part of the distortion we are getting now

in our bills, which you have all mentioned in your opening statements and many of the other people have mentioned here on the

panel, are the huge markups we are seeing on the bill from mindless charges. It makes no sense.

We use these tools to be competitive in a global marketplace, and

it is not because we are a low-labor market country. And so our

crucial tool is being disadvantaged because of these charges.

What is really happening? We know what is happening. As our

prices were coming down, government regulators saw an opportunity the hide—you know, typically prices come down for a while.

They used to be on January 1. Back in the late 1980’s they started

happening on July 1. So when we would have these annual reductions in prices driven by regulators—never as big as they should

have been, but either way—they started to have an increased

temptation to fold in, at the same time, a series of what are really

taxes.

Without commenting on whether they are good objectives or not,

it is fair to say the FCC was not put in the business to be a taxing

agency or for dispensing money, so we had schools, wiring, we had

funds for management of the people to run these networks. I mean,

we had libraries getting moneys. We had rural health care facilities

getting moneys. We had pixie charges a few years ago, which was

new to all of us, which at first the FCC was going to put almost

totally on Cathy’s members and mine, just on the businesses. They

were not even going to allocate it fairly. They were just going to

37

load it all on us. Fortunately, we raised hell and got those lowered

somewhat, but we are still disproportionately paying those.

And that has only been in the last few years. We have a whole

string that has been mentioned by others that are on bills.

Without getting to the issues that Congressman Markey raised

in his bill on subsidies, there is a whole slew of subsidies we could

spend a whole day of hearings on, also.

So, in closing, we really urge you to force these regulators to put

these out on the table so that we can see what they are doing and

not try to bludgeon the carriers to hide these charges, which they

try to sneak in every other year or so, and hopefully that will take

a huge step to getting some of these off our bill.

Thank you.

[The prepared statement of Brian R. Moir follows:]

PREPARED STATEMENT OF BRIAN R. MOIR, PARTNER, MOIR & HARDMAN ON BEHALF

OF THE INTERNATIONAL COMMUNICATIONS ASSOCIATION

Mr. Chairman, I am pleased to have been invited to testify before the Subcommittee Telecommunications, Trade, and Consumer Protection regarding H.R.

3011, the ‘‘Truth in Billing Act of 1999’’ and H.R. 3022, the ‘‘Rest of the Truth in

Billing Act of 1999’’. Mr. Chairman, you, Chairman Bliley, and Congressman Markey, as well as the members of the Subcommittee and staff, are to be commended

for your efforts to ensure that America’s telephone customers are explicitly told

what governmentally imposed taxes, fees, and subsidies they are being required to

pay in their monthly telephone bills. Clearly, the issues addressed in H.R. 3011 and

H.R. 3022 are ones that warrant prompt action. My testimony will represent the

perspective of the telecommunications end user, and I hope that the perspective of

the telephone customer will facilitate the Subcommittee’s deliberations by on these

important matters.

The International Communications Association (‘‘ICA’’) is the largest and most

broadly-based organization of telecommunications end users in the United States.

ICA is a not-for-profit league of almost 500 corporate, educational, and governmental users of telecommunications and information equipment, facilities, and services. ICA members do not include firms predominantly engaged in the production,

sale, or rental of telecommunications services or equipment. Collectively, ICA members spend over $32 billion per year in this area. On average, individual ICA member telecommunications/information expenditures exceed $30 million annually. Twothirds of ICA member companies employ over 10,000 persons, and only 2% have

work forces under 1,000. Over 86% of these firms conduct business from fifteen or

more locations. As always, ICA speaks from a telephone customer perspective that

is broadly informed on the state of the telecommunications and information industries in the United States. If the results of this Subcommittee’s deliberations become

law, and we hope they do, the monthly telephone bills of ICA members, and other

telephone customers as well, could be positively impacted.

Introduction

ICA believes that competition is the ultimate safeguard for the telecommunications industry. In recent years, significant progress has been made in developing

a competitive telecommunications. ICA vigorously supports pro-competitive policies

and the extension of such policies to all sectors of the local telephone marketplace.

Unfortunately, whether a market is competitive or not does not impact the likelihood that telephone bills will accurately and explicitly reflect the numerous governmentally imposed fees, taxes, and subsidies that ratepayers are forced to pay. All

too often, governmental bodies find it in their interest to pressure the telecommunications carrier community into not explicitly showing these costs to consumers.

Even worse, as market prices continue to decrease, some governmental bodies have

demonstrated an increased incentive to create pet fees, taxes, and subsidies in hopes

that they will not be noticed by telecom ratepayers. These government bodies attempt to time the implementation of their pet projects to coincide with a forthcoming rate reduction thereby hijacking a portion of the monies that would otherwise have benefitted ratepayers in higher savings.

38

Business Users’ Dependence on Telecommunications

Since ICA members face competitors in both the technologically developed countries and the low-wage, less-developed countries, they must always be mindful to

minimize their operational costs as much as possible. To compete in the world marketplace, large business has an absolute need for timely, accurate, cost effective information that can be made available on demand. To accomplish this, user companies must be able to obtain, operate, maintain, and fully utilize state-of-the-art telecommunications and information technology at cost based rates.

