U.S. GOVERNMENT PRINTING OFFICE

63–683 WASHINGTON : 2000

FUNDING MECHANISMS OF THE ‘‘E-RATE’’

PROGRAM

HEARING

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT

OF THE

COMMITTEE ON WAYS AND MEANS

HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS

SECOND SESSION

AUGUST 4, 1998

Serial No. 105–108

Printed for the use of the Committee on Ways and Means

(

(II)

COMMITTEE ON WAYS AND MEANS

BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois

BILL THOMAS, California

E. CLAY SHAW, JR., Florida

NANCY L. JOHNSON, Connecticut

JIM BUNNING, Kentucky

AMO HOUGHTON, New York

WALLY HERGER, California

JIM MCCRERY, Louisiana

DAVE CAMP, Michigan

JIM RAMSTAD, Minnesota

JIM NUSSLE, Iowa

SAM JOHNSON, Texas

JENNIFER DUNN, Washington

MAC COLLINS, Georgia

ROB PORTMAN, Ohio

PHILIP S. ENGLISH, Pennsylvania

JOHN ENSIGN, Nevada

JON CHRISTENSEN, Nebraska

WES WATKINS, Oklahoma

J.D. HAYWORTH, Arizona

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

CHARLES B. RANGEL, New York

FORTNEY PETE STARK, California

ROBERT T. MATSUI, California

BARBARA B. KENNELLY, Connecticut

WILLIAM J. COYNE, Pennsylvania

SANDER M. LEVIN, Michigan

BENJAMIN L. CARDIN, Maryland

JIM MCDERMOTT, Washington

GERALD D. KLECZKA, Wisconsin

JOHN LEWIS, Georgia

RICHARD E. NEAL, Massachusetts

MICHAEL R. MCNULTY, New York

WILLIAM J. JEFFERSON, Louisiana

JOHN S. TANNER, Tennessee

XAVIER BECERRA, California

KAREN L. THURMAN, Florida

A.L. SINGLETON, Chief of Staff

JANICE MAYS, Minority Chief Counsel

SUBCOMMITTEE ON OVERSIGHT

NANCY L. JOHNSON, Connecticut, Chairman

ROB PORTMAN, Ohio

JIM RAMSTAD, Minnesota

JENNIFER DUNN, Washington

PHILIP S. ENGLISH, Pennsylvania

WES WATKINS, Oklahoma

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

WILLIAM J. COYNE, Pennsylvania

GERALD D. KLECZKA, Wisconsin

MICHAEL R. MCNULTY, New York

JOHN S. TANNER, Tennessee

KAREN L. THURMAN, Florida

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records

of the Committee on Ways and Means are also published in electronic form. The printed

hearing record remains the official version. Because electronic submissions are used to

prepare both printed and electronic versions of the hearing record, the process of converting

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process

is further refined.

(III)

C O N T E N T S

Page

Advisory of July 24, 1998, announcing the hearing .............................................. 2

WITNESSES

Federal Communications Commission:

Hon. Harold Furchtgott-Roth, Commissioner ................................................ 48

Christopher J. Wright, General Counsel ........................................................ 65

Blumenauer, Hon. Earl, a Representative in Congress from the State of

Oregon ................................................................................................................... 14

Tauzin, Hon, W.J. (Billy), a Representative in Congress from the State of

Louisiana .............................................................................................................. 10

Weller, Hon. Jerry, a Representative in Congress from the State of Illinois ..... 8

SUBMISSION FOR THE RECORD

American Association of Educational Service Agencies; American Association

of School Administrators; American Federation of Teachers; American Library Association; American Vocational Association; Consortium for School

Networking; Council of Chief State School Officers; International Society

for Technology in Education; National Association of Elementary School

Principals; National Education Association; National Education Knowledge

Industry Association; National Grange; National Rural Education Association; and National School Boards Association, joint letter ............................... 84

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FUNDING MECHANISMS OF THE E-RATE

PROGRAM

TUESDAY, AUGUST 4, 1998

HOUSE OF REPRESENTATIVES,

COMMITTEE ON WAYS AND MEANS,

SUBCOMMITTEE ON OVERSIGHT,

Washington, DC.

The Subcommittee met, pursuant to notice, at 10:10 a.m., in

room 1100, Longworth House Office Building, Hon. Nancy Johnson

(Chairman of the Subcommittee) presiding.

[The advisory announcing the hearing follows:]

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Chairman JOHNSON of Connecticut. Good morning, and welcome.

Today, the United States is the most technologically advanced

country in the world, and it’s our responsibility to assure that continued technological strength. Since our children are our future, we

must ensure that they are given every opportunity to thrive in the

technology-driven global economy.

As Congress has acknowledged, the best chance to teach the

most children the needed technical skills is to reach them in primary and secondary schools. Congress recognized this when we

passed a provision in the Telecommunications Act of 1996 which

provides advanced telecommunications services, at discount, to

schools and libraries so that they can bring the most current technology to their communities, at affordable prices. This provision is

now known as the e-rate program. Every school, in rich districts

and in poor, in cities and in remote rural areas, should have access

to the Internet and to the other services that will increase the technical skills of its students. I support the goals of the e-rate program, and I believe that everyone on the subcommittee supports

that program’s goals.

We are not here today to discuss the e-rate program’s purpose or

goals. Rather, we are here to discuss how the e-rate program is

funded. We are focusing on this narrow issue because it, separate

and independent from the e-rate program, has very significant implications for us as policymakers, as members of Congress that

have struggled hard to balance the budget, and as many members

who oppose tax increases.

When the drafters of the Constitution established the three

branches of government, they carefully delineated the duties and

powers of each branch. Congress, and Congress alone, was entrusted with the power to levy taxes. Congress should not and cannot delegate the authority to levy taxes.

That being established, we are here to determine whether the erate program, as implemented by the FCC, is a fee or a tax, because if it is, indeed, a tax, it has not been levied by Congress, but

by an executive branch agency; and, therefore, is illegal.

A fee is a voluntary payment, or benefit conferred, on the payor.

And the amount of the fee paid correlates with the benefit received.

For example, campers often pay a fee to enter national parks like

Yellowstone National Park. If they do not want to pay a fee, they

can chose to camp elsewhere. If they do chose to camp there, the

fees are designed to approximate the costs of running the park. A

tax, on the other hand, is a mandatory charge imposed on the

payor for general or specified governmental purposes. I am sure

that we all too aware of examples of taxes.

At first blush, I must admit that the charges that the FCC has

imposed on telecommunications carriers appear to be taxes. They

are mandatory. All telecommunications providers must contribute

to the e-rate program, whether they receive benefit from the program or not. You may have seen these charges on your phone bill

last month. Also both the Congressional Budget Office and the Office of Management and Budget agree that contributions to the program are general revenues and that disbursements for the program

will be general outlays. This sounds like a tax—mandatory contributions, which go directly into the government’s coffers.

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But I do not want to jump to conclusions. Rather, I want to hear

from witnesses so that they can help us understand whether this

program is, in fact, a hidden tax.

This determination is important. We, as the representatives of

the people, are accountable for the taxes that they pay. Raising

taxes is serious business. And as we struggle to balance burden

and society’s goals, we cannot have the bureaucracy making a

mockery of tax cuts by imposing fees that are, in fact, hidden taxes

that end up being paid by every one of us.

The goals of the e-rate program are laudable. Finding the funding for the program must be a priority. But we must follow the constitutionally prescribed process.

In 1665, Colbert said, I quote, ‘‘the art of taxation consists in so

plucking the goose as to obtain the largest amount of feathers with

the least possible amount of hissing.’’ We have to set our sights a

little higher than simply minimizing the hissing. The Constitution

speaks very clearly: tax law is made by Congress. And money bills

originate in the House, in the Committee on Ways and Means.

I look forward to hearing from our witnesses today, and I’m

pleased to yield to our Ranking Democrat, Mr. Coyne.

