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STATE TAXATION OF INTERSTATE

TELECOMMUNICATIONS SERVICES

HEARING

BEFORE THE

SUBCOMMITTEE ON 

COMMERCIAL AND ADMINISTRATIVE LAW

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

JUNE 13, 2006

Serial No. 109–120

Printed for the use of the Committee on the Judiciary

(

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

(II)

COMMITTEE ON THE JUDICIARY 

F. JAMES SENSENBRENNER, JR., Wisconsin, Chairman 

HENRY J. HYDE, Illinois 

HOWARD COBLE, North Carolina 

LAMAR SMITH, Texas 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

STEVE CHABOT, Ohio 

DANIEL E. LUNGREN, California 

WILLIAM L. JENKINS, Tennessee 

CHRIS CANNON, Utah 

SPENCER BACHUS, Alabama 

BOB INGLIS, South Carolina 

JOHN N. HOSTETTLER, Indiana 

MARK GREEN, Wisconsin 

RIC KELLER, Florida 

DARRELL ISSA, California 

JEFF FLAKE, Arizona 

MIKE PENCE, Indiana 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

TOM FEENEY, Florida 

TRENT FRANKS, Arizona 

LOUIE GOHMERT, Texas 

JOHN CONYERS, JR., Michigan 

HOWARD L. BERMAN, California 

RICK BOUCHER, Virginia 

JERROLD NADLER, New York 

ROBERT C. SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

MARTIN T. MEEHAN, Massachusetts 

WILLIAM D. DELAHUNT, Massachusetts 

ROBERT WEXLER, Florida 

ANTHONY D. WEINER, New York 

ADAM B. SCHIFF, California 

LINDA T. SA ́ NCHEZ, California 

CHRIS VAN HOLLEN, Maryland 

DEBBIE WASSERMAN SCHULTZ, Florida

PHILIP G. KIKO, Chief of Staff-General Counsel 

PERRY H. APELBAUM, Minority Chief Counsel 

SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

CHRIS CANNON, Utah Chairman

HOWARD COBLE, North Carolina 

TRENT FRANKS, Arizona 

STEVE CHABOT, Ohio 

MARK GREEN, Wisconsin 

J. RANDY FORBES, Virginia 

LOUIE GOHMERT, Texas 

MELVIN L. WATT, North Carolina 

WILLIAM D. DELAHUNT, Massachusetts 

CHRIS VAN HOLLEN, Maryland 

JERROLD NADLER, New York 

DEBBIE WASSERMAN SCHULTZ, Florida

RAYMOND V. SMIETANKA, Chief Counsel 

SUSAN A. JENSEN, Counsel 

BRENDA HANKINS, Counsel 

MIKE LENN, Full Committee Counsel 

STEPHANIE MOORE, Minority Counsel 

(III)

C O N T E N T S 

JUNE 13, 2006

OPENING STATEMENT 

Page 

The Honorable Chris Cannon, a Representative in Congress from the State 

of Utah, and Chairman, Subcommittee on Commercial and Administrative 

Law ........................................................................................................................ 1

The Honorable Melvin L. Watt, a Representative in Congress from the State 

of North Carolina, and Ranking Member, Subcommittee on Commercial 

and Administrative Law ...................................................................................... 3

WITNESSES 

Mr. Steven Rauschenberger, Assistant Republican Leader, Illinois Senate, 

and President, National Conference of State Legislatures, Springfield, IL 

Oral Testimony ..................................................................................................... 6

Prepared Statement ............................................................................................. 8

Mr. Stephen P. B. Kranz, Tax Counsel, Council on State Taxation (COST) 

Oral Testimony ..................................................................................................... 24

Prepared Statement ............................................................................................. 26

Mr. David Quam, Director, Office of State and Federal Relations, National 

Governors Association, Washington, DC 

Oral Testimony ..................................................................................................... 32

Prepared Statement ............................................................................................. 34

Mr. Scott Mackey, Economist and Partner, Kimbell Sherman Ellis LLP, Montpelier, VT 

Oral Testimony ..................................................................................................... 37

Prepared Statement ............................................................................................. 40

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

Prepared Statement of the Honorable Chris Cannon, a Representative in 

Congress from the State of Utah, and Chairman, Subcommittee on Commercial and Administrative Law ........................................................................ 2

(1)

STATE TAXATION OF INTERSTATE 

TELECOMMUNICATIONS SERVICES 

TUESDAY, JUNE 13, 2006

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON COMMERCIAL

AND ADMINISTRATIVE LAW, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC.

The Subcommittee met, pursuant to notice, at 3:07 p.m., in Room 

2141, Rayburn House Office Building, the Honorable Chris Cannon 

(Chairman of the Subcommittee) presiding. 

Mr. CANNON. Good afternoon, ladies and gentlemen. This hearing 

of the Subcommittee on Commercial and Administrative Law will 

now come to order. I apologize for being a few minutes late. We 

just had a vote. 

Every month, we’ll receive at least one bill from a telecommunications company and some receive more. I know I do. These bills 

are for our home phone, cell phone, cable, DSL, cable Internet, and 

other services. Whenever I look at my bill, one thing I keep thinking is how much do I have to pay in taxes just to be able to communicate with others. 

In our increasing mobile society, communications services hold us 

together. These services allow us to keep in touch with our families 

while we are away from home. They allow us to communicate with 

our kids when they leave home. I personally e-mail or text message 

my son. It turns out to be the most convenient way to get more 

than three words out of him. And not often and they sometimes are 

‘‘u’’ instead of ‘‘y-o-u,’’ but this is what life is about. With the touch 

of a button, we can contact them to find out how they are, find out 

how they are doing and then they ask us for more money. I was 

thinking we might be able to establish a filter for that. 

The innovations and expansion of communications have helped 

us become a more productive society and fueled our ability to lead 

the global economy. We should be finding ways to encourage innovation, not block it with excessive and discriminatory taxes. Higher 

taxes ensure that we will see less of the taxed service. Taxing telecommunications services stymies technological process by creating 

disincentives to purchase these services. 

Communication taxes have been applied piecemeal by local State 

and Federal Government over a long period of time, and many of 

these taxes were created while we still had essentially one company running communications in America. We now have competition from wireless, cable and others, but we still have not moved 

2

away from a complex tax system, even though we have a dynamic 

competitive industry. 

Taxes on communications services are a jumble. The tax rates on 

communications are about at the point where these taxes are approaching the level of ‘‘sin’’ taxes. We want to encourage people to 

use communications, and we want all people to be able, not move 

the cost beyond what the poor amongst us can afford. The taxes 

fees and surcharges on a phone bill include: Relay center surcharges public right-of-way fees, gross receipts taxes, 911 fees, universal service funds, cost recovery surcharges, State sales tax, local 

sales tax and additional local taxes. 

It is easy to understand what some of these taxes fund such as 

the 911 fees, but other fees are not comprehensible such as the cost 

recovery surcharge found on the Virginia Verizon bill. 

In 2004, the regressive rate of State and local taxation on telecommunications services was 14.17 percent. States and localities 

have acknowledged there is a problem and that we need to reform. 

Today, we’ll discuss this problem and what can be done to limit excessive taxation on telecommunications services and providers. 

This is just the beginning of the discussion. I expect future hearings on this issue, and I look forward to the testimony of the panel. 

Now without objection, the Chair will be authorized to recess the 

Committee at any point. Hearing none, so ordered. 

I further ask unanimous consent that Members have 5 legislative 

days to submit written statements and statements by interested 

parties for inclusion in today’s record. Without objection, so ordered. 

[The prepared statement of Mr. Cannon follows:]

PREPARED STATEMENT OF THE HONORABLE CHRIS CANNON, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF UTAH, AND CHAIRMAN, SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

Good afternoon ladies and gentlemen; this hearing of the Subcommittee on Commercial and Administrative Law will now come to order. 

Every month we all receive at least one bill from a telecommunications company, 

and some receive more, I know I do. These bills are for our home phone, cell phone, 

cable, DSL, cable internet, and other services. Whenever I look at my bill, the one 

thing I keep thinking is: How much do I have to pay in taxes, just to be able to 

communicate with others? 

In our increasingly mobile society, communications services hold us together. 

These services allow us to keep in touch with our families while we are away from 

home. They allow us to communicate with our kids when they leave home. With the 

touch of a button, we can contact them to find out how they are, find out what they 

are doing and for them to ask us for more money. Maybe we could establish a filter 

for this use! 

The innovations and expansion of communications have helped us become a more 

productive society and fueled our country’s ability to lead the global economy. We 

should be finding ways to encourage innovation, not block it with excessive and discriminatory taxes. Higher taxes ensure that we will see less of the taxed service. 

Taxing telecommunications services stymies technological progress by creating disincentives to purchase these services. 

Communication taxes have been applied piecemeal by local, state, and federal government over a long period of time. Many of these taxes were created when we still 

had essentially one company running telecommunications in America. We now have 

competition from wireless, cable and others, but we still have not moved away from 

a complex tax system even though we have a dynamic and competitive industry. 

Taxes on communications services are a jumble. The tax rates on communications 

are about at the point where these taxes approach the level of ‘‘sin’’ taxes. We want 

to encourage the use of communications by ALL people, not move the cost beyond 

what the poor amongst us can afford. 

3

The taxes, fees and surcharges, on a phone bill include: relay center surcharges, 

public right-of-way fees, gross receipts taxes, 911 fees, universal service funds, cost 

recovery surcharges, state sales tax, local sales tax and additional local taxes. It is 

easy to understand what some of these taxes fund, such as the 911 fees. But other 

fees are not comprehensible such as the cost recovery surcharge found on a Virginia 

Verizon bill. 