With the development of various voice and data based systems and applications,

large business users have become dependent on efficient, reliable, readily available,

and reasonably priced telecommunications equipment, facilities, and services. If this

Subcommittee is able to ensure that American telephone customers pay as few governmentally imposed telecommunications fees, taxes, and subsidies as possible, then

America’s business users and its economic future will be significantly benefitted by

your efforts. For this reason, ICA members are fully support these deliberations of

the Subcommittee.

Legislative Objective of Business Users

Typically, ICA’s objectives in telecommunications legislation have been based on

several principles:

A. Legislation should ensure economically rational pricing. This is critical to

ICA members ability to successfully budget and plan for their information and

telecommunications needs. It is also critical to American businesses ability to

carefully control costs in an era of rampant global competition. For less than

fully competitive markets, ICA encourages the application of cost-based pricing

principles by regulators. Of equal importance is the fact that all governmentally

imposed fees, taxes, and subsidies should be clearly and explicitly reflected on

customer telephone bills and kept to a bare minimum. Since American telecommunications technology leads the world, governmental bodies should not be

allowed to needlessly increase its cost to American business by regularly dumping various charges on the bills of American ratepayers.

B. Legislation should increase the availability of services for real user applications and needs—today and tomorrow. It is important that new services be ones that ICA members can really use, not just services that are predefined by carriers and other providers. Public policies should promote increased interoperability among services and networks and allow maximum flexibility for the provision of new telecommunications services. If governmentally

imposed fees, taxes, and subsidies are fully warranted, they should be fairly and

evenly applied to all services so that end user decision making on which services to use is not skewed by unfairly imposed government charges.

C. Legislation should enhance the ability of ICA members to effectively

plan and manage their telecommunications service needs. The need for

customers to manage their telecommunications resources on a day-to-day basis

must be accounted for. A dizzying array of governmentally imposed fees, taxes,

and subsidies only makes end user management of the telecom services more

difficult.

D. Legislation should contain new incentives leading to worldwide compatibility and uniform access to customers and services. The development of

a technologically advanced network based on worldwide standards is critical to

ICA members who are relying upon more and more specialized telecommunications applications in order to remain competitive and innovative in a global

environment. Ever increasing governmentally imposed telecom fees, taxes, and

subsidies retard these incentives in the U.S. and create incentives for investments to be made in those countries that do not have these charges.

The government imposition of charges for school wiring, presubscribed interexchange carrier charges (PICCs), subscriber line charges at varying levels, telephone number portability, federal excise taxes originally intended to help fund the

Spanish American War, 911 services, infrastructure maintenance, and others does

not facilitate the most robust use of the telecom networks possible.

In addition, the imposition of government subsidies is all too often at

unsupportable levels or not explicitly charged. Last Fall, the FCC revised its universal service rules for large local carriers. The revised rules reduced the allowable

levels of support for some companies, but the FCC also adopted a ‘‘hold harmless’’

policy that effectively negated the ratepayer benefit of these rules by allowing the

effected carriers to continue to collect subsidies at the previous levels provided

under the old rules. Also, ratepayers in a number of states subsidize the ratepayers

in other states without any knowledge of this happening. Without questioning the

wisdom of these policies, it is only fair that ratepayers know what they are paying

39

for. In addition, business users are often required to pay higher fees (subscriber line

charges, PICCs, etc.) than other ratepayers for non-traffic sensitive costs. All ratepayers should pay fixed costs equally. If subsidies are required, they should be explicitly indicated and fairly imposed.

CONCLUSION

American businesses and educational institutions rely on telecommunications as

a strategic resource and will do so even more in the future. Telecommunications is

one of the keys to increased competitive advantage, increased profitability, economic

growth, and job creation. This reliance places upon government policy makers, and

in particular members of Congress who want to revise existing policies, the responsibility to see that telecommunications equipment, facilities, and services continue

to be readily available and provided at reasonable rates. A dizzying array of governmentally imposed telecommunications fees, taxes, and subsidies contradicts these

objectives.

ICA stands ready to work with those who want to increase user choice by making

the telecommunications marketplace, and American business generally, more competitive and free of needless governmentally imposed fees, taxes, and subsidies. We

support your quick passage of legislative language consistent with the objectives of

H.R. 3011 and H.R. 3022.

Mr. TAUZIN. I thank you, Mr. Moir.

The Chair recognizes himself quickly.

First of all, Mr. Eisenach, your report indicated that the most

taxed city in America, telephones, is Richmond, Virginia. We heard

the chairman talk about how Richmond and other cities literally

saw the telephone companies and utility companies as an easy target, because hidden taxes are a lot easier to deal with, to increase,

to collect, than taxes that a consumer sees up front. So a great deal

of what the chairman and I want to do is simply to do that, Mr.

Moir—to put it all on the table, in the hopes that, once people see

it all, two things will happen: one, there will be less of a desire to

increase those taxes, because they are no longer hidden and people

can see them and you have got to explain them in the next town

hall meeting; or, second, there will hopefully be a real effort at repeal and at straightening out some of these incredible messes. And

are not those two goals served by this legislation?