Mr. COYNE. Thank you Madam Chairman.

We are here today to conduct an oversight hearing on an issue

that is very important to our children’s educational future. The

issue we are focusing on today is the e-rate program, which is designed to provide our schools and libraries with state-of-the-art

telecommunications services.

This program was created in the Telecommunications Act of 1996

as part of the Universal Service Program, which provides low-income consumers and households in rural and high-cost areas with

telephone services at affordable prices.

The United States has been able to ensure access to telephone

services for all Americans regardless of their location and wealth

through this Universal Service Program. The Universal Service

Program has been in existence for decades and was codified and expanded in the 1996 Telecommunications Act. The Universal Service

Program is a cross-subsidy system by which telecommunications

companies contribute to the Universal Service Fund and then draw

from the fund as reimbursement for discounts and other subsidies

that they have provided to consumers.

The contributions from the telecommunications companies go

into a revolving fund which pays back the industry amounts reflecting their Universal Coverage subsidies. The principal expansion of the Universal Service Program in the 1996 Telecommunications Act was the provision to provide public and non-profit elementary and secondary schools, public libraries, and rural health

providers with advanced telecommunications services such as the

Internet.

Since 1996, over 100,000 schools have applied for the program,

which the FCC has announced it will fund at about $2 billion. I am

well aware of how important this program is, because many schools

and libraries in the district that I represent have applied for the

program, and all of them are very pleased about the new educational opportunities they can now offer their students. Soon, if all

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goes as planned, Internet access for schools and libraries will be a

reality.

The stated purpose of today’s hearing is number one, to review

funding mechanisms for the e-rate program; and number two, to

determine whether it is a tax. If the Ways and Means Committee’s

jurisdiction has been bypassed, this is a legitimate matter for us

to consider here today.

However, I am also aware that there has been a great deal of political rhetoric surrounding the issue. For example, some have

called the e-rate program a tax, and named it after our Vice President. I hope we all will focus on the substantive issues and not engage in partisan rhetoric here today. First, the 1996 Telecommunications Act passed by the House by a vote of 414 to 16, a clear bipartisan endorsement. Further, it is my understanding that in May

of 1995, when the schools and libraries provision was added to the

Senate version of the bill, the House parliamentarian was consulted to determine whether the provision was a tax, for purposes

of the House blue slipping it as a revenue measure not originating

in the House of Representatives. The Senate bill was not blue

slipped by any member of the House at that time. Further, the

Senate provision was included in the final conference agreement

approved by the House and the Senate.

To the extent the e-rate program constitutes a tax, we should assert jurisdiction on a possible amendment to the Commerce Department’s appropriation bill that is currently before the House of Representatives, which would block funding for the program.

On the other hand, it is the responsibility of the courts to evaluate whether a new law is constitutional and appropriately delegates authority to the executive branch. The very issue we are discussing today is pending before the 5th circuit court of appeals. The

answer will be provided by the court in the very near future.

In the past, the industry has supported this fund and built contributions into its cost base. The contributions to the fund have

never been explicitly passed on to the consumer as a line item

charge. However, companies are now having to compete for customers in the deregulated world created by the 1996 Telecommunications Act.

To get those customers, they need to advertise a very low cost

per minute. They have been aided in this goal by reductions the

1996 Act caused in local access charges. According to the materials

I received from the FCC, this reduction is now about one and half

cents per minute. This reduction should have more than offset the

increased costs of Universal Service, guaranteeing customers rates

that were at least a penny a minute less.

For a customer who makes an hour of long distance calls a week,

that savings is about $30 per year. Why, then, have phone companies chosen to show the increase in Universal Service as a separate

charge and not part of the rate? It’s not because their costs have

increased. It’s because doing that allows them to advertise a lower

rate than they actually charge, and, as a bonus, blame it on the

government. For example, itemizing the charge allows them to

charge the hypothetical customer I was just describing about half

a cent more per minute than their advertised rate, increasing the

bill by about $15 a year.

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I believe today’s witnesses will help us better understand whether the phone bills our constituents receive are actually reflecting

their phone company’s underlying costs. I hope our committee will

not be a part to legitimizing any rhetoric which prevents consumers from getting the full benefit of reductions in long distance

telephone costs mandated by Congress.

Thank you, Madam Chairman.

Chairman JOHNSON of Connecticut. Thank you, Mr. Coyne. You

opening statement was very helpful. Those of us who were very

supportive of the Telecommunications Act and of its funding of this

function at the time did believe that it would be paid for through

the savings that that Act allowed the industry to realize. And I

personally believe that that may be why it was never blue slipped.

But that is exactly the controversy we are here to look into today,

because the long-term implications of the legislative branch allowing the executive branch to develop revenue sources for specific

functions is very serious and does compromise our ability to control

the tax burden on the people of the Nation and to manage the relationship between revenues and appropriations and the Nation’s priorities.

So this is not a hearing about whether or not we support hooking

up the libraries and schools. We all clearly do support that. It is

a very important, though rather technical hearing, on the means

by which we plan to accomplish those goals.

I would like to first recognize Mr. Weller for his testimony, a valued member of this committee and a member of the Oversight Subcommittee.

Mr. Weller.

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

Mr. WELLER. Well, thank you, madam Chair. And thank you, Mr.

Coyne, and members of the Oversight Subcommittee for the opportunity to testify today. And I also want to commend Chair Johnson

for her leadership on today’s issue. I’m particularly glad to join my

colleague, Mr. Tauzin, also my colleague and friend, Mr.

Blumenauer today to testify before the Oversight Subcommittee on

what I think we all agree on, and that is on an effort to achieve

the goal that we all share, which is giving every child access to the

Internet through our local schools and libraries, to better prepare

them for the economy and job market of the 21st century.

Two years ago, when we passed the Telecommunications Act, in

1996, it included a simple directive: that any telecommunications

carrier serving a particular geographic area must make any of its

services under the Universal Service Fund available at reduced

rates to schools and libraries. Unfortunately, the FCC misinterpreted the Telecommunications Act and now jeopardizes this goal

that we all share, which is providing Internet access for all of

America’s children.

Like you, Madam Chair, I want to work in a bipartisan way to

fix this problem.

First, if we look historically, the FCC determined that as much

as two and quarter billion dollars per year should be made available to support Universal Service for schools and libraries.

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Second, the FCC expanded the scope of what was available for

schools and libraries from just discounted rates on the telecommunications services and decided to include Internet access

costs and Internet connections, such as wiring.

Third, the FCC created a whole new bureaucracy known as the

School and Libraries Corporation to administer the e-rate program

without any authorization from Congress to do so.

Finally, with probably the most questionable of all the provisions, the FCC determined that the funds supporting the e-rate for

schools and libraries should come from an assessment or tax on all

telecommunication service providers. This controversial assessment, which is currently facing legal challenges, and as Mr. Coyne

pointed out, has commonly become known as the Gore tax.

Here are the problems that we now face.

The FCC has taken unauthorized to create a new, ineffective bureaucracy that has yet to provide any funding to 1,800 schools in

Illinois that have applied for help in connecting their students to

the Internet.

And two, the FCC has taken the unconstitutional action of imposing an unauthorized tax on telephone usage in order to cover

the expenses of this enterprise.

The FCC is incorrect in its contention that the so-called Gore tax

is a fee. A fee is a voluntary charge for a service rendered. However, telephone customers are not receiving a service. Thus, if a

charge is levied and no direct service is provided, then it is characterized as a tax regardless of whether it shows up on your 1040

Form or your telephone bill. And only Congress can impose a tax

under our Constitution. The FCC’s actions are now being contest

in court.