In 2004 the regressive rate of state and local taxation on telecommunications 

services was 14.17 percent. States and localities have acknowledged there is a problem and that we need reform. Today, we will discuss this problem and what has 

been done to limit excessive taxation on telecommunications services and providers. 

This is just the beginning of the discussion. I expect future hearings on this issue, 

and I look forward to the testimony of the panel. 

Without objection, the Chair will be authorized to recess the committee at any 

point. Hearing none, so ordered. 

I further ask unanimous consent that Members have 5 legislative days to submit 

written statements and statements by interested parties for inclusion in today’s 

record. Without objection, so orderd. 

I now yield to Mr. Watt, the Ranking Member of the Subcommittee, for an opening statement. 

Are there any Members wishing to make opening remarks?

Mr. CANNON. I’d now like to recognize Mr. Watt, the Ranking 

Member of the Subcommittee, for an opening statement. 

Mr. WATT. Thank you, Mr. Chairman. Today’s hearing and markup consider tax policies of significant importance to the effect that 

industries and also to the States and local governments that levy 

taxes and rely on revenues from those taxes. At the hearing on 

H.R. 1396, which we understand are marking up today one of the 

witnesses testified ‘‘it is axiomatic that if had Congress intervenes 

in State and local taxation in a manner that establishes a favored 

group of taxpayers, then other taxpayers who feel that they are in 

the same position will come forward seeking the same favorite 

treatment.’’

Against the backdrop of any Federal legislation seeking to curtail 

or limit the States’ taxing authority, are structural issues of federalism and constitutional considerations including due process, 

commerce clause, and equal protection. There are also very basic 

bread and butter issues: Funding of schools, revitalizing post hurricane devastated areas and paving streets. Things of that kind. 

That said, I think that it is important that we take a serious look 

at the current state of State and Federal and local tax structures 

and the way they affect the telecommunications industry and the 

consumer. I believe the change is necessary in this area. I am also 

respectful of State sovereignty and hope that this and subsequent 

hearings will enlighten us on what role Congress can constructively 

make in assuring that the principles of tax efficiency, competitive 

neutrality and tax equity on which all stakeholders seem to agree 

are reflected in concrete policies and practices. 

One of my particular concerns about the discriminatory application of State and local taxes on the telecommunications industry is 

the disproportion of burdens such taxes may have on low fixed and 

middle income families and communities of color. As Chair of the 

Congressional Black Caucus, I have endeavored to support legislative initiatives that close the disparities that exist in various facets 

of American life. Telecommunications is no different. Indeed, in 

light of the pervasiveness and rapidity of technological advances, I 

believe that ensuring policies that promote growth, competition and 

access are fundamental to citizens of all economic background. 

4

Understand that we will hear from additional stakeholders at 

subsequent hearings. For example, a U.S. conference of mayors and 

other local entities not represented here today may have another 

variations on these issues and certainly a different perspective. 

And because I have always wanted to hear all the perspectives, I 

will certainly be supporting additional hearings so that everybody 

can express themselves. 

Thank you again, Mr. Chairman, for convening the hearing. I 

look forward to additional hearings on this issue and thank the 

witnesses in advance for their testimony, and I yield back the balance of my time. 

Mr. CANNON. Thank you. I always appreciate your thoughtful 

comments. I want to apologize for the background communications 

while you are speaking. Just for the convenience of witnesses, we 

have a camera that is associated with whoever thinks he’s going to 

be the first witness, and I am not sure who that is. Is that you, 

Mr. Rauschenberger? Okay. Great. 

Then, actually, for odd reasons we are going to introduce Mr. 

Mackey first and then we’ll move across the dais. We’ll start with 

you as the first witness. 

Scott Mackey is an economist and partner at Kimbell Sherman 

Ellis. He’s worked with the States and major wireless telecommunications companies in their efforts to conform to the Mobile Telecommunications Sourcing Act. Mr. Mackey has been the chief economist for the National Council State Legislatures and represented 

NCSL on the Steering Committee on the NTA Telecommunications 

and Electronic Commerce Tax Project. 

Mr. Mackey earned his undergraduate degree in economics from 

Middlebury College and his MBA from the University of Colorado. 

Mr. Mackey, thank you for your appearance here today. We look 

forward to your testimony. 

Our next witness is David Quam, the Director of the Office of the 

State and Federal Relations for the National Governors Association. He works closely with the governors of Washington D.C. Representatives and the NGA’s standing committees. 

Prior to joining the NGA, Mr. Quam was the Director of International Affairs and General Counsel for the International AntiCounterfeiting Coalition, Inc. He was also Majority Counsel for the 

U.S. Senate Subcommittee on the Constitution, Federalism and 

Property Rights for the Committee on the Judiciary. 

And Mr. Quam received his undergraduate degree from Duke 

University and his J.D. from Vanderbilt University, and we appreciate you coming to testify today. 

Our next witness is Stephen Kranz, Tax Counsel for the Council 

on State Taxation. He’s responsible for following and responding to 

State tax developments around the country for COST. Mr. Kranz 

is a regular contributor to COST’s publications and COST’s State 

Study and Report on Telecommunications Taxation. He’s also a frequent speaker on State and local tax topics around the country. 

Prior to joining COST, Mr. Kranz established the Office of the 

Chief Counsel while working at the District of Columbia’s Office of 

Tax and Revenue. He spent 6 years as a trial attorney in the Honors Program of the United States Department of Justice, Tax Division and he is the current chair of the District of Columbia Bar’s 

5

State and Local Tax Committee. And Mr. Kranz, welcome. We appreciate your time. 

Our final witness is, or in this case, the first witness today is 

Senator Steven Rauschenberger. Senator Rauschenberger was 

elected to the Illinois Senate in 1992. He is now the assistant Republican leader and specializes in eliminating State and local discriminatory tax schemes, as well as immigration, Medicaid, and 

welfare reform. 

Would you like to come to Utah? Take some of the arrows for the 

next few days? 

He is President of the National Counsel of State Legislatures 

through August of this year and previously served as co-chair of 

NCSL’s Executive Committee Taskforce on State and Local Taxation of Telecommunications and Electronic Commerce. 

During his time in office, Senator Rauschenberger has been an 

advocate in the interests of taxpayers. 

Senator Rauschenberger, we thank you for coming here to Washington to discuss these issues with us today. It is nice to see you 

today and appreciate your involvement in the topic, which is very 

important. I extend to each of you my warm regards and appreciation for your willingness to participate in today’s hearing. In light 

of the fact that your written statements will be included in the 

hearing record, I request that you limit your oral remarks to about 

5 minutes. 

We have a lighting system that starts with a green light that 

goes for 4 minutes, then it turns yellow and at 5 minutes it turns 

red. It is my habit to tap my pencil just to get a little bit of attention at that point. Sometimes we have a lot of people in these hearings, maybe people who are still wandering back from votes. When 

that’s the case, we try to keep it more tightly at 5 minutes because 

everybody needs a chance to ask questions, but this is not a fixed 

thing, unless people ask questions that I don’t like then I get 

tougher with the gavel. That’s not true, we have never had a problem with that, I don’t think. 

On the other hand, we would like to explore a bit in discussion 

and with questions, and so to finish up your thoughts, we’ll move 

on. And after you’ve presented your remarks I will, based upon the 

time of arrival of Members of the Committee will be offered the opportunity to ask questions. 

Now, pursuant to the Chairman of the Judiciary Committee, I 

need to ask you to stand and raise your right hand and take the 

oath. 

[Witnesses sworn.] 

Mr. CANNON. The record should reflect that all of the witnesses 

answered in the affirmative. 

You may be seated. 

And then we are going to start with you, Mr. Rauschenberger; 

is that not correct? You are recognized for 5 minutes. 

6

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

Mr. RAUSCHENBERGER. Good afternoon, Chairman Cannon, and 

Ranking Member Watt and Members of the Subcommittee on Commercial and Administrative Law. I truly appreciate the opportunity 

to be here to testify before you today and I am very appreciative 

of the fact that you are taking up what I think is a very important 

issue to my children, to my constituents, and ultimately, to the 

United States. 

I am State Senator Steve Rauschenberger from Illinois. I am 

President this year of the National Conference of State Legislatures. With me today in the audience is State Senator Leticia Van 

de Putte of Texas and NCSL’s President-elect. Senator Van de 

Putte and I have made telecommunications tax reform one of 

NCSL’s major priorities and I am pleased that she could join me 

here today to see the testimony and see how I did in my first testimony before the Judiciary Committee. 

New technology convergence and competition in telecommunications makes it critical to simplify and reform State and local 

taxes to ensure a level playing field and to enhance economic development and avoid discrimination among telecommunications providers. 

For almost 100 years until 1984, telephone service was a highly 

regulated industry in which consumers did not have a choice of 

provider. Phone companies were subject to tax under statutes applicable to public utilities, and such taxes in the form of gross receipts, franchise and other industry. Specific taxes were passed on 

to customers as part of the regulatory rate setting scheme. Many 

monopoly phone companies had no reason to, and normally did not, 

oppose these taxes. In the 1990’s, many States began efforts to deregulate local markets and to open these markets to competition to 

improve consumer choice and, hopefully, lower prices. In the Telecommunications Act of 1996, Congress further opened local markets. In most States, the deregulation of the industry was not accompanied by corresponding elimination, simplification, or restructuring of the old monopolistic tax system that’s based on silos and 

technology. Innovation and convergence of existing technologies are 

radically expanding what telecommunication services are; blurring 

the distinction between telephone and Internet services; between 

cable wireless and satellite communications; between long distance 

and local service; and, between telephone and other forms of communications. 

Many of these new technologies are capable of delivering telecommunications or telecommunications-like services. As a result, 

similar services can be delivered by networks that are taxed very 

differently and for a growing number of new technologies, these 

services are free from State and local taxation. This uneven governmental treatment at the State and local level, while not intentional, has led to competitive barriers, discouraged market investment and infrastructure development that is crucial to the future 

and impacted the rollout of advance telecommunications service 

throughout the United States. 