Mr. EISENACH. Absolutely, sir. I think Chairman Bliley was very

eloquent in introducing this legislation, when he talked about it

this morning and told us that he, himself, had experienced the fact

that, rather than making the case for more government spending

directly to the people, governments, instead, levy the tax on telecommunications service providers, regulators then pressure the

service provider to bury the tax, and——

Mr. TAUZIN. He is a former mayor telling us that that was the

way things were done, as long as you could hide it.

Mr. EISENACH. Yes, sir.

Mr. TAUZIN. And once the change came about that he and the

other administrators of that city and other cities in America could

not hide it any more, they stopped not raising it. And that is at

least a good effect immediately. If this bill passes, right?

Mr. EISENACH. Absolutely. And I would go further to say that I

think this is fully consistent with the intent of Congress. You and

I have had many conversations about the Telecommunications Act

and its imperfections, but it certainly has facilitated a move toward

competition, and, in its plain language, it says that we need, in all

of these arenas having to do with subsidies, to move from an implicit subsidy regime to an explicit subsidy regime.

40

Now, the Federal Communications Commission has already lost

in court in some of its efforts to continue hiding the subsidies, its

efforts to jigger access charges and subscriber line charges, and so

forth, to continue hiding the subsidies in that program and keeping

them implicit and hidden from consumers.

I think part of the effort here is to have Congressional oversight

to ensure the Commission is not successful in other efforts—for example, with the schools and libraries program—to do the same

kind of thing.

Mr. TAUZIN. Now, Mr. Breen, you, obviously, represent the view

that this is going to be pretty hard for the FCC to do and for companies to follow because of the fact that there are now so many

complex subsidy arrangements and so many taxes coming from so

many directions that it is going to make the bill not only hard to

administer for companies like yours, but for consumers to understand and it is going to be a pretty hard diet to feed the consumers.

Give us your take on that.

Mr. BREEN. Well, I think you have accurately characterized it. I

mean, you need to start from the perspective that says, on our very

best day, you know, living in the world of billing, the best that we

can do is not hear from our customers.

Customers do not pick up the phone, call in to the call center and

say, ‘‘You know, I just want to let you know this is one of the most

marvelously formatted bills. It is accurate. The aesthetics of the

paper are really wonderful, etc.’’ Mr. TAUZIN. We do not get those

calls, either.

Mr. BREEN. We have that in common. So anything that involves

adding to the complexity or the uncertainty associated with what

is on that bill, by definition is going to be a bad thing for us.

Mr. TAUZIN. But, you see, here is the problem we have. Here is

the tension. One the one hand, what consumers already know

about their bill is getting them angry. What they can already see

in terms of subsidies is getting them angry.

One of the members of the subcommittee this morning told us

that he was being charged for portability but he does not have access to portability systems. Why am I paying that?

I was on a radio talk show in New Orleans, and I had a student

call in and say, ‘‘Why am I being asked to subsidize my parents on

their phone bill?’’ And when I got home, my mother said, ‘‘And, by

the way, Billy, I am subsidizing you in DC, too, and I do not like

that.’’ I mean, they already know that there are some crazy subsidies going on and they already complain about how complex their

bills are—witness, Ms. Hotka, your retailer who has to hire special

people to go through these incredibly complex bills, already.

We are going to give them a lot more information if this bill

passes. They are not going to like how complex it looks.

On the other hand, that is reality. If we are ever going to get a

solution to all these taxes and all these subsidies and reductions

and simplification, do not you think the first thing we have to do

is just doggone burden ourselves with the truth?

Mr. BREEN. I think a lot of it, though, comes down, Mr. Chairman, in terms of the way that truth is going to be communicated.

And I cannot really comment on how the policy would play out in

41

other areas, but I know, from a billing standpoint, you are dealing,

for the most part, with a lot of legacy systems.

Any time you go in to try to introduce levels of change, the more

micro-level those changes become, whether it is text messages,

whether it is doing different forms of rate calculations, it opens you

up to a higher probability of two things: one, fundamental problems, i.e., the bill just does not get handled properly; and, No. 2,

calls from the consumer, which is going to drive cost into your cost

centers, and ultimately flow back into the cost that you go back

and charge your customer. So that is probably my biggest apprehension.

Mr. TAUZIN. Before I yield, I want to give anybody a chance to

comment. The choice is, obviously, that we inundate people with

this massive information and get them angry because we have inundated them with all that information. Or do we allow people to

keep hiding the truth from them.

Mr. Moir?

Mr. MOIR. Mr. Chairman, your legislation is actually going to

solve AT&T’s billing problem, because the second you have the disclosure we know what is going to happen. They are not going to

be able to do the next pixie. They are going to have to fold it into

slick. They are not going to be able to do rural health care and education and library give-aways at our expense.

Once these are out there and everybody sees this long laundry

list that he is dreading having to do, what is going to happen? All

bloody hell is going to break loose.

Mr. TAUZIN. They might even ask Congress to pass programs like

that——

Mr. MOIR. Absolutely.

Mr. TAUZIN. [continuing] instead of letting the FCC do it, right?

Mr. MOIR. And if the FCC is smart, they may eliminate some of

them before you go beat them up.