The result is that many schools across the country that were depending on the e-rate have been left in the cold. Some examples in

the district I represent, in the 11th District of Illinois, include

Bradley-Bourbonais Community High School, which has applied to

get 38 computers connected; Steger High School, in south Cook

County, which applied to get 156 classrooms wired; Wilmington

School District, which applied to get 123 computers connected and

50 classrooms wired; Joliet’s Public Library District, which applied

to get 20 computers connected; and La Salle Catholic, which is a

grade school, which applied to get 36 computers connected and 14

classrooms wired.

This is only a smattering of examples where the FCC and the

SLC have left the hopes and dreams of schools and students hanging in the winds. We cannot let this continue. That’s why I’m glad

to join with my colleague and friend, Mr. Tauzin, in sponsoring the

School and Libraries Internet Access Act of 1998, H.R. 4324.

The School and Library Internet Access Act would save the technology assistance program for over 1,800 schools in Illinois alone

by slashing the World War I three percent telephone excise tax,

which currently goes to the general revenue fund, to one percent,

and earmarking the remaining revenue to fund the important

school and library Internet access programs that through block

grants to our States. In addition to slashing the current tax, the

School and Library Internet Access Act repeals the so-called three

percent Gore Tax on telephone customers. Our legislation will save

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consumers and estimated $5 billion, while providing $1.7 billion in

the first year to equip our schools and libraries with Internet access.

This legislation effectively kills two birds with one stone. First,

the legislation preserves and expands funding for this important

Internet access assistance program for our schools and libraries

and places it appropriately under the jurisdiction of the National

Telecommunications and Information Administration. Second, the

legislation abolishes the FCC’s unconstitutional, what some call the

‘‘Gore Tax’’ funding mechanism and reduces an antiquated World

War I tax, which disproportionately impacts the poor and senior

citizens.

Let’s do it right this time. The FCC and its illegal ‘‘Gore Tax’’

created the problem. However, I support the bipartisan goal of giving every child in school access to the Internet and believe we need

to solve this problem by enacting the School and Library Internet

Access Act. It is important to the children of Illinois and the 1,800

schools which are pleading for help. It is the right thing to do. Let’s

work in a bipartisan fashion to get this job done.

Of course, Madam Chair, I ask my colleagues to give the School

and Libraries Internet Access Act, which helps solve this problem,

favorable consideration in this committee.

Again, thank you, Madam Chair and Mr. Coyne.

Chairman JOHNSON of Connecticut. Thank you, Mr. Weller.

Mr. Tauzin, the cosponsor of H.R. 4324.

STATEMENT OF THE HON. W.J. TAUZIN, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF LOUISIANA

Mr. TAUZIN. Thank you, Chairman Johnson.

Let me I suppose go right to the heart of this issue. The issue

is not whether or not we ought to fund a decent schools and libraries fund or whether we ought to carry out the purposes of the erate program thoroughly, completely in America. I think we all

agree that it is a good public, national goal to make sure that all

the children of America have access to Internet services and, in

fact, have access to what will become extraordinary new opportunities in long distance learning. And it’s also—the same is true for

our libraries and certainly true for rural hospitals in America.

That’s not the question.

The question, as you correctly pose it, Madam Chairman, is

whether or not the e-rate tax itself is a tax or a fee. Is it the fee

that the parliamentarian said it was going to be? Or has it become

a tax?

To the quick: the 5th circuit is going to decide this. But I think

we can decide it rather quickly, too. The courts have pretty well determined what is a fee and what is a tax. Now you have great expertise in taxation. We’ve seen fees at the Commerce Committee.

A fee is simply a collection of a charge for which there is a nexus

in service. Someone pays and gets a benefit for it directly.

A tax is something where you don’t have a direct benefit. You

generally are putting in money for the good of other people in our

society.

This qualifies. This e-rate quickly qualifies as a tax, and the

question is how do we get from here to there? The answer is that

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the Commerce Committee and other committees who worked on the

Telecommunications bill, and your committee included, intended, I

think, very quickly to make sure that the FCC administered a

properly discounted service plan to make sure that the monthly

charges to the schools and libraries of America were discounted

charges, that is, charges that could be afforded by the schools and

libraries and rural hospitals in the same sense that we intended

in the Universal Service fee collection system that charges on a

monthly basis to rural individuals or poor individuals in our society

would be discounted. That is, the rest of us would subsidize the

connection of telephone service to those individuals so that our telephone would be more valuable to us. Everybody would be on the

same system; and, therefore, poor and rural people would not be

left out of service on a monthly basis for telephone service.

What the FCC did in interpreting that provision to include a capacity to levy a tax on telephone users for the purpose of construction grants to schools and libraries goes way beyond the intent of

Congress. And as you pointed out, Madam Chairwoman, I think it

calls into question the powers of the executive side of our government. It is the power of Congress to levy a tax for the purpose of

providing a construction grant program. And it is the purview of

Congress to decide the level of that tax and then also to oversee

the spending of that program.

Here’s what the FCC did. It levied its tax, and it set up corporations to administer the spending of the money after it collected the

tax, and decided then that these corporations would decide, in fact,

administer a grant program to schools and libraries in America—

corporations that are not subject to congressional oversight. So, in

effect, it avoided the constitutional separation of powers. It avoided

the oversight of Congress through its Ways and Means Committee,

and its appropriation process in working this program through.

The bill that Jerry and I and others have filed does several

things at one time.

One, it legitimizes the program. It takes out of question, the

question of whether or not we ought to properly fund this program

with a properly funded tax. It funds it properly with a tax we are

already collecting since 1914, a tax that was imposed—three percent on telephones—that was imposed in 1914 to fund World War

I. If my history serves me right, that war is over. We can find a

new purpose for that tax.

Our bill repeals that tax over time, but leaves in place one-third

of it, the one cent, that will properly fund the schools and libraries

program. And then secondly, we repeal clearly any authority the

FCC thinks it has to levy a so-called e-rate tax on telephone users.

It repeals two taxes at the same time, sunsets the balance of the

1914 tax, leaving enough in place, $1.7 billion a year—in fact, escalating to $2.1 billion in this last year, enough in place over five

years for us to carry out the program properly under congressional

supervision with a tax that’s clearly authorized without corporations that have been called into legal question by our own GAO.

I submit to you that this is a plan that’s a win-win for all of us.

It gives great tax relief to Americans, repeals the e-rate tax, repeals two-thirds of an old tax, provides a funding mechanism for

schools and libraries that is legally and properly funded, and subVerDate 11-MAY-2000 11:38 Jun 21, 2000 Jkt 010199 PO 00000 Frm 00015 Fmt 6633 Sfmt 6602 E:\HEARINGS\63683 pfrm02 PsN: 63683
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jects it all to the proper legislative oversight of this committee and

the Appropriations Committee, and other education committees of

Congress, as well as the Commerce Committee in its oversight of

the NTIA. I suggest to you this is a good approach. It solves a lot

of problems at one time, and gets rid of any legal questions about

the sanctity of this program.

[The prepared statement follows:]

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Chairman JOHNSON of Connecticut. Thank you, Mr. Tauzin.

Mr. Blumenauer.

Mr. COYNE. Madam Chairman——

Chairman JOHNSON of Connecticut. Welcome to have you. Sorry.

Mr. COYNE. I wonder if I could make an observation relative to

what’s been said here. To continue to refer to this tax as the Gore

Tax I think is misinterpreting what the purpose of this hearing

here today is. As the Chairwoman pointed out, the purpose here

today is find out whether or not it is a tax, or it isn’t a tax. But

to refer to this as a Gore Tax I think just brings some partisan

rhetoric into this hearing that is not becoming of the process here

today.

We could just as easily be calling this the Weller Tax in as much

as Representative Weller voted, as I did, for this legislation, and

maybe we ought to refer to it as the Weller tax instead of naming

it after the Vice President.

Chairman JOHNSON of Connecticut. Mr. Blumenauer, it’s a pleasure to have you before our committee.