7

Imposing these higher tax burdens on telecommunications services provided by some telecommunication providers while imposing 

lower or even no tax burdens on similar services sold by nontraditional providers, places governments in the position of picking winners and losers in the market place. 

Under the legacies of the former monopolistic structure, State 

and local tax burdens on telecommunications companies and their 

customers are significantly above those imposed in other types of 

industries and service. The Council on State Taxation, COST, 

found that the average rate of State and local taxes for telecommunications services was around 14.1 percent, compared with 

only an average of about 6 percent for general business taxes. 

No reasonable policy maker can continue to justify this discriminatory tax regime on communication services. At a time when we 

talk about how important it is to have everyone ubiquitously connected to the network and to have access to high speed communications, for us to allow a—a discriminatory tax regime is not realistic. 

You need to know that NCSL has been working for almost a decade on reforming State telecommunication taxes. The three principles that I want to highlight that we believe and have pressed 

hard for are tax efficiency by State and local governments; we’ve 

pushed hard for competitive neutrality in State and local public 

policy; and, for tax fairness between technologies. 

Telecommunications tax reform is much easier said than done. 

States face a tremendous barrier in overcoming inertia, in persuading local governments in municipalities to accept the risks of 

a new tax regime which may lower rates but broaden their tax 

base. But if we are going to have the kind of advanced deployment 

of telecommunication services in networks that we all believe are 

the future for the United States, we are going to have to take those 

kind of risks. 

I think the fact that this Subcommittee is taking this issue up, 

helps provide impetus and encourages State and local decision 

makers to stay focused on the task. The threat over time that there 

may be deadlines from the Federal Government serves as a stimulus which will help bring State and local government decision 

makers together. 

You know, I’ve worked thoughtfully and watched the telecommunications industry cooperate with my task force for nearly 

a decade as we tried to build consensus and we have had some 

progress. I am going to get into it in questions where States had 

acted on their own. 

But I don’t think we have another decade to thoughtfully wait for 

enlightened State public policy makers to find their way on their 

own. So the very fact that you’re convening this, that you are discussing this, you are making people aware that the Congress is 

concerned about equity and taxation, are making sure we send the 

right kind of messages. I’ll be happy to answer any questions you 

have. 

Thank you. 

[The prepared statement of Mr. Rauschenberger follows:]

8

PREPARED STATEMENT OF SENATOR STEVEN RAUCHENBERGER


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Mr. CANNON. Thank you, Mr. Rauschenberger. It’s always a 

pleasure to hear from you. 

Mr. Kranz. 

STATEMENT OF STEPHEN P.B. KRANZ, TAX COUNSEL, 

COUNCIL ON STATE TAXATION (COST) 

Mr. KRANZ. Thank you, Mr. Chairman, for the invitation to participate in today’s hearing. 

As you said during the introductory remarks, my name is Steve 

Kranz. I am Tax Counsel with the Council on State Taxation, also 

known as COST. COST is a trade association that represents about 

600 of the Nation’s largest taxpayers, including companies from 

every industry segment and particularly those companies in the 

telecom and cable and technology arena which have been asked, 

and, in fact, forced by State and local laws to collect the taxes that 

we are discussing today. 

COST’s mission is to preserve and promote equitable and nondiscriminatory taxation, and as the 2004 State study and report on 

telecommunications taxation, which COST prepared, points out 

telecommunications and communications taxation is anything but. 

In fact, it is inequitable and discriminatory. 

We have forced a square peg of a monopoly form of tax administration, left over from the days of telecom regulation, into the 

round hole of free market telecom service providers. The result is 

a system that’s broken and in desperate need of repair. 

COST has studied and commented on the tax structure facing 

telecommunications providers since 1999, has put on a number of 

those studies and can describe the landscape in really 2 words: Oppressively burdensome. We have a system of telecom taxation that 

violates every tenet of good tax policy, creates an untenable burden 

for telecom providers and more importantly for their customers. We 

ask telecom companies to collect tax from their customers under a 

set of rules that are so complicated no one can do the job correctly. 

We ask companies to collect tax from their customer at rates that 

make one think the product they’re selling should be kept behind 

the counter of a convenience store and only sold to customers who 

are over the age of 18. 

While a small number of States have made progress, as State 

Senator Rauschenberger has indicated, by improving their particular tax systems, the overall burden, as you see by looking at the 

1999, the current study, has not significantly changed. In fact, the 

overall tax rate that is imposed by State and local governments 

continues to increase. 

Telecom customers are taxed at a rate more than double the rate 

on goods sold by a normal or general business. Second, the accounting burden that’s imposed by State and local tax authorities is astounding. Companies are required to file almost 50,000 tax returns 

a year if they do business nationwide. 

Looking in further detail at the results of the telecom study. In 

2004, as I said, the rate that was imposed on telecom services was 

double that was imposed on goods sold at a K-Mart. The average 

rate on telecom was over 14 percent, while the average rate on 

sales of goods was about 6 percent. This difference is something 

you can see in many of the States across this country. Eighteen 

25

States have rates on telecommunications in excess of 15 percent. 

Nine of those States tax telecom services at rates exceeding 20 percent. 

Turning to the accounting burden that is created by this system. 

I mentioned 50,000 tax returns a day. That’s a big number. And 

if you break it down, it is over 190—I am sorry—50,000 and tax 

returns per year broken down is over 190 tax returns per business 

day, almost one every 21⁄2 minutes. I don’t know how much time 

it takes you to do your tax return or whether you do it, but it takes 

a long time to prepare tax returns and these companies are required to spend phenomenal resources filing those returns on a 

daily basis. 

On a State-by-State level, when you look at the study, 18 States 

require companies to file more than a thousand tax returns per 

year. Of those, 6 States require more than 3,000 tax returns per 

year. Looking at your phone bill, as you said Mr. Chairman, you 

can see the complexity on its face. In Maryland, for example, there 

are 7 separate line items, different taxes that are imposed. In 

Washington State, there are 10 separate line items of tax imposed, 

and in New York, there are 12. Each of these line items requires 

a company to calculate, collect and remit tax information and dollars from consumers on a monthly basis. 

In conclusion, while the phone bill gives you a snapshot, the 50-

State study gives you a thorough picture of the complexity of the 

issue that exists out there. The difference in rates that is imposed 

on telecom companies and the administrative and accounting burden that results from the various impositions. 

Mr. Chairman, and Members of the Subcommittee, thank you 

again for giving me the opportunity to testify. I hope that you provide—that you find the information and the COST study useful as 

you consider this difficult problem. And I’d be happy to respond to 

any questions that you’d have. 

Mr. CANNON. Thank you, Mr. Kranz. 

[The prepared statement of Mr. Kranz follows:]

26

PREPARED STATEMENT OF STEPHEN P. B. KRANZ


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Mr. CANNON. We want to acknowledge the presence of Mr. Coble 

from North Carolina and the gentlelady from Florida, Ms. 

Wasserman Shultz, who have joined us for the hearing. 

And Mr. Quam, you are recognized for 5 minutes. 

STATEMENT OF DAVID QUAM, DIRECTOR, OFFICE OF STATE 

AND FEDERAL RELATIONS, NATIONAL GOVERNORS ASSOCIATION, WASHINGTON, DC 

Mr. QUAM. Thank you, Chairman Cannon, Ranking Member 

Watt, Members of the Committee. My name is David Quam. I am 

the Director of Federal Relations for the National Governors’ Association and greatly appreciate the opportunity to testify here today. 

Telecommunications tax reform has been a major issue for the 

governors over the past year. As I am sure we’ll discuss, the NGA 

was essential in trying to pull together industry and State and 

local officials together last year to have a discussion about what 

could be done regarding the status of State and local taxes on telecommunications, and really, it’s a communications issue. Not just 

telecommunications, but all the different communications mediums 

which are now competing against one another. 

I’ll talk a little bit about those reforms, but first, there are four 

main points that I’d like to get across to the Committee today. 

First and foremost is that issues and responsibility for State and 

local taxations should be left to State and local officials. Ultimately, 

this is about State and local revenues, and State and local taxes 

and governors and State legislatures are very concerned with both 

those revenues and control of those tax systems. 

Second, an acknowledgement that changes do need to be made. 

Communications technology has evolved far beyond the existing 

State tax systems and a failure to act on behalf of States will only 

create increasing disparities among competitors and threaten long 

term revenues for State and local governments. 

Third, States are working to reform their taxes. Perhaps not at 

the speed that some in industry would like, but States are working 

very actively to try to modernize their tax systems, reduce administrative burden, and, in some cases, reduce rates. 

Finally, that Congress can best support State tax modernization 

by ultimately avoiding Federal action that will restrict the ability 

of States to craft meaningful reforms. Again, this gets back to the 

principle of federalism because we’re talking about State and local 

taxes. Reforms and solutions really need to come from State and 

local governments. 

The discussions that NGA hosted were quite comprehensive, and, 

I should say, quite difficult. 

NGA and members of the big seven organizations, including 

NCSL, the National League of Cities, the Conference of Mayors, 

the Association of Counties, and others, joined together with representatives from the telecommunications industry, from the Internet industry, and cable and satellite television. All of the major 

players who are currently involved in communications—in the communications industry to try to discuss what could be done. First, 

what are the problems associated with State and local taxation. 

Second what are the principles for reforms for the different groups 

33

and, third, could consensus be developed to create some sort of solution that could be enacted by State and local governments. 

A couple of key points became clear during those discussions. 

First, of course, that the current system of taxation is complex and 

does not completely reflect today’s market for communications services. Several State taxation systems continue to tax communications based on the technology used to provide them rather than the 

service. It is these silos that often create disparities between new 

competitors in the market place. 