Mr. TAUZIN. Mr. Lassman, quickly, and then I have got to move

on.

Mr. LASSMAN. Mr. Chairman, I think it was Louis Brandeis who

wrote that sunshine is the best disinfectant, talking about regulation. And I think the 800-pound gorilla in this room that no one

has yet mentioned that causes a great shadow and a great deal of

fear is that any legislation you pass, especially that deals with billing, will be put in place by the Federal Communications Commission, and their idea of truth in billing, if you look at the docket that

they have handled in the last year, is very different than your own,

and that should be discussed and part of your deliberations.

Mr. TAUZIN. Amen, brother.

Mr. Green from Texas?

Mr. GREEN. Thank you, Mr. Chairman. I appreciate the chance

of this hearing, because, like most of us, we have letters all the

time that come in our office about the complexity of the phone bill.

One of them is that I have particularly seniors who are asking, for

example, the $5 charge that our long distance carriers charge.

Originally, I was under the impression, when that was put in, that

was in case they did not use it. It was just a $5 minimum charge

per month, but it was going to be reduced out if you used that, if

42

you called more than $5. Now I have some phone bills coming in

saying no, that is in addition to whatever you use. When did that change, or was it ever correctly the original $5

charge? AT&T, I guess you are the one on the line, but I would like

to ask it of MCI and everyone else, I guess.

Is it actually an offset? Is it a monthly fee and it is offset against

your long distance, or is it in addition to whatever you call?

Mr. BREEN. No. I think you have, Mr. Green, appropriately stated that the charge you are talking about is typically referred to as

an OCP or an optional calling plan charge, and it essentially gives

the consumer an opportunity, based on a particular calling plan, to

pay a fixed monthly fee in order to entitle them to a certain rate

structure with a particular plan, whatever it may be. That really

was the intent initially.

Mr. GREEN. But initially I understood from seniors there was a

charge for just access to a long distance provider. Is that on the

bill? That is currently on it?

Mr. BREEN. Yes.

Mr. GREEN. Okay. And is that charged no matter what? What if that senior makes more than $5 worth of calls? Is that subtracted

out, or is it in addition to whatever calls they make?

Mr. BREEN. My understanding is the way that it is currently set

up is that it is purely additive and that it is independent on the

amount of usage that a person has during the month.

Mr. GREEN. Okay. So if I pick any long distance provider—

AT&T, MCI, Sprint, whatever—that charge will be on the bill?

Mr. BREEN. Yes.

Mr. GREEN. Was it confusion that I had, or maybe some of my constituents had that originally that $5 charge was just an access

fee to have a long distance carrier and it would be reduced out for

whatever you call, for whatever you actually called long distance?

Was that the original intent and it was changed somewhere along

the way? There is a lot of folks out there who believe that is what

it was.

Mr. ENGEL. Would the gentleman yield?

Mr. GREEN. Sure.

Mr. ENGEL. My recollection is exactly as my colleague’s recollection. We were told initially that that would be a fee instituted for

people that do not use service, because it supposedly was expensive

for the companies to carry it without anybody utilizing it, and that

if the person did make the calls, that the amount of money they

spent on the calls would be subtracted from the fee. That was exactly my understanding of it, as well. And we had not discussed

this before.

Mr. GREEN. There was no collusion on this.

Mr. ENGEL. No collusion.

Mr. GREEN. We are not that organized.

Mr. ENGEL. That is actually a good question, but I actually want

to say that is my impression, that is was told to us.

I yield back.

Mr. GREEN. Do you have a response?

Mr. BREEN. Well, I am not in a position right now to be able to

give the chronological set of events that contributed to it. I do know

that the genesis of it, though, was to basically be utilized as some

43

form of an offset, you know, cost-to-cost causation with respect to

the combination of local access to the long-distance network to

make sure that, in fact, that was applied equitably.

Mr. GREEN. Thank you.

Mr. Chairman, I think that is something that we might need to

look at, because I know the complexity of the bill and the intent

of the hearing. That was part of it. There is either some misinformation, or that it was an offset and it was a basic charge for

having access to a long distance carrier and it would be reduced

out if you made $6 long distance calls in a month, instead of paying

$11 for $6 worth of long distance calls.

Mr. TAUZIN. I think Mr. Eisenach wanted to respond.

Mr. EISENACH. Well, there are two articles that I brought with

me, because I find this is—despite the fact I spent a good bit of my

time studying this, I find this is confusing as anyone else. One article is from the ‘‘Washington Post’’ and one is from the ‘‘Wall Street

Journal.’’ I would be happy to share these with the subcommittee.

Mr. GREEN. Hopefully, they agree.

Mr. EISENACH. They explain, in layman’s language, what some of

these charges are all about.

Just to clarify, I think there may be a confusion here between

what is called the carrier line charge, which is the access to the

long distance network, and that is charged whether you sign up

with a long distance carrier or not. That is typically more in the

nature of $1.50 than the $5 charge that you are talking about. I think what you are talking about with the $5 charge is part of

a calling plan that a number of the long distance providers——

Mr. GREEN. I understand that if you have a calling plan. So the $1.50—I have been told—and I have to look at my own phone bills,

I guess—that the actual cost to have a long distance carrier access

was about $5.