STATEMENT OF THE HON. EARL BLUMENAUER, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF OREGON

Mr. BLUMENAUER. Thank you, Madam Chair.

And I appreciate your courtesy in allowing me to join with you.

And the exchange that’s been going on I think underscores the importance of why you should have this oversight series of hearings

and testimony. I identify with the 1,800 schools in Illinois. I have

schools who have applied for the e-rate in my district. You have

them in yours. They are a part of the 100,000 schools and libraries

that Mr. Coyne referenced who’ve made application and who

should, by rights, be receiving benefit for it. And the longer that

we continue to dilly dally here in the Federal Government, we hold

our children and their future hostage. And I think it’s inappropriate.

I want to state from the outset that I am a strong supporter of

the e-rate. I believe Congress, in 1996, made that commitment, and

it was with the clear expectation that the e-rate was going to be

funded out of the savings that were going to accrue to the telecommunication industry. In section 254, there was a notion that it

would be part of the Universal Service Program, which been in

place administratively for over 60 years. Universal service provides

services to high-cost and rural areas, and it is something that has,

in fact, been litigated. The Federal Court District Court for the District of Columbia did already settle earlier in the game that the

Universal Service program was not a tax. It was a fee because it

was used to ensure affordable rates for specified services not designated primarily as a means of raising revenue. The addition of

a support mechanism for schools and libraries does not change the

fundamental nature of the Universal Service Program. And as was

referenced by Mr. Tauzin, when this issue was under debate in the

House, it was called before the parliamentarian and a ruling was

made in the House that it was not a tax, it was a fee. And I think

it is important for us to keep that in perspective as we move forward.

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Now we have these pesky little extra items that are being added

to phone bills. You referenced, I believe, the one that AT&T has.

There’s a 93 cent surcharge for Universal Service activities. However, only 19 cents of that is attributable to the e-rate cost. The

majority is for the Universal Service that they have, in fact, been

collecting for over 60 years.

It seems to me that it is important to allow the litigation to go

forward as been referenced. But I think the evidence is clear from

the legislative history, from what’s happened with the Universal

Service in the past, that it’s very likely that it will be, in fact, determined to be a fee. It is important I think for this committee,

however, to look at proposals that have been proposed by my colleagues to my left, because it may well be at some point in the

game that we do want to have an alternative mechanism available,

either because there are politics that intervene, as they have intervened to this point, or because there are better ways of going about

it.

I remain open to alternatives frankly at some point if they’re necessary. But at this point, they aren’t necessary. I have grave reservations about starting over again. The FCC has addressed what

I think were legitimate complaints about the administration and

structure. They have implemented the recommendations from the

GAO report. They’re ready to go, albeit at a scaled down level. If

we somehow get lost in the rhetoric, the politics, try and score

points, the children and the commitment will be lost in the dust.

And I think that would be a mistake, because there are these

100,000 schools and libraries that have made application for e-rate

discounts, as was envisioned earlier. They are ready to go. We have

the ability as a Congress to move forward in cooperation with the

administration and the FCC and do so. And I hope that in the

course of your deliberations, it will be clear that that is the course

that we should follow.

I do have a great deal of information that I’m not going to bore

you with that I would like to be made a part of the record if I could

submit it.

And I stand willing to answer any questions or engage in a conversation as you see fit.

Chairman JOHNSON of Connecticut. So ordered. We will submit

your material for the record.

[The prepared statement and attachments follow. An additional

attachment is being retained in the Committee files.]

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Chairman JOHNSON of Connecticut. I think it is important to acknowledge that historically the Universal Service Charge has been

dedicated to goals that have benefitted everyone. At times, it was

used for the war effort. That certainly benefitted everyone. Deficit

reduction—has the same impact on everyone. Universal

connectivity of all the telephone lines benefits everyone. It means

that anyone can call into any little rural remote area.

The way the FCC interpreted their responsibility under this law

has, I think, raised very fundamental questions. You point out that

there was the expectation and I think particularly Congressman

Tauzin on the Commerce Committee, it is my understanding that,

and it was my understanding as a legislator voting for that bill,

that our expectation was that this responsibility would be funded

from the savings that we were in a sense giving to the industry.

Is that not correct?

Mr. TAUZIN. It’s important to understand that there are three

things happening here, though.

The first is the collection—the administration, rather, of a Universal Service Fee and helps us all have telephones.

The second thing we intended in the bill was the administration

of a second discount service, specifically designed for schools and

libraries, to come out of the Universal Fee, to be funded by the savings. That’s correct.

Nowhere did we intend that the FCC would add a third thing,

amounting to this grant program for construction inside the school.

If I can maybe draw an analogy that helps us understand it.

When America decided on a Universal Service Fee system to

make telephones more affordable for rural people and poor people,

nowhere in that system did we provide a tax collecting to go out

and wire up the insides of houses, to put communication centers,

to put a telephone in every room of every rural house, in the barn

and in the tractor. This is such a separate concept of actually providing construction grants to go out and do the inside wiring and

to put communication centers in all the buildings and offices of a

farm.

What the FCC did was to make that extension, that leap, if you

will, of interpretation. What they said was not only are we going

to provide discounted service for the monthly charges that a school

or library would be assessed for access to the Internet, we’re going

to actually add another charge, a tax, which we will collect and administer through a corporation to grant money to the schools and

libraries to do what?—to do construction programs inside the

schools, to build communications centers, to put wiring into every

class, to put wiring in the offices of the administrators. There are

even applications to put them inside buses.

Now, here’s my point. That’s a separate concept from Universal

Service discounted rate that Congress never intended. And no one

in an administrative agency ought to assume they have the power

to tax and spend like that.

Now, I’m not quarreling with the goal. I think it’s a good goal.

But it’s our responsibility under the Constitution to both levy that

tax, and we have in 1914, and to spend it properly, with congressional oversight and approval.

33

One final thought, Madam Johnson. I think this is critical. For

all of you who want to see schools and libraries wired up, understand what happened in the last several months. The FCC has now

scaled back its program. It’s trying now to decide which schools and

libraries are going to get this money as opposed to which are not,

in a scaled back program. The problem with that is that when we

wrote our bill, in 1996, we created an entitlement. We did so on

purpose. We didn’t want politics played with this program. So we

said that any school that filed a bona fide request for this discounted service had to get it. The FCC couldn’t deny it. Now,

they’ve interpreted that section to mean a grant of construction

funds. Does that mean that any school, the richest in the America,

that applies for this money has an entitled right to get that money

if its a bona fide request. Maybe so. Do you get where I’m going?

By interpreting it this one step further, the FCC may have created not only a legal mess over whether they can tax, but a legal

mess over who’s entitled to this money. Under the bill that Jerry

and I filed, Congress would oversight the spending of this money.

We could target it to the schools and the libraries around America

that most need it, under a five-year program that would be administered properly through the State education authorities of our

country. And I suggest that’s a much sounder approach.

Chairman JOHNSON of Connecticut. And, Mr. Tauzin and Mr.

Weller, would your bill provide sufficient funding to meet the entitlement nature of the original vision of this program?

Mr. WELLER. Well, if you look at the projected funding that’s provided, Madam Chair. In the first year with the funding mechanism,

which is a legal funding mechanism that’s already established in

the statutes. In fact, you know, that telephone tax that was created

in 1914, the one penny out of every dollar that we earmark for the

school and library Internet access program, it’s projected it would

generate $1.7 billion in the first year.

Now, in the FCC’s current program, as they suggest, they would

provide about $1.2 billion, so we actually provide more money if

you’re looking at it from the standpoint of what way can we provide

more money. And as we pointed out earlier, we solved the problem.

There’s the question about constitutionality of this tax that the

FCC has levied that was not authorized by Congress, which we

solve the problem by providing a legal funding stream.