Second, industry regards certain, if not most, State and local tax 

practices and requirements as barriers to their ability to compete 

in an ever-increasing competitive market place. This is best 

summed up by one of the participants who said, ‘‘in my estimation 

the real problem here is that there are 49 too many States.’’ I think 

that’s summed up where industry was coming from with regard to 

State and local taxation. 

Another industry observation from a non-telecom: ‘‘Nobody wants 

to be a telecommunication company.’’ If you look at the tax burden 

and some of the regulatory burdens, anybody out side of that rubric 

would like to remain out there. 

Third, every one wants to preserve their own competitive advantage. If a statute allows you a business model that gives you a competitive advantage over another member, you are going to want to 

preserve the status quo. These are all obstacles for reform. From 

the State standpoint, local and State officials are committed to 

competition and encouraging innovation. There is no governor that 

wouldn’t want more broadband access in their State. However, 

State sovereignty also has to mean something, and at its core, that 

is the ability to structure State and local revenue systems, regulate 

businesses and protect and promote the public interest. 

And finally, for State and local governments, revenues do matter. 

Any reform that simply shifts cost to States away from States is 

going the create more problems than it ultimately solves. And so 

anything that is just a simple tax cut without more comprehensive 

reforms, creates difficulties. 

As I said before, States are working to reform their systems. The 

COST study, which we’ve heard about, cites simplification reform 

in Florida, Illinois, Ohio, Tennessee, and Utah as having decreased 

the number of tax returns that a telecommunications provider 

must file by over 18,000. 

More recent reforms in Missouri and Virginia have gone even 

further. Virginia is a particularly interesting example—having just 

passed, it will take effect this year. The back story on Virginia’s 

new tax, one that combined several different communications industries to broaden the base and lower the rate, is that it involved 

all levels of government negotiations between the governors office, 

State and local government, and different industry groups. 

Finally, States have also supported wide ranging telecommunications tax reforms as part of the streamlined sales and use tax 

agreement. This is the State-based voluntary agreement. Under 

that agreement, States are required to adopt uniformed definitions 

in administrative rules in return for collecting taxes from revoked 

vendors that volunteered to participate in the agreement. The governing board recently adopted new definitions that will require 

34

States participating to adopt those definitions into their State laws 

for purposes of sales tax. So there is considerable reform going on 

at the State level. 

When State and local government went into the discussions that 

we held with industry. And I should say that ultimately they did 

not prove fruitful because of some of the conflicts we had between 

revenue neutrality and competitive neutrality. 

There were several different principles that were important to 

State and local government. First and foremost, reform should be 

technology neutral focusing on the service rather than the technology used to provide the service. Second, reform should be revenue neutral, hence one of the problems during our discussions. 

That’s debated over 20 billion annually telecommunications taxes 

not only support general revenues, but are often allocated at the 

local level to pay for specific purposes ranging from education to 

improving public safety systems. 

The potential to significantly reduce State and local tax revenues 

is one of the primary difficulties with simply subscribing to a request that telecommunications industry be treated just like a general business. As the COST study asserts, and assuming the numbers are correct, and Steve, I’ll give you the benefit of the doubt—

the telecom tax rate stands at 14.17 percent compared to only 6.12 

percent for general business. Mandating a reduction on telecommunications rates to those of general business with the effort 

required of 51 percent increase. 

Third, the Federal Government should not pre-empt State and 

local taxing authority. Fourth, the role of State and local government in serving public interest obligations must be maintained in 

any sort of reforms. And fifth, reform can not happen over night. 

The complexity of State and local tax systems does not lend itself 

to an immediate or one-size-fits-all solution. Reform should incorporate the interest of all affected parties and allow for sufficient 

transition time to fully implement comprehensive reform. 

I’ll be happy to take any questions from the Committee. 

[The prepared statement of Mr. Quam follows:]

PREPARED STATEMENT OF DAVID QUAM

Chairman Cannon, Ranking Member Watt, distinguished members of the committee, my name is David Quam and I am the Director of Federal Relations for the 

National Governors Association (NGA). I appreciate the opportunity to appear before you today on behalf of NGA to discuss issues related to the taxation of communications services at the state and local level. 

OVERVIEW

Last year NGA embarked on an ambitious effort to develop consensus between 

representatives of the communications industry and state and local officials regarding the future of state and local taxation of communications services. For over eight 

months participants representing the wireline and wireless telecommunications sectors, cable and satellite television and state and local governments met to examine 

the issues raised by the current systems of taxation, formulate principles for reform, 

and if possible, craft a consensus for promoting changes that could benefit industry, 

government and consumers. 

Through those discussions several points became clear:

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

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

35

• State and local government officials are committed to encouraging innovation 

and deployment of communications services while also protecting the public 

interest and providing for the needs of their citizens.

The last two points proved the most difficult to reconcile. From the industry perspective, the days of monopoly service have given way to a competitive and evolving 

marketplace. Traditional state and local tax laws, which are generally based on the 

technology used to deliver communications services, distort the marketplace by disproportionately favoring one industry over another. The solution proposed by the 

telecommunication industry was to end specific telecommunications taxes and treat 

telecommunications service providers like a ‘‘general business.’’

In contrast, state and local officials recognized the need to modernize existing tax 

laws, but stressed that reform also must reflect government’s responsibility to protect the public interest and remain cognizant of the need for state and local governments to balance their budgets and structure their revenue systems. 

In the end, these competing interests prevented consensus, but they also made it 

clear that the complexity of state and local tax systems requires that long-term comprehensive solutions evolve from states—not the federal government. The ability of 

states to structure their revenue systems is a core element of sovereignty that must 

be respected by the federal government. Congress therefore can best support state 

tax modernization by avoiding federal action that will restrict the ability of states 

to craft meaningful reforms. 

BACKGROUND

In 2000, NGA’s Center for Best Practices issued a paper calling for Governors and 

state legislators to ‘‘reexamine the state and local tax treatment of the telecommunications industry.’’ (‘‘Telecommunications Tax Policies: Implication for the Digital 

Age,’’ NGA Center for Best Practices, 2000). The report concluded that existing state 

and local tax systems were ill-suited for the modern telecommunications marketplace, stating:

‘‘[S]tate and local telecommunications tax systems are not competitively neutral. 

In many cases, the current tax structure favors some segments of the industry 

over others. In other instances, the tax burden on the telecommunications industry is greater than that of other industries. In either case, telecommunications companies are not competing on a level playing field. The current tax 

system forces these companies to compete not only on the basis of economic factors, but also on the basis of the tax differential among them.’’

The report went on to recommend that state policymakers review their state telecommunications taxes with goals of increasing tax efficiency, competitive neutrality, 

tax equity and administrative simplicity. Importantly, however, the report recognized that many of its reforms are not revenue neutral and that the fiscal impacts 

of any changes on state and local government ‘‘need to be a major focus of any proposals.’’

STATE TELECOMMUNICATIONS TAX REFORMS

Since 2000, several states have taken up the mantel of telecommunications tax 

reform. As noted in the Council on State Taxation’s 2004 State Study and Report 

on Telecommunications Taxation (COST Study), simplification reforms in Florida, Illinois, Ohio, Tennessee and Utah decreased the number of tax returns that a telecommunications provider must file by 18,610. More recent reforms in Missouri and 

Virginia have gone even further. The Missouri law, which will take effect Aug. 28, 

2006, expands the municipal tax base by making it clear that providers of cell phone 

and other wireless telecommunications are subject to the same tax as wired telecommunications. In return, the state (rather than municipalities) will collect the tax 

and apply a new 5 percent ceiling to all municipalities by 2010. 

Virginia’s new communications tax law is even more comprehensive, streamlining 

existing state and local taxes into a statewide, flat-rate structure and eliminating 

local cable-franchising fees. Beginning January 1, 2007, the commonwealth will collect the tax and disburse rebates to municipalities on a share basis reportedly equal 

to what they now gather from the existing tax structure. In addition, a statewide 

rights-of-way use fee will be applied to all cable-TV service lines in the same way 

it is currently applied on all local exchange telephone lines. Supporters of the law 

maintain the new measure will raise approximately the same amount of revenue 

that municipal authorities now receive from local taxes and franchise fees. The 

standardized rate is distributed evenly among communication services resulting in 

reductions in the monthly phone bill for most residential customers. 

36

States have also supported wide-ranging telecommunications tax reforms as part 

of the Streamlined Sales and Use Tax Agreement. Under the Agreement, states are 

required to adopt uniform definitions and administrative rules in return for collecting sales taxes from remote vendors that volunteer to participate in the Agreement. The Governing Board (the governing body for the Agreement) recently adopted uniform definitions for telecommunications services that will require changes to 

the tax laws of the Agreement’s member states. The benefits of the Streamlined 

Agreement—central collection; uniform definitions, customer remedy procedures and 

sourcing rules; and notification of and limitations on local rate and boundary 

changes—represent critical reforms that will significantly reduce complexities and 

ease providers’ administrative requirements. 

OPENING A DIALOGUE

While states worked individually to modernize their tax systems, it was the debate over how to best extend the federal Internet access tax moratorium that underscored the need for states and local governments to work with communications providers to address state tax issues. 

A key part of the extension debate was how to level the perceived tax disparities 

between telecommunication and cable broadband offerings and address the rise of 

new Internet-based services such as Voice-over-Internet-Protocol. Those industry 

sectors not subject to the moratorium argued for their inclusion to promote competitive neutrality. Those subject to the moratorium argued to preserve their exempt 

status; and those outside the moratorium fought to prevent the transfer of any additional tax responsibility to their industry. The debate illustrated the difficulties 

states face in modernizing their tax systems to make them competitively neutral: 

industry sectors that stand to gain from reform support state efforts; industries with 

an existing competitive advantage due to state or federal restrictions fight to maintain the status quo. 