Mr. EISENACH. That is not what this article suggests.

Mr. GREEN. Okay.

Mr. EISENACH. And that is not my understanding.

Mr. TAUZIN. Without objection, the two documents will be made

part of the record and we will make copies for members of the committee. Thank you, Mr. Eisenach.

Mr. BREEN. Just for further clarification, I think that that is

probably where the source of confusion lies. There are, in fact, two

separate fees. One is essentially intended to be an access fee to the

long distance network. The other one has tended to be associated

with a specific calling plan that a customer would sign up for, and

then that is a monthly fee that they would pay, independent of the

number of calls that they made.

Mr. GREEN. And those two fees are not something that Congress

or the FCC set. AT&T or MCI decided that we would have one line

here for the $1.50, if it is $1.50, and then if I select a certain calling plan I pay $5 or $10 or whatever to get $0.10 a minute, or

whatever the market says at a given time. So that was something

that the company decided, the long distance carriers decided?

Mr. EISENACH. As I understand the carrier line charge, that is

something that is approved by, or I would argue mandated by the

Federal Communications Commission, so that is part of the regulated billing process.

44

Mr. GREEN. If the gentleman will yield, the bill we are talking

about would separate that which is government mandated from

that which is either charged by the companies or voluntarily accepted by the customer. So I think one of the reasons for this bill

is to end some of that confusion.

Mr. GREEN. Yes. I agree. And that is why I think the bill is

worthwhile.

I also think we are all guilty of it, though, whether it is Congress, whether it is the FCC, or maybe a long distance carrier saying, ‘‘Well, we want to break it out,’’ and we will go to the FCC,

and the FCC gives you the authority to break out that $1.50. So

it is government-mandated, but it was at the request of the long

distance carriers.

Again, those balls are in the air, and all of us I think are throwing them up there.

Ms. MCCARTHY. Would the gentleman yield?

Mr. TAUZIN. The gentleman has an additional minute.

Mr. GREEN. Thank you, Mr. Chairman.

Ms. MCCARTHY. Gentlemen, I really appreciate your line of inquiry, and I wanted to follow up and find out, is the carrier line

charge—I understand that access fee is required, but is the calling

plan required?

Mr. BREEN. The calling plan is not required. It is based upon the

calling plan that a customer would sign up for.

Ms. MCCARTHY. What if a customer chooses not to have a calling

plan but will pay the access fee, the carrier line charge, as required?

Mr. BREEN. Those customers, I think, that you are describing

would be in a non-pick status, where they would not be picked, for

example, to an AT&T or an MCI, and they would not have a calling

plan with us, per se, and they would reach our network through

what we refer to as ‘‘dial around,’’ and would become casual usage

and would not pay that calling plan or OCP charge that I was talking about.

Ms. MCCARTHY. I have had a lot of inquiries, particularly from

seniors, who, with their MasterCard or VISA or cell phone do not

want to pay that $5 or $6 fee each month because they do not use

that stationary phone to make long distance calls, or they just do

not make long distance calls. They might use a credit card.

So you are telling me they do not have to pay that? Because we

have been giving out bad information in my office, then.

In this day and age of cell phones, a lot of people are just getting

rid of their phones and using their cell phone for everything, or

they are using a credit card that gives them airplane mileage or

some other benefit when they make those calls.

Mr. BREEN. I understand. Honestly, short of seeing the individual bill and account and going through it, I just do not want to

comment further on it, because I just think I might contribute to

further misleading you.

Ms. MCCARTHY. Mr. Chairman, if someone on the panel can give

me a sense of the rule or regulation, could they speak?

Mr. TAUZIN. Mr. Moir, do you know?

Mr. MOIR. Thank you, Mr. Chairman.

45

The line charge that has been discussed was coined back in May

1997. It is called the ‘‘pixie charge.’’ The local phone company—and

it varies. You know, for single line business or the first line at

home, it is one charge. For the second line and additional lines in

homes, it is about a dollar higher. And then, for those of us who

are at work, it is considerably higher. In fact, it varies from State

to State, but the industry average is about $4.60 or $4.70 a line.

Theoretically, it is supposed to be coming down, but it actually

went up the last year.

Mr. TAUZIN. That is just the line charge?

Mr. MOIR. That is just that. And now——

Mr. TAUZIN. What the gentlelady is getting at is the $5 plan

charge.

Mr. MOIR. I am getting there. Right. So what happens is those

charges are billed by the local phone company, these pixie charges,

to your designated, or what we call or what they call ‘‘pre-subscribed long distance company,’’ who then, of course, bills it back

to the customer on their bills.

Now, in the very situation you have raised, you can choose to not

designate a long distance company for that line or actually, you

know, if you have five lines at home, you can have long distance

companies for some lines and not for others.

For any line you do not designate or pre-subscribe a long distance company, then the local phone company will bill you directly

for that line charge, that pixie, but then all of these fees that you

are getting from long distance companies and various plans will

not occur on your bill, and then you will use, as the gentleman

mentioned, a dial-around or some other way of getting to long distance.