I have some figures here Mr. Tauzin just shared with me, but its

budget estimates are in 1999, the legal funding stream, one penny

out of every dollar in your phone—telephone use, would generate

$1.7 billion in 1999. In the year 2000, $1.7 billion. In the year

2001, $1.8 billion. In the year 2002, $2.—excuse me—$2 billion.

2003, $2.1 billion. Of course, now we—our legislation does sunset

it five years from today. But if Congress were to determine, as you

know, as Congress should have the right to do in our oversight,

that we should extend it, we certainly could. For that five years,

we provide more money than the current FCC tax.

Chairman JOHNSON of Connecticut. And what exactly does your

legislation allow the money to be used for?

Mr. TAUZIN. Specifically, for all the purposes that the e-rate fund

as devised by the FCC envisions for the construction grants to

schools and libraries and rural hospitals so that they can, in fact,

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have communication centers wired up to all the classrooms or all

the specific reading rooms or what have you in the library or the

hospital.

Chairman JOHNSON of Connecticut. Does your legislation retain

the responsibility of the FCC to develop a discounted rate for libraries and schools?

Mr. TAUZIN. Yes. Yes, ma’am.

Chairman JOHNSON of Connecticut. So the original purpose of

the FCC as a rate setter, to develop a discounted rate for schools

and libraries is retained under your proposal. What you are doing

is creating a clear tax to fund a clear public purpose?

Mr. TAUZIN. Yes, ma’am. In it, the fee that’s charged for all of

us to have telephones. The telecommunications services is about

$690 million. That’s retained within the FCC authority. They still

have the additional Internet access authority. It’s about $88 million

to make sure that schools and libraries can get cheaper rates for

Internet service. All we do is remove this tax and spend authority

with the construction grants and put that back under Congress

where it belongs.

Chairman JOHNSON of Connecticut. Thank you very much. I do—

will just sort of conclude my initial statement about the use of the

former Universal Service revenues being for universal goals, and

point out that it does seem to be a problem; that the FCC levied

a fee that everyone pays, but not everyone benefits from.

Mr. TAUZIN. Madam Chairman?

Chairman JOHNSON of Connecticut. Yes.

Mr. TAUZIN. Could I add one thing? I want to correct the record.

The statement was that the charges that Americans are feeling for

this e-rate—they’re only 19 cents on the AT&T 93 cent surcharge.

According to the FCC’s order, which I have a copy of, 36 percent

of the total is for this e-rate. Thirty-six percent of the 93 cents is

a 33 cent charge on Americans on AT&T. On MCI, it’s 5 percent

of the fee. When you multiply that out, a $1.80 is being charged

under this e-rate. It’s a significant tax on American telephone

users, and as Jerry pointed out. I want to make this point as we

conclude perhaps. This is the most regressive tax in America. The

poorest of the poor use their telephones. And they’re being taxed

at these high rates, again, by an agency I don’t think has the authority to do so.

Chairman JOHNSON of Connecticut. Thank you. I think that is a

very significant point.

Mr. Coyne.

Mr. COYNE. Thank you, Madam Chairman. I wonder if the two

authors would tell us how you intend to fund the bill?

Mr. WELLER. Well, Mr. Coyne, as I stated in the testimony, our

legislation, as when it relates to revenue, in 1914, there was a

three percent tax that was levied on telephones. And at that time,

of course, very few Americans had telephones in 1914, so it was

considered a luxury tax and the intention was to use that as a revenue source to finance the World War I effort. And like most taxes,

the war is over with but the revenue is still coming in. And it goes

into the general revenues. Then you also have the FCC tax that

they levied on telecommunication services. Our legislation eliminates the FCC’s tax and also reduces the World War I tax from

35

three percent to one percent. The remaining one percent we earmark so we have a legal, already established revenue stream,

which, as projected, would generate $1.7 billion to go towards the

school and library Internet access program.

Mr. COYNE. CBO, I am told, says that the legislation would reduce budget receipts in 1999 by $4.3 billion; and over a five-year

period, $23.9 billion. Is that correct?

Mr. TAUZIN. Yes, Mr. Coyne, that’s correct. In fact the industry

had estimated $28 billion. OMB came back with the $23.9 billion.

And that’s the total offset required if you want to do this. If you

want to repeal both two-thirds of that old 1914 tax and also repeal

this e-rate tax. It takes $23.9 billion of offsets over five years—a

little less than $5 billion a year. And what we’ve suggested to our

leadership here is that if we’re going to do a tax bill that benefits

specific groups of Americans included in that tax relief bill ought

to be this general tax relief against the most regressive taxes in

America, this tax on talking in our country, that all people pay,

particularly poor people. In some jurisdictions, Mr. Coyne, taxes on

telephones are higher than the total taxes on tobacco. And for a

free speech society, that ought to be untenable. And what we’re

suggesting is that in a good tax relief package, $23.9 billion over

five years ought to go to all Americans in the form of general tax

relief on their telephone bills.

Mr. COYNE. But you still feel that even with the reduction and

the revenue coming in as a result of your legislation, we’d be able

to fund the purpose of the schools and libraries?

Mr. TAUZIN. Absolutely, Mr. Coyne.

Mr. WELLER. If I could interject, Mr. Coyne, as I pointed out the

one penny per dollar in telephone service, the 1914 World War I

tax, which we reduce from three cents per dollar to one cent per

dollar, that remaining one cent is earmarked for the School and Library Internet Access Program—goes into that trust fund. And that

is projected to generate $1.7 billion, which is a half a billion dollars

more than what the FCC currently projects to spend this year.

Mr. TAUZIN. It theoretically could go on forever on our telephone

bills. There is no sunset today. The FCC theoretically, if it has this

authority, could it continue to collect this tax as long as it felt it

had a purpose to collect it.

Secondly, if a school came back in five years and demanded more

money, I mean theoretically, they might be entitled to it if they

have a bona fide request. They might have to raise the amount of

this tax over time to fund the request that come.

Suppose somebody file suit and says, we were denied funding

and we think we were entitled to funding and they win that suit;

then this tax has to continually go up. What we’d do is we’d provide what we think is sufficient amount of monies over five years

trust funded. Then, as Jerry said, if this Congress feels like it

wants to go further, it always has that right over that five year period to extend that program. But that’s a legislative authority, not

an agency authority.

Mr. COYNE. Mr. Blumenauer.

Mr. BLUMENAUER. It just seems to me that my colleagues are

sort of arguing against themselves on this.

36

First of all, over the course of five years, if you compare their

proposal with what the FCC would do if allowed, there is a much

larger portion that would accrue under the FCC that would meet

the projected needs. The proposal that is being suggested by my

friends is considerably less than what is needed—and they’re criticizing the FCC for not doing enough. In fact, the only reason the

FCC scaled it down was because of the firestorm of political controversy. But they have scaled it down and they would set the

money out on a priority basis to get funds to those most in need

first. But over five years, they would do more than that which is

proposed by Representative Tauzin, who also proposes sunsetting

the program. Furthermore, if you block grant to the States, there’s

no guarantee that you will get this same scope as we are talking

about under the FCC proposal.

Finally, if the suggestion is that you shouldn’t include wiring to

the classrooms, well, then you in your wisdom can go ahead and

cut back. But I would submit for the record some report language

that specifically references getting services to the classroom. I

think it was a reasonable interpretation the gentlemen included in

their legislation, and that’s what America schools and libraries are

expecting. I am confident in the final analysis this in what Congress and the Administration will do.

Mr. COYNE. Thank you.

Chairman JOHNSON of Connecticut. Mr. Blumenauer, just to that

point, doesn’t it concern you that if the FCC, the way they have

constructed this fee, and the way they are planning to implement

it, will put them in the position of reimbursing systems where they

are building a new school and would have naturally have wired the

classroom billing us for that wiring? I mean, if you do it with a

block grant, States can make some judgments about whether some

of the, frankly, more affluent communities that were already building a school where they would normally would have done this really needs that help or not. I can tell you, in the old innercity schools,

which we are not going to absolutely replace in the near future, the

construction costs of wiring to the classrooms are very great. But

there are other suburban areas where, frankly, they are building

new schools with a lot of state aid, where we do not need to use

Federal resources to complement that construction grant.