Following passage of the extension, NGA called for an open a dialogue between 

state and local elected officials and industry representatives to examine current taxation practices, compare principles and priorities for reform, and determine whether 

any consensus exists for modernizing state and local communications taxes. 

State and local government associations worked together to develop key principles 

to help guide discussions with industry. First, reforms should be technology neutral, 

focusing on the service provided rather than the technology used to provide the service. Such a change would decrease discriminatory tax treatment between competing 

service providers and allow for greater certainty for new entrants. 

Second, reforms should be revenue neutral for state and local governments. Estimated at over $20 billion annually, telecommunications taxes not only support general revenues, but are often allocated at the local level to pay for specific purposes 

ranging from education to improving public safety systems. The potential to significantly reduce state and local revenues is one of the primary difficulties with simply 

subscribing to the demand of the telecommunications industry to be taxed like ‘‘general business.’’ The COST study asserts that the average effective rate of state and 

local transaction taxes for telecommunications services is 14.17%, compared to only 

6.12% for general business. Mandating a reduction of telecommunications rates to 

those of general businesses would therefore require a 51% decrease in state and 

local tax rates. Actual revenue losses would likely exceed the $6.987 billion difference estimated in a November 2001 study prepared by Ernst & Young LLP for 

the Telecommunications State and Local Tax Coalition. 

Third, the federal government should not preempt state and local taxing authority. Governments at the federal, state and local level have long recognized that communications services play a unique and critical role in modern society that may require different regulatory and tax treatment from those imposed on general businesses. Furthermore, state and local jurisdictions are generally required to balance 

their budgets. A federally mandated reduction of more than $7 billion in telecommunications tax revenue would require spending cuts or revenue increases to 

cover the loss. The ability of states to structure their revenue systems to fund government services is a core element of state sovereignty that should not be undermined by federal authorities. 

Fourth, the role of state and local government in preserving public interest obligations should be maintained. The responsibility of managing public-rights-of-way, 

funding public safety infrastructure, providing consumer protection and promoting 

universal service are critical state and local functions. Reforms to state and local 

tax systems should not undermine government’s ability to carry out its responsibilities to protect the public interest. 

37

Fifth, reform cannot happen overnight. The complexity of state and local tax systems does not lend itself to an immediate or one-size-fits-all solution. Reform should 

incorporate the interests of all affected parties and allow for sufficient transition 

time to fully implement comprehensive reforms. 

CONCLUSION

A modern communications infrastructure that provides high-quality, reliable, and 

affordable communications services is essential to the economic competitiveness of 

states and the nation. Recent technological advancements in communications services are fundamentally changing the manner and means by which consumers communicate with one another. These changes have led to the development of new services, greater competition and increased consumer choice. Technological advancements also pose challenges for states, which generally tax communications services 

based on the technology used to provide the service rather than the service itself. 

Left unchanged, these laws will create inequities between competing service providers and diminish state communication tax bases as new technologies evolve beyond existing laws. 

Although NGA’s efforts to develop consensus recommendations for reform were 

not immediately successful, Governors continue to support state efforts to modernize 

their tax systems in a manner that promotes innovation and competition, encourages investment, preserves state authority, provides necessary resources and advance the public interest.

Mr. CANNON. Thank you. We’ve got a bill for a vote. We have a 

couple of votes, but I think we have time, Mr. Mackey, for your testimony and we will come back and do questioning afterward. 

STATEMENT OF SCOTT R. MACKEY, ECONOMIST AND 

PARTNER, KIMBELL SHERMAN ELLIS LLP, MONTPELIER, VT 

Mr. MACKEY. Thank you, Mr. Chairman, Representative Watt, 

and Members of the Committee. As you said in your introduction, 

Mr. Chairman, I have looked at this issue from both sides now. I’ve 

worked with the wireless industry for the last 5 years, specifically 

trying to address the discriminatory and excessive State and local 

tax burdens, and also, when I was at NCSL I was working on it 

too. I think—seeing it from both sides—it is clear that the problem, 

as defined on both sides, is the same. Everyone acknowledges there 

is a problem, and of course, the stumbling block is how to solve it. 

I am going to focus on something that you, Mr. Chairman, and 

Representative Watt mentioned in your opening statements, which 

is the economic impact of some of these taxes. I’m going to talk specifically in my short time about consumers and about the overall 

economy, because these taxes and the tax systems that we’ve allowed to sort of become institutionalized really have impacts that—

broadly on the national economy and on consumers that don’t get 

a lot of attention but perhaps really should. 

On the first point concerning consumers. Everybody in the State 

and local world knows that consumption taxes are regressive, and 

I think what you see with telecommunication taxes is you have a 

layering effect of one regressive tax on top of another regressive tax 

on top of another, you know, where you have multiple taxes at the 

State and local level all being layered on the consumer. And as a 

result, you have sort of a very regressive tax system on our people 

on fixed incomes and our low income households. When you have 

average effective rates of 15 percent—as has been talked about in 

the COST study—obviously a tax on telecommunications and other 

communications services is going to have a much bigger impact on 

somebody with a lower income than a higher income. 

38

A troubling trend recently is some jurisdictions actually imposing 

flat rate taxes. For instance, in the City of Baltimore, where the 

city imposed a $3.50 per line tax on wireless and wireline phone 

lines. Well, obviously, at $3.50 as a percentage of a $25 cheapest 

plan you can get is a lot higher than $3.50 on a $100 plan. And 

the impact can be even magnified in households where you have 

families—at least in the wireless side, for instance, you have, you 

know, buy your first phone and sign up for a second or third line 

for only $10 more a month. Well, the marginal rate on some of 

those second and third lines is 40 percent if you are only paying 

$10 more and you are adding $3.50 in tax plus 5 percent tax. 

So we really have a situation where the regressive nature of 

these consumption taxes is really, really magnified in the area of 

communication services tax. 

Now consumers are burdened, but consumers are also wage earners. They’re also out there trying to earn a living. And the other 

point I wanted to make is the economic impact of these communication services taxes really affect the whole economy because, as others speakers have alluded to, we’ve moved from a monopoly structure where there wasn’t choice, there wasn’t competition for consumers. Taxes were buried in the bills and essentially taxes didn’t 

matter. You were buying plain vanilla communication services and 

the tax that you pay really wasn’t going to affect what you were 

buying. Now we are in a situation where consumers have choices 

of providers, choices of technology. And they’re really—more and 

more of their dollars are being spent not so much on plain vanilla 

communication services, but on other things: downloads and things 

like that. 

So what you are seeing is consumers are a lot more price sensitive today than they were in the monopoly era. And when you impose taxes of 15 percent and as high as 20 percent and more in 

some States, what you have is a real impact on consumers’ purchasing choices. One study that looked only at wireless, but a lot 

of it, I think, is true for other communication services as well, 

found that every 1 percent increase in the price is going to reduce 

consumer demand by between 1.1 and 1.3 percent. So you can 

imagine a system where you have tax burdens that are 9 percent—

7 to 9 percent higher than what you buy at the store. That’s going 

to translate into a 10 to 12 percent reduction—in consumer expenditures on communications. 

So what does that mean to the economy? Well, obviously the 

communications companies—wireless, wireline, cable—are investing huge amounts of money to push advanced communications network broadband out to more consumers so they can compete with 

each other and get into everybody’s business. And obviously this 

benefits consumers because the more competition there is, you are 

going be able to get a better deal. And what we are finding is that 

these taxes that have an impact on how much revenue, you know, 

cash flow from operations—that these companies have available to 

invest back in their networks. And these are not insignificant 

amounts of money. In the wireless side, it’s 20 billion a year. I am 

sure it is higher, even higher in cable and wireline telecom as well. 

And this is how these advance communications networks are going 

39

to be built: by the private sector investing money to get these services out there. 

Now, the reason this is important is because study after study 

has showed that there are huge productivity benefits to the U.S. 

economy when we can get these networks out there and get businesses and consumers and everybody using them to be more productive. In fact, a study that was recently done by Ovum and 

Indepen found that 80 percent of the productivity gains in the year 

2004 were estimated to come from information technology and communications. 

So obviously, the more money that companies have to invest in 

networks, there is going to be more productivity benefits that are 

going to accrue to everybody. And when we talk about the revenue 

concern that the local governments have, those are real concerns. 

But there is also the possibility that we can create a bigger pie and 

have people spend more on services if we didn’t have some of these 

discriminatory taxes that are going to result in more tax revenues 

coming in for everybody, higher incomes, and all of the positive 

things that we saw in the ’90’s with the Internet and the growth 

of e-commerce. 

So these taxes do matter to the economy. And you know, to the 

extent that these tax structures are retarding investment in advanced communication services, that’s a problem. 

And I’ll just sum up with a simple maxim that if you want more 

of something, subsidize it, if you want less of something, tax it. 

And unfortunately, we are taxing our way to slower broadband deployment, less investment by the private sector in advanced communication services. And we’re doing that at a time when State 

and local governments and their economic development people are 

very serious about wanting to get this out there. On the one hand, 

we have these tax structures that are retarding investments and 

in some areas we actually have subsidization going on to try to get 

more of it. 

These taxes really do have an impact directly on the consumer 

as a purchaser, but also the overall economy and affect it that way. 

So it is a very important issue, and it is great that this Committee 

is looking at it because of these national implications of what we 

are doing, and I know you have a vote. I look forward to the question period, and I thank you. 

[The prepared statement of Mr. Mackey follows:]

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PREPARED STATEMENT OF SCOTT R. MACKEY


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Mr. CANNON. We will recess for about 20 minutes. Long enough 

to go over and vote. Then when I get back, we’ll restart. So we will 

be recessed for a bit. Thank you. 