Mr. TAUZIN. So the answer, in short, is that you can avoid these

charges if you want, simply by not choosing a long distance carrier

and using these other systems when you need long distance.

Mr. MOIR. But you will still have to pay the pixie charge, but you

will avoid the minimums.

Ms. MCCARTHY. That is that line charge. That is that minimal

dollar-something.

Mr. MOIR. Well, but if you have two lines it is more than a dollar.

Ms. MCCARTHY. I understand.

Thank you, Mr. Chairman.

Mr. TAUZIN. Thank you, ma’am.

The gentleman from Oklahoma, Mr. Largent.

Mr. LARGENT. While we are on this subject, I want to go to this

pixie charge. If you are on this little bill, it has current line charge

or carrier line charge, $1.51. That is what we are talking about,

right, at the top?

Mr. MOIR. For the first line.

Mr. LARGENT. Right. Does it make any sense to charge anybody

a carrier line charge who does not have a long distance provider?

Anyone?

Mr. LASSMAN. Mr. Largent, what you have put your finger on is,

in common sense terms, no. It does not. However, rates to pay for

our underlying telecommunications network are regulated, and the

46

cross-subsidies involved in that regulation require that somebody

has to pay for the upkeep.

What you have identified, that situation, is how we take from

consumers to pay for that.

Mr. LARGENT. Would the same be true, then, for this local number portability surcharge over here that is on my bill, as well, when

I do not have the ability to switch local providers? It does not make

any sense.

And the reason this is an issue to me, I mean, not only am I

being charged for number portability when I do not have a choice

of local providers, I have a son who is a young married guy going

to college full time, working a part-time job 30 hours a week. He

does not have a long distance provider. He cannot afford long distance, so he just does not have a provider, but he is still getting

charged this carrier line charge.

Mr. MOIR. I would just like to make a slight correction or disagreement with what was just said here by my colleague to the

right.

When the pixie charge was being debated and decided in May

1997, so we could get to start seeing——

Mr. LARGENT. By whom?

Mr. MOIR. By the FCC.

Mr. LARGENT. All right.

Mr. MOIR. The FCC that you all have jurisdiction over here.

Mr. LARGENT. Yes. Sometimes.

Mr. MOIR. Yes, even though they do not always listen. That FCC,

then chaired by your good friend Reed Hunt, that FCC decided——

Mr. TAUZIN. Wait. Is he the guy that wrote a book that said he

was just taking orders?

Mr. MOIR. Something like that. Although I thought the FCC was

an independent regulatory agency under the commerce clause and

directly responsible to the Congress, but what do I know.

Or at least Commerce Committees used to——

Mr. LARGENT. Mr. Moir, you are using my time.

Mr. MOIR. All right. The pixie charge came out of access moneys,

and the idea was to take—and they were saying these were fixed

costs. What we were saying, before you add that as a line item and

take it out of access charges, which is being billed on a usage-sensitive basis, we want you, the FCC, to figure out what the true cost

is of that local loop from your customer premise to the FCC.

States have rate cases all the time. The FCC, in its entire history, going back to 1934, has never done a cost of service proceeding. Back home, in your State and your State, they do it all

the time. The FCC has never done that and refused to do that. And

they just took an arbitrary amount of money and dumped it there

and dumped most of it on business users.

Our average one, if that was a business bill, would be $4.60 or

$4.70 for the same figure.

They just did that without any cost justification whatsoever.

So the more you can highlight these issues, the more they are

going to, at the FCC, have to cost justify these baloney numbers.

Mr. LARGENT. Ms. Hotka, I had a question for you, because in

your testimony you said, ‘‘While most analysts acknowledge that

rates for long distance and data services have fallen, bills generally

47

are not.’’ That is true for my house. I just have been doing my

taxes and figuring my tax bill, and my communication bill, telephone bills are $300 a month at my house. That is my personal

bill. Whereas I used to get one phone bill that was local and long

distance, I now get a local phone bill from Southwestern Bell, I get

a cell phone—I used to get two cell phone bills—long distance bill,

and now an ISP. So I have got at least four different bills that

come in on a monthly basis, and my bills have gone up.

But now I have got Internet in my kitchen, I have got three cell

phones, to my knowledge, and so there is a lot of other things that

I get to do. And I have a fax, as well, in my house. So there is a

lot of things that the business community and individuals like myself are getting to do and have access to today that we did not have

access to years ago when our bills were much smaller.

So I am not disagreeing that the cost of regulation is a burden

to all of us, but what I am saying is that I think some of the reason

that my personal phone bill is going up is my wife cannot live without a cell phone, we have to have a fax, and we are now on the

Internet, so there is a lot of other goods that we are receiving that

are causing our bills to go up, as well as the regulatory burden.

Would you agree with that?

Ms. HOTKA. Yes. There is no question. And advances in technology are doing more to advance retailing at this stage than anything. But, at the same time, frankly, when I made my phone calls

to my Telecommunication Committee members I anticipated that

the complaints that I would get would echo the questions that you

have had today, ‘‘What does this mean? How does this work?

Where does this money go?’’ I thought that those comments would

be made by smaller companies.