So one of the problems with the FCC program is that, since they

are not accustomed to administering an appropriated program,

they aren’t equipped to make those decisions. If we either do that

at the State level, I think we need to deal with that.

One of the problems with the FCC extending its authority—and

it is, after all, a rate regulatory agency—and the things it does

through rates, it does for everybody and everybody is to benefit.

This is a situation of which benefits are differentiated across the

scope, but everybody pays the fee. This is a very dramatic expansion of the FCC authority. I’m glad to know that some members

have done some thinking about it, so that we can clearly ascribe

a source of funding for what is a very important public purpose

program.

I think that one of the things that this committee has to be concerned with is how do we honestly raise money through taxes, but

37

also it assures that it get to the right place at the right time to

the people who really need it.

Mr. BLUMENAUER. May I respond?

Chairman JOHNSON of Connecticut. Yes.

Mr. BLUMENAUER. Well, first of all, the innercity school that you

talked about would get more benefit under the FCC because there

is a scale from 20 to 90 percent, with the larger benefit rolling to

those most in need. So a new suburban school in the FCC proposal

would receive very little compared to the innercity school. The interpretation that my colleagues have just made would wipe out the

wiring to the innercity school. They’re complaining that that’s what

the FCC is doing.

Chairman JOHNSON of Connecticut. I want to let the other members question, so we’ll come back to this. I think 0 to 100 is just

about as fair as 10 to 90.

Let me yield to Congressman Jennifer Dunn.

Ms. DUNN. Thank you very much, Madam Chairman. I appreciate your putting together this hearing today because I, for one,

have real concerns about the assault on constitutional authority

that I’ve seen in the last few years, whether it’s the American Heritage Rivers Act or it is second amendment rights taking those

away from the State’s jurisdiction. I have a real concern and I

think it’s necessary for us to discuss this sort of constitutional jurisdictional issue.

I like very much the bill being proposed by you, Mr. Tauzin, and

you, Mr. Weller. I think it gets jurisdiction back to where it belongs, which is the Ways and Means Committee under section 1 of

the Constitution and the Congress. I’m very pleased to hear the detail on your bill.

I think, Mr. Blumenauer, where you described this as a user-fee

versus a tax, very clearly that has not been declared yet by the appeals court and it lies in the 5th circuit court of appeals. Right now

I think we will have our answer eventually, and I tend to believe

that the FCC have gone a step too far, but will wait to make my

decision until I hear about that.

I have concerns generally about taxation and the United States

Government. The fact that this luxury tax was imposed in 1914

when few people had telephones, it was definitely a surtax or a luxury tax on those people who were able to afford telephones. And

now, how many decades later it still is in place. I think we must

continue to do very solid and detailed oversight on this sort of taxation.

The amounts of money vary that we have heard from you. I have

a concern on Mr. Tauzin and Mr. Weller. I wonder if you could

please explain for me if we are able to get by this FCC Gore Tax

and into the proposals that you’ve included in your legislation?

How do you make up for those revenues—that 2 percent of revenue—that has before flowed into the general funds and now would

be eliminated as you phase out that portion of the tax?

Mr. TAUZIN. Well, first of all, let me—if everyone is not aware

or acknowledged that, and I’ve cosponsored an earlier bill that

would completely repeal that 1914 tax—before this e-rate problem

became a problem that we saw an opportunity perhaps to correct

with it. Let me concur with you that a 1914 luxury tax on teleVerDate 11-MAY-2000 11:38 Jun 21, 2000 Jkt 010199 PO 00000 Frm 00041 Fmt 6633 Sfmt 6602 E:\HEARINGS\63683 pfrm02 PsN: 63683
38

phones is long overdue for appeals. Our bill does that over repeals

some immediately, two-thirds immediately, one-third at a later

date.

Secondly, repealing a tax that is going to the general fund obviously requires an offset. Repealing the e-rate, we found out, also

requires an offset because the e-rate collections were counted in the

budget estimates. The total again is about $4 billion over five

years—by a little less than $5 billion a year. That has to come out

of budget estimates, budget spending, and over in the course of our

deliberations between now and the end of this session.

Our plan is obviously to get the leadership, and hopefully the

chairman of your committee, to accept the notion that in any general tax relief bill that this is a good place to give Americans tax

relief and fund it indeed out of surplus that we expect to come to

the Government on top of what Social Security surpluses are being

generated, and would be protected under our general plan.

In a nutshell, we would hope that this is part of the general tax

relief bill, and that this $5 billion a year is funded as a general tax

relief for all Americans, in addition of whatever special tax relief

is provided in that bill, out of surplus that we expect to generate

over the next five years over and above what Social Security trust

fund surpluses are generated and would be protected.

Ms. DUNN. Good. I thank the gentleman. Mr. Weller, did you

want to comment on that?

Mr. WELLER. Well, just actually to build on a comment that my

friend Billy Tauzin made, but responsed to my friend, Mr.

Blumenauer’s comment. We were talking in response to Mrs. Johnson’s question regarding urban schools and suburban schools, and

I represent part of the City of Chicago, as well as the south suburbs and a lot of rural areas. Of course, I think of LaSalle Peru

High School, a building which I think was designed to withstand

a nuclear strike—the building is a fortress; it was built over a century ago and it’ll last a lot longer than most buildings in the District that I have the privilege of representing.

But in talking with the school administrators, and their goal of

course is to give every child access to the computers and the Internet. What I think is wonderful about the discussion we’ve had this

morning, we’ve moved beyond the question of whether or not we all

work towards the goal of giving every child access to computers

and the Internet. I think we all have agreed, and with the comments this morning. The question is how do we solve the problem

in getting there. And with the FCC’s tax, of course we have a constitutional question, and of course the legislation that Mr. Tauzin

and I offer solves the problem by providing the legal source of revenue, and accomplishes every goal that the FCC suggest we accomplish with their goal.

Of course, in the case of LaSalle Peru High School, they need $1

million really to put in the wire, the fiber, and of course the hardware so they can provide computers and Internet access for every

child. Our program would make that available. Of course, we blockgranted to the States and then the State of Illinois—in our case,

the Illinois State Board of Education—would administer in the application process and distribution of those funds. This follow our

philosophy which is that those that are closest to the communities

39

and the schools and library districts being served can best make

decisions in allocating those funds. That’s why we intend to do this,

rather than having a regulatory agency, which is what the FCC is.

The FCC was not created as an agency to provide grant money

to schools and libraries. The FCC was put in place to regulate telecommunications. We of course solved the problem of helping our

schools, and helping our libraries provide access to the Internet by

providing a legal revenue stream—$1.7 billion in the first year—

which is more than the FCC indicates that they would provide.

And, of course, we get that money out to the States, through their

State Education Authority to allocate those funds to local school

districts and libraries. It’s common sense, it’s legal, and it would

work. it is consistent with a lot of other funding programs they already have in place for education.

Ms. DUNN. Thank you very much, Madam Chairman. It is the

belief of this Congress that we not increase taxes, and certainly we

would not like to have taxes increased arbitrarily by an administrative agency. That’s something for this committee first to put

great thought into. So I appreciate your defining what the nut of

this problem is for our hearing today.

Thank you very much.

Chairwoman JOHNSON of Connecticut. Thank you. Congresswoman Thurman.

Mrs. THURMAN. Thank you, Madam Chairman.

I’m going to follow up on this. If what I read is that this was

passed through the telecom bill, how are we saying that this was

not an authorization for Congress to raise these dollars? I understand there might be a law suit on this to make that determination, so quite frankly right now, we’re assuming something without

any legal terms for this. I don’t understand why we are saying that

they’ve done something that we’re not sure about yet. Maybe you

can explain that. I don’t know.