[Recess.] 

Mr. CANNON. The Subcommittee will come to order. All this technology going on here. Modern communications are fixed to the floor 

and worse, we have noise from the floor. 

I think—Steve, do you want to stay for a question? 

Thank you. We have another briefing going on elsewhere, so I 

think we’ll do questions. I’ll ask you questions and we will be a little less formal here, but I’d like to get up to that briefing as well. 

I apologize for that, the interruption. That’s sort of what happens 

in Committee. But we had some really interesting discussion, and 

what I’d like to do is just get comments from the various perspectives on this issue. Historically, the richest guys in town were the 

guys who had the telephones first and they got to call each other 

and the maids got to call the maids in other houses. You had somebody who actually physically pulled the plug and put it in so you 

connect to the circuit. And so we taxed people pretty heavily on 

telecommunications because it was a luxury. 

The world has changed around us now. We don’t—not only do we 

not have plugs, but we don’t have circuits any more. We have the 

Internet and communication on the Internet. 

I am wondering if given the regressive nature, and certainly 

you’ll testify on this, but I’d like to focus on the regressive nature 

of the tax as telecommunications has become so common. Is that 

not something that ought to concern us significantly. We’ll start 

Steve, with you and go down the panel. 

Mr. RAUSCHENBERGER. Absolutely it should. The aggressive nature of telecommunications taxes is a problem. Because the rate’s 

high. Because consumption tends to, on traditional phone lines, 

tends to be more concentrated in less affluent socio-economic 

groups. And the other thing that we didn’t touch on but I think has 

been stated—the concept emerging since the ’20’s and the ’30’s, the 

1920’s and 1930’s in the United States of a ubiquitous network 

where everybody’s connected. The value of the network is, in large 

measure, because everybody is on it. I mean having a phone system 

that only connects half of the Members of Congress is less valuable 

to everybody. So these extraordinarily high taxes also discourages 

some people from being on the network. 

Mr. CANNON. Thank you. That’s a remarkably important insight 

and I appreciate that. I don’t mean to interrupt, particularly, but 

if you could add to the commentary. You might, in particular, want 

to talk about this. It seems to me the wonderful thing about America is we have upward mobility. The ideas of Americans that we 

have is that rights come from God, individuals delegate those 

rights to Government, and we protect those rights through the rule 

of law. And in that environment, it doesn’t matter who your poppi 

was, you know. It doesn’t matter where you were born or the color 

of your skin. What matters is your initiative and your intellect and 

other talents. 

And so in America, we have this upward mobility that’s created 

by a system. No other country—I mean, there’s been stories about 

China for instance, where they would seek out the smartest kids 

67

in the country, bring them into the bureaucracy and the bureaucracy is what actually maintained and developed upward mobility 

but it was very, very limited. Whereas in America, any kid can fail 

his test here and there and not do well, but finally get some initiative and make something out of himself. 

It seems to me that telecommunications is like a key factor in 

letting that kid get an education, assert himself, connect himself 

and move up. And am I missing something here but isn’t that an 

important part of it? 

Mr. RAUSCHENBERGER. I would agree. I would again say the danger we have in not dealing with this traditional silo tax and regulatory scheme and simply avoiding doing it because it’s uncomfortable. It causes us to rethink how we do municipal taxation or 

rethink how we do State taxation. There’s no long-term benefit to 

the United States or to any municipality or State not reforming 

these. 

So that’s why—if you are going to have a network of exchange 

of information, if intellectual property is going to be one of the cornerstones of my children and your children, and the United States 

has to build on as we compete in an ever-increasing flattened 

world. We need to make sure our networks are ubiquitous, that 

they’re low costs, that they’re broad based and they’re well distributed, and our tax policy today does not—you know, I believe in the 

sovereign States. 

I am a States’ rights person. We need to work with the municipalities and the States to make sure we do this right. But we do 

need leadership on some issues from Congress to help set time 

frames. 

Mr. CANNON. And when you talk about a ubiquitous network 

what you’re talking about there is not only the whole system where 

you better but the ability of kids or individuals to emerge in the 

system. The record should reflect that Senator Rauschenberger is 

nodding his head in the affirmative on that. Thank you. 

Mr. Kranz, or Mr. Quam——

Mr. QUAM. I’d be happy to take that. I think you definitely hit 

on an issue I think everybody here recognizes in that we have a 

legacy problem that our tax laws are not keeping up with some of 

the technological evolutions that we’ve seen. Some of which have 

been evolutionary, if not revolutionary, just in the last 6 years. The 

Internet, in particular, is now the cornerstone in communications. 

This is no longer just wireline and pack switches and that type of 

thing. And so States do need to reform and take a look at the 

regressivity of some of the taxes and the entire tax system as a 

whole. However, one of the things I pointed out in my testimony—

one of the things that was critical during our discussions, was 

bringing everybody to the table. 

Again, this is not telecommunications anymore, this is all communication services. You have what has traditionally been defined 

not as telecommunication—telecom now offering telecom type services. So if you are talking about reform of the tax system, and 

again, States are really beginning to look at reform at the State 

level where you can broaden the base and lower that rate and possibly address some of these legacy issues. You need to get rid of 

some of the restrictions that prevent States from being able to 

68

broaden that base so that you can craft a solution that really works 

at the State level. 

I go back to the example in Virginia. Again, during that process, 

which took a number of years, they reached out to local government groups, all sorts of different industry groups. Crafted a bill, 

established a rate, ran the tax numbers to see if the revenues 

would be sufficient to make municipalities whole and get the revenues that the State needed, and also meet some of the competitive 

neutral aspects that they were after. When it didn’t, they went 

back out, tried to bring, you know, talk to other industries, brought 

them in to the point where you have a very comprehensive bill that 

really could revolutionize State and local tax structures in Virginia. 

Now, it’s important to note that that model can’t be used everywhere. Not every State is going to have the options that Virginia 

did as far as moving taxes, increasing them some places, lowering 

them in others. But the dialogue at the State level, State and local 

level, and I would argue at the Federal level, has got to be now, 

not about telecommunications taxes but about communications, the 

entire industry. Ultimately, reforms should be future proof, and I 

want to borrow a phrase from one of my friends in telecom that 

said if we do that right, you get to reforms where the next new entrant and the next new thing fits seamlessly in there and provides 

opportunities for everybody to use that technology and taxation is 

no longer picking and choosing winners and losers, but it is also 

meeting the needs of State and local government. 

Mr. MACKEY. Just briefly, Mr. Chairman. I absolutely agree that 

we ought to be concerned with the regressivity. As you mentioned, 

obviously, the networks are ubiquitous, but you also have, you 

know, the demographics are changing in terms of who’s using and 

purchasing a lot of these services, and you alluded to it in your 

opening statement about the kids doing the text messages back and 

forth and you having to try to keep up with your kids doing it. 

I mean, we have got a lot of young people, a lot of people on fixed 

incomes staying connected through this technology in a lot of different ways, not just through voice. So it’s absolutely important 

and critical that we look at it. So I would agree 100 percent. 

One other thing, if I can tie it back to something I said earlier, 

to the extent that—and this relates to the prices that folks pay for 

communications services. To the extent that we have tax policies 

that slow the emergence of competing networks so that we have 

one provided by a cable company and one provided by a landline 

company and one provided by a wireless company, and others all 

able to provide broadband, to the extent we slow that, consumers 

are denied the benefits of competition, which are also going to 

lower the price that consumers have to pay for those services. 

So there’s the impact of the regressive taxes and slowing of investments that’s going to bring lower prices for everybody as well. 

Mr. CANNON. Thank you. I have another couple of questions, but 

my time has expired. 

Mr. Watt. 

Mr. WATT. Mr. Chairman, I always like these hearings because 

we spend all that time arguing about things that I think everybody 

already agrees on. Taxes are too high, taxes shouldn’t be regresVerDate 0ct 09 2002 14:49 Aug 29, 2006 Jkt 000000 PO 00000 Frm 00072 Fmt 6633 Sfmt 6601 G:\WORK\COMM\061306\28199.000 HJUD1 PsN: 28199
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sive, taxes are unfair, State to State is inconsistent. I think pretty 

much everybody on the panel said that in one way or another. 

The point I am wrestling with, I don’t even disagree with any of 

that, is how the Federal Government gets there from here and 

what our standing is to be setting a standard. And so I guess my 

devil’s advocate question, not to try to get to a different conclusion 

than you all—I mean, Senator Rauschenberger said that we need 

to do something to provide incentives to, quote, enlighten State 

public policymakers. Recognizing that there are some enlightened 

State public policymakers, the problem is it sounds to me like they 

are all moving in the direction and all of a sudden the Federal Government is getting ready to do something preemptive, or runs that 

risk. 

So I am trying to figure out how we don’t stifle those enlightened 

State public policymakers, but don’t overstep our bounds at the 

same time, because if you accept the notion that interstate commerce—and this is one of those—telecommunications, I guess, is 

interstate commerce—but if you accept the notion that the Federal 

Government can preempt, and the next step is going to be no taxes 

on telecommunications, I don’t know how you get off that slippery 

slope. I don’t know how you get from the notion that you can do 

this on interstate telecommunications, but there is still some intrastate, and I’m not sure what authority we have as Congress to do 

this. 

So I’m going to encourage you all—I’m going to stop talking and 

encourage you all to have a discussion about some of the things 

that we need to be focusing on, not the things that we all agree 

on. Everybody will tell you taxes are too high, but I’m sure Senator 

Rauschenberger is not going to tell you that the State doesn’t have 

the authority to set its own tax structure, and I’m sure the local 

government is not going to tell you that we’ve got to at least have 

some revenue coming from somewhere if we’re going to provide 

local services. And at some point we’ve got to come to grips with 

who has responsibility and authority to make these assessments, 

and you all keep talking about providing incentives, or speeding 

up, but I haven’t heard anybody say where you think we ought to 

get off, because once the Federal Government gets on, we don’t 

have much of a history of getting off of anything. 