This stuff is not understood by Fortune 100 companies. It is just

too complicated. It makes it very difficult for them to do cost/benefit analysis on different kinds of telecommunication technologies.

When Mr. Tauzin talks about a flood of information, that is good.

We would like to have a flood of information. It would help the people who are tasked with analyzing this stuff make much better decisions.

Right now, frankly, to some degree, they are simply retreating

from it and saying, ‘‘I do not get this stuff.’’ Well, they are going

to have to get this stuff. It is what is going to make them competitive in a global economy.

Mr. LARGENT. Yes.

Ms. HOTKA. And so I think any difficulty you have got at home

plowing through your thick bill, just imagine how awful that is for

companies which are in many nations. It is very difficult. And so

anything we can achieve here which is going to make this easier

for them to understand is going to help them use these technologies

that you mentioned more efficiently.

Mr. LARGENT. Yes.

Mr. Chairman, I understand we have a vote on the floor, so I

yield back.

Mr. TAUZIN. I thank the gentleman.

Mr. Wynn?

Mr. WYNN. Thank you, Mr. Chairman.

Mr. Breen, I believe you are with AT&T?

48

Mr. BREEN. Yes.

Mr. WYNN. The question I have is: why do some companies collect the e-rate subsidy, which appears to be a favorite whipping boy

today, on a flat rate and some use a percentage of the customer’s

bill? Also, at the same time, how does AT&T collect it?

Mr. BREEN. I really cannot answer that at this time. I am not

absolutely sure on that one, but we can get back to you on that.

Mr. WYNN. I would appreciate that, because there is some evidence that there is a discrepancy between the 5.7 percent that the

FCC collects for e-rate and what is reported in the ‘‘Wall Street

Journal’’ at about 8.6 percent, and so obviously there is a concern

about what happens to the difference if, in fact, this is true. So if

you would provide that information, it would be very helpful.

Mr. BREEN. Understood. We will.

Mr. TAUZIN. Mr. Lassman may have an answer.

Mr. LASSMAN. Mr. Wynn, to clarify that, the pricing structures

that we see from the private companies in their interaction with

consumers mirrors some of the decisions we made 50 and 60 and

70 years ago about regulation, and that is that consumers are more

important than businesses. That was taken as an assumption.

Today, there are flat rate universal service fees given to consumers, residential lines, and percentage-based universal service

fees applied to business lines.

So the answer, unfortunately, to your question is both.

Mr. WYNN. Are you prepared to make that representation on behalf of the long distance companies? Not to in any way suggest that

you are incorrect, but that is a pretty broad statement on a pretty

critical issue, and if AT&T is not sure how they do it, I have to

be a little concerned that an activist group might not have the latest information.

Mr. LASSMAN. I am not speaking for AT&T or any of the other

450-plus long distance companies in America, but I am trying to

explain to you at least one distinction about how those bills——

Mr. WYNN. So it is your understanding then that no consumers

are being charged a percentage rate.

Mr. LASSMAN. Business consumers are. Residential

consumers——

Mr. WYNN. No residential consumers are being charged a percentage rate?

Mr. LASSMAN. To my knowledge, they are not. Like I say, I cannot speak for each of them.

Mr. WYNN. We will try to follow up on that, but I thank you.

That was very helpful.

Mr. Chairman, in view of the vote, that is all for me.

Mr. TAUZIN. I thank you.

The record will stay open for 30 days. I would ask you, please,

if you have further comments on the Upton bill, on some of the testimony Mr. Norquist gave about what is going to happen when the

meeting happens in Texas, any further supplements you would like

to give us—I know you are good at that—we would appreciate it

very much.

Thank you for your testimony today. The hearing stands adjourned.

49

[Whereupon, at 12:09 p.m., the subcommittee was adjourned, to

reconvene at the call of the Chair.]

[Additional material submitted for the record follows:]

AMERICAN LIBRARY ASSOCIATION

March 9, 2000

Chairman W.J. TAUZIN

Subcommittee on Telecommunications, Trade, and Consumer Protection

House Committee on Commerce

Washington, DC 20515-6115

DEAR CHAIRMAN TAUZIN: On behalf of the American Library Association’s 59,000

members, I applaud the committee’s efforts to give American consumers of telecommunications more information in order to ensure ‘‘truth in billing’’ and to increase overall understanding of a complex billing system. The debate you are undertaking on bills H.R. 3011 and H.R. 3022 is a laudable activity, especially if the outcome of your efforts provides the whole picture to consumers.

ALA has long been a supporter of openness and access to information in the government process and in the marketplace. Librarians are in the daily business of providing full and accurate information to consumers. However, we would not want to

see this concept misused to discredit a program that has provided benefits to consumers through schools and libraries in hundreds of communities in every state.

Just as we provide our customers with accurate information that is not misleading,

we expect Congress to require nothing different from telecommunications providers.

Eighty-seven percent of American voters favor discounts for schools and libraries

in rural and high poverty areas so they have the same affordable access and availability to technology as schools and libraries in wealthy areas. These voters are telephone customers and they deserve a greater understanding of all the subsidies within the telephone system, and how these subsidies are becoming more explicit as a

result of the deregulation provided for in the Telecommunications Act of 1996.