Mr. TAUZIN. Ms. Thurman, let me try again. The problem is basically in our universal service fund concept, we’ve always thought

of universal service as a subsidy system where you and I perhaps

may be charged a subsidy. But our poor neighbor, our rural neighbor, might enjoy the use of a telephone. That enhanced our telephone.

Mrs. THURMAN. And we did that, though?

Mr. TAUZIN. Yes, we did that a long time ago?

Mrs. THURMAN. And we did it again and redid it again in 1996

with the telecommunications?

Mr. TAUZIN. We did it again in terms of Internet services. We not

only said it’s a good idea for everybody to have telephones that I

telephone and yours is more valuable, all Americans are connected.

We also said in the 1996 act is look, we’re entering a new age of

communications. Internet services are not only good and useful,

they’re going to be critical to educating our children. So we said for

heavens sake, let’s make sure that every school and library has the

ability to access Internet services at discounted rates. The same

way we wanted to make sure that every rural person and poor person had access to telephone service at discounted rates. That was

our intent.

40

What the FCC did was to take that very legitimate purpose and

add another one on to it. By defining that reference access to the

classroom, they decided well, let’s put together a program whereby

the telephone companies will collect money from their customers.

We will collect it through a corporation, in fact three of them they

set up, that will then give grants to schools and libraries to do

what inside construction. It’s a little bit like taking the universal

service fund that we’ve enjoyed all these years and saying we’re

going to interpret it now to allow the farmer out in rural America,

to reconstruct his house so that every room in his house has a telephone and has all kind of new services—that his barn is equipped

with telephone services, his tractor now is equipped with telephone

services.

We never interpreted universal services to include construction

grants. That’s the problem. The problem for us now is how do we

take this good purpose and clarify any questions about legal funding also preserved for you and I, our constitutional function of taxing and spending on the Nation for legitimate purposes like this.

Hence our bill.

What we’re saying is that whether or not the 5th circuit decides

it’s a fee or a tax. I think it’s a tax; I think the 5th circuit is going

to decide that. Why not clarify that? Why not get rid of this question about whether these corporations are legal or not?

Mrs. THURMAN. But that would only be on the construction part

of it?

Mr. TAUZIN. Yes, only on the construction part.

Mrs. THURMAN. Okay, so we’ll move on beyond that. So now what

happens then to doing what was intended to do, which was to open

up the telecommunications for schools and libraries. You just totally get away with, even from the 1914 to even what was passed

in 1996?

Mr. TAUZIN. Yes.

Mrs. THURMAN. Your surplus dollars for the purpose of

Interneting schools throughout this Country?

Mr. TAUZIN. What we’re saying is that the FCC should provide

discounted rates of service for every classroom in America where

the kids are going to be connected to the Internet and learning on

it. So that’s true. The FCC should provide discounted rates of service, the monthly charges you pay, for Internet access to every hospital in America so that we all have the advantage of telemedicine,

which is going to save us all money and save many lives.

We said that the same is true for every library in America. That

no library ought to suffer for the lack of Internet services because

the rates are too high. There ought to be discounted services for

them. Yes, the FCC continues to do that. It simply doesn’t have the

power to tax for this construction program. You and I would have

that power through this bill.

Mrs. THURMAN. When you put your bill together and you said

that you’ll take two-thirds of the money or $24 billion whatever

your amount was. In putting your numbers together, how have you

made the assessment for the needs for this Country? I mean, have

you got this down to a formula, do we know—is it going to be similar to what schools and libraries have had before? 20–80, 90–10,

41

whatever based on their disadvantage? I mean, how have you made

this assessment?

Mr. TAUZIN. What we did was to, first of all, determine that 1

cent out of this 3 percent tax was adequate to provide, as Jerry

pointed out, 1.7 escalating to 2.1 billion each year for five years.

We looked at what the FCC originally intended in the e-rate proposal and we recognized that this was more money than the FCC

had originally intended to collect—very close to those numbers. We

said, here is a fund that can do that.

Secondly, as was pointed out, the FCC is not scaling back its program. Under our proposal, you wouldn’t have to scale it back. You

could do full funding.

The third thing is we wanted to make sure that in this full funding that there was not going to be an uncapped, unlimited amounted that might be collected; that we would have some control over

that. So, in essence, as we administer the grant program through

the States, if the States present to us legitimate needs as Jerry

pointed out, we can expand it. If the States are presenting request

that aren’t as legitimate for rich schools, etc. that don’t really need

this money, then we can literally live with our cap or even limit

those spendings.

Ms. DUNN. So didn’t that concern you a little bit if what the

chairman said earlier was that there was a universal need, universal goals for everybody, and then we do get into the politics, a

little bit of divvying these dollars up State by State. I mean, you’re

making mention that well if they really need it or if they don’t need

it or whatever. I mean, I’m a little concerned the way you phrased

that. Maybe that’s not exactly what you mean, but I don’t want to

get into the politics. This is about children; this is about our libraries; this is about access.

Mr. TAUZIN. Good point. That’s why we wrote the language in

1996 as an entitlement. Let me say it again. That is why we carefully said that no school, rich or poor, who filed a bona fide request

for discounted rate of service would be denied. We wrote it as an

entitlement so there wouldn’t be any politics. There wouldn’t be

any calling of names on this proposal or anything else. This would

be a simple, straight forward. The school provides a bona fide request for discounted service for cheaper rates per month for service

to the Internet. They were going to get it from the FCC. The FCC

could not tell one school or another you don’t get it. That’s why we

wrote it that way.

But now we’re talking about something different. We’re talking

about a construction grant program, and what we’re saying there

is, and the FCC has finally come to that conclusion too, that when

you come to construction grant programs, you could have unlimited

request for dollar. But you have to have some kind of assessment

of need. The FCC is trying to work their way through that. What

we’re saying if we properly fund this program, properly administer

it through the NTIA which is our technology, telecommunications

technology grant agency, and then let the State and their State authorities design their programs for their own need, that we’re more

likely to achieve that result without an open-ended program like

the FCC has potentially created out of misinterpreting the act.

Chairman JOHNSON of Connecticut. Congressman Hulshof.

42

Mr. HULSHOF. Thank you, Madam Chair. I was flipping through

an old Farmers Almanac the other day and saw this quote that

said, ‘‘If Patrick Henry thought that taxation without representation was bad, he ought to see taxation with representation.’’

[Laughter.]

And yet, I echoed the comments that my colleague from Washington State made that ultimately the power of taxation should

rest with those of us who are here.

Mr. Blumenauer, I wasn’t here in 1996 to vote for or against the

Telecommunications Act, and regardless of what the parliamentarian’s decision was at the time, whether it was a user-fee or an excise tax, in the Hulshof household, one of my responsibilities is to

pay the bills. This past weekend, I wrote the check for our family

to GTE and I looked at the bill, knowing this hearing was coming

up, and GTE tells me that I’m paying an excise tax. Do you disagree?

Mr. BLUMENAUER. No, you’re paying an exise tax. That’s been on

the bill and it’s been a separate line item. What we’re talking about

is the e-rate which is separate and distinct from that. You’ve been

paying your monthly bills with universal service for as long as

you’ve been writing checks. And appropriately so because it is contributed to the entire universe and it’s made, as Mr. Tauzin said,

the entire system more valuable. This system of telecommunications will be made more valuable by having all of our children

have access to it. That doesn’t make it a tax.

Mr. HULSHOF. Well I think that everyone here that’s been discussing that question and those of you responding, we share the

same goal. It use to be when I was in school doing a school project,

you went to the local library and paged through books and now

with the click of a mouse you have a wealth of information that

wasn’t there before. I think the intent and the goal of everyone is

the same.