That’s my question. Whoever wants to answer it. 

Mr. RAUSCHENBERGER. Congressman, thank you for asking that 

question. Two quick observations. Enlightened legislators, State 

legislators, is not the same as military intelligence. Sometimes it 

really does exist. I think State public policy is moving in the right 

direction, but so are the glaciers in Greenland. 

I think at risk here is the speed that we need to understand that 

we operate today 16th- and 17th-century Governmental models 

which served the public well——

Mr. WATT. The States are operating under those same models. 

The Federal Government is still operating under some of those 

same models, too. So that doesn’t answer my question. 

Mr. RAUSCHENBERGER. Which is why public policy falls behind. 

I would make three recommendations to you. First of all, I think 

preemption is a dangerous place to go, but if the Federal Government or the Congress were to consider putting out there a set of 

70

guidelines and recommendations to States, much like they did with 

the Mobile Sourcing Act where there was a requirement that 

States over a period of time act to modernize their sourcing rules 

or they lost the ability to levy those taxes. In the end, we had 50-

State compliance because people had time to react to it. It set an 

agenda for State legislators. 

I would also recommend that as this Committee looks at it, you 

need to consider defining communication services broadly enough 

that State legislatures can broadly tax all communications services 

at a lower rate rather than focusing on some technologies. The concept that Voice Over Internet Protocol or Internet speech ought to 

somehow be treated differently than wireline communications is 

not something I think is in the public’s best interest in the long 

run. 

I think also I would recommend, whatever you do, that you allow 

sufficient time frame, keeping in mind that some State legislatures 

still only meet every other year. I would argue 4 to 6 years at the 

minimum, is the shortest time period to mandate to work with the 

States to modernize because some legislatures don’t meet often 

enough. 

The last thing I would urge you to consider in this short laundry 

list is the understanding that States are going to have a difficult 

time mitigating the impact on local governments. So giving States 

resources to work with; for example, I have always believed that 

the best opportunity to actually get telecommunication tax reform 

done at the States, is simultaneous with modernization of State 

sales taxes in the streamline bill where there’s resources from the 

modernization of the sales tax occurring simultaneous with the loss 

of revenue in telecommunications. So we can improve both those 

tax systems. 

Mr. KRANZ. Mr. Chairman, Representative Watt, I think if you 

take the problems we’ve described and break them down into two 

separate pieces, the tax rate burden and the discrimination that occurs there and the administrative or, as I call it, the accounting 

burden, those two problems can be solved with very different solutions. And the rate burden, the discrimination, there are models 

out there, the 4R Acts that Congress passed, preventing States 

from discriminating against transportation companies in their taxing positions. There’s a markup later this afternoon on a bill that 

would prevent States from discriminating in natural gas pipelines. 

That’s the kind of Federal solution that could be crafted here, 

and my job isn’t to advocate any solution. Our study is intended 

to discuss the lay of the land out there. 

On the administrative or accounting burden, a solution could be 

fashioned at the Federal level similar to what State Senator 

Rauschenberger mentioned in the streamline bill. There Congress 

can provide a carrot incentivizing the States to get to a simpler 

world. 

Those are possibilities that I think should be considered. I know 

that our friends at the State level don’t want Federal solutions to 

these problems, but I do agree that the icebergs in Greenland are 

moving faster. 

Mr. QUAM. Mr. Watt, I am going to, surprise, surprise, disagree 

with some of my panelists. Having the Federal Government someVerDate 0ct 09 2002 14:49 Aug 29, 2006 Jkt 000000 PO 00000 Frm 00074 Fmt 6633 Sfmt 6601 G:\WORK\COMM\061306\28199.000 HJUD1 PsN: 28199
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how proscribe a solution here or preempt the States in coming out 

and asking for that as a potential solution seems to be saying, 

please help States—please save us from ourselves. 

The last time I checked, States and local officials, they answer 

to voters, and they are subject to elections, and they are making 

those decisions. That’s ultimately where State and local tax decisions need to remain. 

In my testimony I mentioned that one of the biggest things Congress could do in this field, because States are reforming taxes, is 

support modernization by just avoiding Federal action that will restrict the ability of States to craft meaningful reforms. 

I get back to one of the best ways to ultimately allow States to 

reduce rates, if that is an ultimate goal, is to be able to broaden 

the base and create some tax equity and some competitive neutrality among competitors. I think that is a worthy goal, but a goal 

that has to be pursued at States. 

Finally, I think Senator Rauschenberger is right on the mark 

with regard to streamlined. The streamlined bill has been a remarkable effort by States on a volunteer basis to modernize sales 

tax systems, to address an incredibly complex systems of sales tax 

laws, find agreement and work together in a sovereign way, because it’s States making State decisions and working together and 

ultimately having the Federal Government support that effort and 

partner with States I think will be a large step forward with regard to taxes and promoting that type of simplification, administrative simplifications. 

Mr. MACKEY. Mr. Chairman, Mr. Watt, just briefly. The problem 

is I think if we just say just leave it to the States, I mean, we have 

a history of about 10 years where everyone has said there is a 

problem, and we’ve had, as others have said, very little movement. 

I absolutely agree that the federalism issues are very tricky, and 

you guys are drawing that line, but, I mean, Congress is uniquely, 

I hope, positioned to look at the broader economic issues of balancing federalism between the national economy and some of the 

impacts that some of these taxes are having on our ability as a Nation to compete globally and to get the networks out as quickly as 

possible. That is a difficult balancing act. Certainly if this were an 

easy thing for States to do, more would have done it. 

I guess the problem from the communications industry side is 

just that it’s difficult and frustrating when everyone agrees that 

there’s a problem, and there is not much action or no action, or, 

I guess, one State moves to fix it. 

That’s the dilemma that we face, and we’re glad that you guys 

are having this hearing so we can talk about some of these issues, 

and you can weigh where you come out on that balancing act. 

Mr. CANNON. Thank you. Without objection, we’ll go to a second 

round of questioning. 

Mr. Watt just asked pretty much my second question that I 

wanted to talk about. Let me refine it now a little bit, because I 

am highly reluctant to preempt States. On the other hand, there 

are some issues that really cry out in our constitutional environment for Federal national policy. 

I think, Mr. Mackey, you talked about the value of the network, 

in fact, several talked about the value of the network, being more 

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valuable as more people get involved, and to the degree that that 

network becomes a huge national asset. And, in fact frankly, the 

foundation for the wealth not only of America, but for the rest of 

the world, it seems to me that that cries out for national policy in 

a world where any given State can distort that network fairly substantially. 

Does anyone want to comment on that with particularity? If you 

say it, it’s better in the record than if I say it. 

Mr. RAUSCHENBERGER. Let me say again, whether you are talking about the first intercontinental rail system, the movement toward standard gauges for railroads in America, or the National 

Highway System where States surrendered small parts of their 

State sovereignty—we all agreed lane width would be 131⁄2 feet, 

yellow paint would separate oncoming lanes of traffic—those networks have always had more value because there was consistency 

and leadership at the Federal level. No governor and no mayor is 

in a position not to see from 30,000 feet the value and the importance of being part of a ubiquitous, seamless network. 

For Congress to set a 6- or an 8-year reasonable deadline requiring States and local governments to reform and bring their tax system into compliance so they don’t discriminate against a particular 

type of technology does not seem to me to be overly intrusive. I 

don’t think any of us are suggesting here that we manage the network from the Federal Congress. 

We’re talking about what everybody agrees is clearly a discriminatory taxing system that’s affecting this network, which we all 

agree has value. I think your point is on target. 

Mr. QUAM. Mr. Chairman, I see a fundamental difference between sort of highways and railroads and the role they played and 

the network they served when they were being built and what we 

look at today. You’re absolutely right, the value of network is absolutely proportional to the number of people on it, no question about 

it. 

No one would say, however, that the wireless industry has somehow not been successful in the last 10 years when you look at the 

number of subscribers. No one would argue that some of the large 

Bell companies who are investing in fiberoptics and broadband and 

aggressively going out there aren’t competing and competing well 

and competing at the highest levels. The COPE Act itself is about 

establishing market-based reforms to increase that competition. 

When you’re talking about the railroads and the highways and 

a national presence, that was needed in some sense just to get the 

roads built, just to get them across the States. We have networks 

in place right now; I can go buy a roaming plan, and my phone will 

work anywhere in the United States. That’s a pretty robust network. 

The question becomes, Mr. Watt, I think you said yourself, the 

commerce clause gives Congress very wide authority, and arguably 

communications is interstate, and we give Congress wide authority 

to come and interfere with State and local taxation. However, the 

question has got to be should Congress interfere with that. I think 

the 10th amendment ultimately means that’s got to be a very high 

bar to cross. 

Mr. WATT. I think the question is where you draw the line. 

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Mr. QUAM. I think that’s absolutely right. 

Mr. WATT. That’s really the question. What you’re doing is making the case for a Federal taxing system. That’s probably more understandable than the argument you’re making. I don’t see—I don’t 

see a compelling Federal argument to provide an incentive to do 

this in 6 years. I see a more competitive, compelling argument that 

the Federal Government could take it over completely and say 

don’t tax it. That’s what we did with the Internet.

But you’re on a slippery slope, and I’m just suggesting that you 

need to be careful, and even there I don’t know how you say to a 

State and local government you can’t tax local phone calls, local 

communication. That’s not——

Mr. CANNON. That’s my next question. You’re asking exactly the 

questions that I think need to be asked, but can I just add a little 

bit? We have already decided not to tax the Internet, and we are 

talking about being neutral to technology. So, how do we tax telecommunication systems when you have a system that we’re already 

agreed on a national level, with some exceptions, not to tax? 