We look forward to working with you and other stakeholders to enhance communication on this complex subject. Please let us know if we can provide additional

information or comment.

Sincerely,

EMILY SHEKETOFF

Executive Director, Washington Office

American Library Association

PREPARED STATEMENT OF ROY NEEL, PRESIDENT AND CEO, UNITED STATES

TELECOM ASSOCIATION

Thank you very much, Mr. Chairman, for giving me the opportunity to submit testimony for this hearing with respect to H.R. 3011, the ‘‘Truth in Telephone Billing

Act of 1999,’’ and H.R. 3022, the ‘‘Rest of the Truth in Telephone Billing Act of

1999.’’ This hearing is both timely and important. As the President and CEO of the

United States Telecom Association (USTA), I am submitting testimony today on behalf of over 1100 local telephone companies that we represent throughout the

United States. Our members send out millions of telephone bills every month. These

companies are already regulated with respect to their telephone bills, being subject

to both state and federal regulations and/or mandatory guidelines. To give you an

example of this, the Federal Communications Commission (FCC) just last year gave

us new and additional Truth-in-Billing requirements—which it called ‘‘guidelines’’—

to follow. Given this experience, I would say to you that as a general proposition,

government regulation of billing content is not a sound legislative or public policy

goal, especially in a competitive environment.

I understand and appreciate the billing issue that prompts your legislation. What

I hope is that you will stop today to consider the fact that the statutory requirements that you would place on carriers may actually cause more consumer concision

than H.R. 3011 or H.R. 3022 seek to cure. Phone bills are already long enough as

it is, and consumers do not want to be confronted with even lengthier bills, containing detailed explanations of universal service charges and other charges. The

entire arena of universal service, for instance, is extremely complex even to professionals in the telecommunications industry. Both pieces of legislation, if enacted,

would require telephone bills that would raise even more questions for consumers

rather than answering them. USTA believes that a customer’s phone bill is not the

appropriate place to explain contributions to the universal service fund pursuant to

Section 254 or any other governmental mechanism, fund, tax or program.

50

The FCC just last May released its First Report and Order and Notice of Proposed

Rulemaking (FCC Docket 98-170) In the Matter of Truth-in-Billing and Billing Format. The FCC adopted in that proceeding binding Truth-in-Billing guidelines for

telecommunications carriers. The purpose of these guidelines was to provide consumers with basic information to make informed choices and to protect them from

unscrupulous competitors. In this proceeding, the FCC also looked at the type of

issues that H.R. 3011 and H.R. 3022 contemplate, with the FCC concluding that

charges associated with federal regulatory actions, such as universal service, should

be identified through a standard and uniform label. The FCC issued a Further Notice of Proposed Rulemaking with respect to the specific labels to be used. My message here is not to salute the FCC’s actions but to point out to you that both the

FCC and the states are actively engaged with respect to this Truth-in-Billing issue,

even though in many instances we find their requirements examples of regulatory

overkill. Nonetheless, this is not an area that the regulators are treating with benign neglect.

Added to the above, USTA believes that H.R. 3011 and H.R. 3022, if either were

to be enacted, would be costly for telephone companies to implement. Extreme expense would be associated with changing existing billing systems to provide for the

lengthy descriptions that either piece of legislation calls for. As drafted, these obligations would extend to ‘‘any other governmental mechanism, fund, tax or program.’’

Read literally, telephone bills would be required to have additional line items for

the subscriber’s share of every tax or fee that a carrier pays (e.g., income taxes,

rights of way fees, number portability, etc.). In the competitive environment mandated by the Telecommunications Act of 1996 (’96 Act), these costly (and, again, customer-confusing) regulatory requirements are ones we are seeking to avoid. No

longer in a monopoly era, telephone companies simply cannot absorb the significant

costs of such requirements without resultant negative economic consequences.

The problem you are trying to solve with H.R. 3011 and H.R. 3022 is itself the

by-product of the ’96 Act and the changes wrought by Section 254, which Congress

added because the prior monopoly scheme of universal service could no longer be

sustained in a competitive environment. Regulatory costs are true costs, something

USTA believes the ’96 Act sought to eliminate and/or supplant through increased

competition.

Finally, telephone companies regard their customer billing as a powerful, competitive marketing tool which allows them to differentiate their services from other providers. Aside from raising obvious First Amendment concerns, compelled government speech greatly disrupts the manner in which companies communicate with,

and compete for, customers. Moreover, though the phone bill was ‘‘deregulated’’

nearly 15 years ago, increasing state and federal mandates, along with new legislative proposals (as seen in H.R. 3011 and H.R. 3022), signal a disturbing trend toward reregulating the phone bill as a common carrier service. In a competitive environment, this circumstance must be strenuously avoided.

In closing, there is no existing vacuum that Congress needs to fill by legislative

mandate. USTA’s members have a strong self-interest in maintaining the integrty

of their phone bills and in making sure that customers can clearly understand and

read them. Though the concerns Congress seeks to address within H.R. 3011 and

H.R. 3022 are legitimate, USTA respectfully asks that Congress allow our companies, and the marketplace in general, to communicate to their customers free from

further law or resulting regulation.

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