There’s been some talk, I think that’s where you’re headed, and 

I’d like to get the opinions of these folks. Should we tax the telephone number? Because if you tax a telephone number, people will 

go to URLs, and that will clog a system that people have come to 

enjoy. In other words, if you are going to be technologically neutral, 

don’t you need Federal leadership; and secondly, don’t you need to 

get away from taxation entirely of a system that is fundamental? 

We tax gasoline. We don’t tax, except in cases like Utah, and 

they are under the process of thinking about being stupid on this 

point—we don’t tax except generally speaking through gasoline 

taxes. 

Doesn’t it make some sense to not tax communications because 

that’s the only way you are going to be technologically neutral; and 

secondly, don’t you need Federal leadership to actually do that? 

Mr. WATT. Except you should know for the Chairman it makes 

sense not to tax anything. 

Mr. CANNON. Very little. 

Let’s start with Mr. Mackey and move back, because, Steve, you 

may want the last word on this one. 

Mr. MACKEY. That’s a policy question that people would argue 

about. I think what the industry is seeking on behalf of its customers is fairness, and fairness defined as we’re not seeking to be 

exempt from all taxes. We feel like the services that the communications services industry provides, which, after all, are moving 

more and more away from plain vanilla talking on a telephone and 

more toward a lot of digital goods and other types of services that 

are really no different than sometimes what you buy at a store, 

whether you buy a CD in a store or download it onto your phone 

or onto your computer at home—we think that the industry would 

argue that fairness means being taxed like general business. Now, 

from an economic development maybe you can make the argument 

that the rate should be zero. This industry, communications industry, has been subject to a discriminatory burden for so long that 

we just want to get to where general business is. And we think 

there are significant economic benefits to the economy of doing that 

74

that, as I said earlier, will generate some money at local governments to help them fill in some of what they think they are losing. 

Mr. CANNON. Mr. Mackey, do you know how many users Skype 

has today? Last I heard, it was 28 million, but it’s probably doubled 

since then, 30, 40 million. Does anybody know? In other words, we 

have something like 98 million landlines, something like 100 million cell phones. Skype is now in the ballpark of those. They are 

not taxed. 

So I appreciate the fact that you’re willing to take the stripes of 

the normal tax burden here, but the normal tax burden is not 

going to be normal for a year or 2 longer. 

Mr. MACKEY. I’ll quickly follow up. To the extent you maintain 

the high rates, you are just driving everyone to the type of system 

you’re talking about with them. 

Mr. CANNON. Pushing the envelope a bit because I want some 

feedback, we are rapidly becoming a system where not only is the 

discriminatory tax outrageous, counterproductive, but any tax is 

going to be marginalized by technology. So don’t we need Federal 

leadership on probably a quicker scale than you are suggesting, 

Senator Rauschenberger, to deal with this issue so America maintains its leadership and expands at a rate unencumbered? And, of 

course, it does create a problem for States; I’m not suggesting it 

does not. 

Mr. QUAM. Mr. Chairman, it won’t be surprising that I’m going 

to be contrary. 

Mr. CANNON. When you disagree, would you tell me what we do 

about taxing VOIP? I think taxing a phone number is silly. That’s 

probably what we do in the Senate with the COPE Act. I think it’s 

a stop-gap, and I hope the States think about how we get away 

from that quickly enough so we don’t distort the system. That’s 

what I’d really like to hear from you. What do we do to tax Skype 

in a way that is not counterproductive to the development of the 

Internet and communications services generally? 

Mr. QUAM. Right now, and somebody can tell me if I’m wrong, 

I believe Skype is a free service. Some of it is. So it’s more or less 

a free service. So forgetting the tax, you also have a free service 

compared to other communications. So there are a lot of economic 

factors involved in why Skype might be growing the way it is. 

More importantly, I want to get back to an important key point, 

and this is the hearing and what you’re talking about is State and 

local taxation, it’s not Federal taxation. The Federal Government 

certainly can and should be a leader with regard to Federal tax policy. I don’t think the Federal Government has to lead when it 

comes to State and local tax policy. 

Mr. CANNON. Would you deal with the issue of the national policy toward telecommunications, communications, Internet, all the 

bundle of things? In other words, if you say historically we don’t 

have a right to deal with local taxation of particular items, well, 

we have constitutional issues that we’ve developed over a long period of time, but we are not talking in a context. Now we’re talking 

about a future in which communication can be virtually free, and 

that means free of taxes and in some cases free of even cost other 

than the access to the bandwidth. 

75

The question in my area is now selling mostly bandwidth and 

other things that go along with bandwidth. That’s where they view 

their financial future. And whatever services, whether that’s telecommunication or television, cable content or video conferencing, 

they just want to get money—in other words, the industry is saying 

we want value for what we provide, we don’t care what it is that 

you do. 

So telecommunications, if you take an arbitrary identifier like a 

telephone number, becomes an obstruction to the development that 

might otherwise just happen, and the States are in the middle of 

that, and we’re looking at that from a national policy view. 

What do we do to distance ourselves in the areas of innovation 

and communication? That’s what I think I need to hear from you, 

not that the States have rights, because they do. But what do we 

do as a country so we go in the right direction, and what is the 

most important economic force in the world today? 

Mr. QUAM. I get back to, again, the point that was made when 

we gathered all of our players for the discussion. That was an issue 

I talked about before, and that is future-proofing, which is really 

what you’re talking about, the vision for the future that will allow 

for the growth of new technologies, new entrants, new paradigms 

really, and how do those match up with Government responsibilities, ultimately. 

The Federal Government certainly has a role in planning Federal 

policy to do that. I don’t disagree. Do I have the answers? No. I 

don’t think anybody in this room does, but it could be one heck of 

a debate. 

My issue remains that at the end of the day States do have 

rights, States do have responsibilities, States do have public interest that they need to enforce, and sovereignty means something, 

and revenues do matter. 

To the extent that the Federal Government interferes with those 

State tax systems, I think that’s a very high bar to cross. Establishing a national standard with national resources, absolutely, 

that’s Congress’s prerogative. But when you cross into the State 

line, and I think we can be good partners, and States can be 

innovators and will be innovators moving forward. 

Mr. CANNON. Mr. Kranz, you have something to say? 

Mr. KRANZ. The communication companies are inevitably in a 

national playing field. Whether they’re traditional telecom companies, cable companies, the Skype or the Vonage that are selling 

communication services online, they are in a national playing field, 

and I think we’ve identified—and I hate to use the phrase, but 

we’ve identified two nonlevel portions of that playing field, and one 

is communication companies competing with other communication 

companies and the disparity in treatment there. That requires a solution. 

The bigger problem that is addressed and I think the traditional 

communication companies are very concerned about is the difference between tax treatment of communication companies and 

general business, and that’s where you have the huge disparities 

in rates and where there is a need for Federal solution or Federal 

guidance that says you can’t discriminate, States and localities, you 

can’t discriminate against these communication companies. 

76

And as you said, Mr. Chairman, it’s no wonder that consumers 

are being driven to other solutions, but you eliminate the discrimination that’s imposed, and the drive is not going to be there. 

Mr. CANNON. Thank you. 

Mr. RAUSCHENBERGER. I think we either voluntarily or involuntarily at some point surrender some of our freedom for the security 

that government offers. We surrender some of our resources for 

government to spend on common purposes. I think tax systems 

work best if they’re simple, broad-based and low-rate. I would 

argue the solution that we ultimately need to get to for State taxation is a low rate, fair, broad-based consumption tax, a modernized sales tax across the States where States still have the sovereign right to decide what they want to exempt from taxation and 

the right to set their own rates. 

The solution for telecommunication services, the solution for 

cable services, the solution for the service that we don’t know about 

yet is simply to define it into the consumption tax base. Make a 

decision later if you want to exempt it. 

I know we’re not supposed to talk about that other bill, but really 

fundamental to solving a lot of these problems is to quit treating 

telecommunications as if it’s something different. It’s not Twinkies, 

it’s the expenditure of funds. We ought not to at the State level or 

the local level charge two to two and a half times a tax penalty 

simply because we’ve historically done it. 

If you think of the tax system in the United States, you think 

of a three-legged milk stool is what I tell people. On the one leg, 

you tax wealth through the property taxes in the United States, 

mostly in the States. You tax productivity through income taxes. 

And the third leg of that stool is sales taxes or consumption taxes. 

The solution, I think, in the long run that doesn’t discriminate 

between technologies, doesn’t pick favorites in companies is to 

move all of those services into the base of the consumption tax and 

make public policymakers who want to argue that they shouldn’t 

be in the consumption tax base argue why they ought to be exempted or taxed at a higher rate. 

Mr. CANNON. Thank you. I appreciate your time here today. This 

is an issue that I think is remarkably important. I might point out 

that State revenues are at an all-time high in part because of the 

technology boom and in part because of Federal tax cuts. Lots of 

things are happening here. 

This seems to me to be the time States ought to be figuring out 

to rationalize what they’re doing. In part, that ought to include allowing the driving force, which I think has been the Internet, or 

the network, let’s say, more broadly, the opportunity for people to 

enter with a low threshold to get over, and that ultimately keeping 

that threshold low for every node on the Internet is probably pretty 

vital. 

This is a complicated area, we recognize it, and we appreciate 

your input on it, and I suspect we’ll have more hearings as we pursue the issue. Again, thank you all for coming. We are now adjourned. 

We had a markup scheduled, but because of the briefing on Iraq, 

we don’t have a quorum, and so we are going to adjourn the Committee; not just the hearing, but the full Committee. Thank you all. 

77

[Whereupon, at 5:02 p.m., the Subcommittee was adjourned.]

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