I want to give you a chance to respond because Billy was making

a point earlier, and I’ve noticed that you were not in agreement

through your nonverbal reaction. Congressman Tauzin makes the

point that the e-rate Program is now being administered beyond

the scope of universal service; it’s being administered through an

improper FCC agent—I’m paraphrasing his words of course. It’s

being funded well above its demonstrated needs. And fourthly, that

it is open-ended. Now, what disagreement do you have with any or

all of those premises?

Mr. BLUMENAUER. I just finished explaining why I think this application of the universal service fee extension doesn’t transmit it

into a tax. Let me just reference the last two points that you made.

First of all, with all due respect, the information I have is distinctly different from my two colleagues. The demonstrated need

for what’s in the pipeline now is far above the $1.9 billion that the

FCC has earmarked. They’ve scaled it down as a result of all the

controversy that’s been going on. They had originally identified

$2.25 billion for the year, it would be something like $3.35 billion

through June of 1999. They’ve scaled it back to $1.9 billion. The

gentleman’s proposal would be $1.7 billion, and then go on over

time. So the demonstrated need for what’s in the pipeline, the estimate is higher than what the FCC is doing; and the $1.9 billion

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the FCC is proposing is higher than the $1.7 billion that the gentleman had suggested. That was the point that I was trying to

make.

You’ve suggested that somehow that it’s the rich districts that

are going to be accruing the benefit under this, and we need to be

concerned about the innercity. That’s precisely what the FCC has

been attempting to do, by giving a larger payment subsidy to the

innercity school to the rural poor schools that have a much lower

connection. And as the chair mentioned, some of these innercity

schools have to have wiring or else it is illusory to assume they

have Internet access because you’ll continue to have it as it is

today, the 73 percent that have Internet access have access mostly

to the principal’s office. It’s only 27 percent of the classrooms. You

need a proposal like this that gets it to the classrooms.

Mr. HULSHOF. Let me reclaim because I see my time is about to

expire. No that’s okay. Mr. Tauzin, did you want to quickly respond?

Mr. TAUZIN. Quickly, let me, first of all, thank you for being an

original cosponsor.

Mr. HULSHOF. Proud to be on the bill.

Mr. TAUZIN. Secondly, the answer is that the so-called demonstrated need figure includes all these rich school request. The

FCC is now admitting they’re going to fund at a much lower percentage rate of grant. That number they cited to you is an unrealistic number. It includes requests that are extraordinary to even

wire up and connect to the Internet school buses in some districts.

So keep in mind, the number we provide, nearly $2 billion a year

over a five year period is quite adequate to the real needs expressed already by applications to the FCC.

Mr. HULSHOF. I appreciate that. As a concluding comment,

Madam Chair, and conversations with a young man, a 27 year old

man who’s an Internet provider back home in Hannibal, MO, who

for other reasons because of the telecom bill is now $11,000 a year

in fees/taxes who came to me an said, ‘‘Look, I would prefer much

better that at least you consider, and either vote up or down these

increases, these taxes, so that I can at least express my opinion at

the ballot box every two years because that’s why we send people

to Washington to represent us.’’

I appreciate each of you being here. Thank you, Madam Chair.

Chairman JOHNSON of Connecticut. I think, Mr. Blumenauer

that your previous response demonstrates that what the FCC has

done is unprecedented in terms of the scope of the exercise of its

authority. For it to exercise its authority to provide a discounted

rate is harmonious its statutory authority and with its traditions.

For it to get itself in the position of administering what is in effect

an appropriated program supported by a tax is to not only extend

their scope of authority beyond their law it seems to me, but also

face them with administrative responsibilities that they have never

had before. And whether this should go through the Commerce Department and in the block grounds, or whether it should go to the

Education Department and down through one of their mechanisms.

We do have in the Federal Government already established bureaucracies who have long experience in thinking through how do

we best allocate these and whether it’s $1.8 billion or $2.2 billion.

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So it is disturbing that the FCC should be trying to make this determination in an area which we actually have a whole department

established to deal with the educational needs of our schools

throughout America and have a much greater body of experience

in how you would distribute and administrate these dollars.

I think part of what we’re dealing with here is that when you,

in a sense, levy a tax for a major public purpose, and this is a

major public purpose I don’t think anybody would deny that hooking up all of our schools, libraries, and hospitals is not a major public purpose. That with that comes a lot of complicated decisions and

a lot of investment in a bureaucratic delivery system. So it’s important for us to really engage in this issue as a fee to support a discounted service. Or is this a tax to support a program to implement

construction grant. These are very different entities with different

sources of legal authority, and they do have enormous implications

for the overall bigger picture of Congresses obligation to tax the

people of America to fund programs that fulfill our public purposes.

And to be accountable for where we raise the tax and where they

go.

A fee upon a discounted service in the context of regulation is a

very different animal both legislatively and constitutionally from a

tax purpose. I think this discussion has been very helpful to show

the scope of this program and the difficulties that scope represents.

I think we are all in agreement that we would want to have money

enough to do the job. I personally would like to see us be able to

do it as an entitlement because you don’t want schools to wait two

years to do something that they need to do now. So there is a lot

more that has to be delved into in another realm.

The focus of this hearing is important. Is this is a tax or a fee

because it helps us deal with it. Is this going to be an appropriated

program of which we’re going to deliver through the appropriate

bureaucratic mechanism and oversee its accomplishment of its

goal. Or is this rate regulation and discount subsidies over endless

periods of time, which it is. I mean, the rate regulation, the discount rates will be forever. They are not for five year.

Mr. Coyne.

Mr. COYNE. If you would allow me at this point, I think at this

point a clarification here would be helpful relative to the issue of

fee versus taxation.

In AT&T, the way they are billing their customers, what they are

putting into the bills currently as of July 1998, and I quote from

their bill that says, ‘‘The universal connectivity charge that appears

on your bill is being assessed at a monthly fee of 93 cents per account, instead of the previously announced 5 percent monthly

charge. This fee—and they refer to it as a fee—supports the extended universal service fund which now not only helps provide affordable telephone service, but also gives schools and libraries access to the Internet. The FCC has also reduced the fees AT&T pays

local phone companies to connect toll calls. That’s one reason our

prices for long distance service have continued to come down over

the last decade.’’ Then they give a phone number for information

if you want to call, an 1-800 number.

Chairman JOHNSON of Connecticut. Great, and I appreciate that

and I have a copy of their bill here. The issue remains as its approVerDate 11-MAY-2000 11:38 Jun 21, 2000 Jkt 010199 PO 00000 Frm 00048 Fmt 6633 Sfmt 6602 E:\HEARINGS\63683 pfrm02 PsN: 63683
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priately described as a fee and are the purposes for which it is used

are traditional purposes that fees are used for. Is the delivery

mechanism a traditional fee-delivery mechanism? And more importantly on the issue of fee versus taxes, does everyone who pays the

fee benefit from paying the fee, or do only selected groups benefit

from pay the fee? And does everyone who benefits pay the fee? Because in this case not necessarily everyone who benefits pays the

fee.

I appreciate your recognition of the way this is worded, but I

think the problem is really profound and not one we should protect

ourselves from.

Because we have other people waiting to testify, let me move on

to Mr. Neal.

Mr. NEAL. Thank you, Mrs. Johnson, thank you very much. Not

being a member of the subcommittee, I appreciate you granting me

some time.

I think that the panelist have all indicated that the goal of the

e-rule program was desirable. I could just maybe direct my question to Mr. Tauzin. Could you recreate quickly where this provision

was inserted and at what time it was inserted?

Mr. TAUZIN. Are you talking about in legislative history?

Mr. NEAL. Yes.

Mr. TAUZIN. I would probably make a mistake in doing that without reference to the documents right now. I can only tell you that

through the creation of the act, the 1996 Act, it culminated over

about four or five attempts. We passed the bill several times in succession. The final act in 1996 signed into law did contain clearly

the instruction of the FCC for discounted service. Without reference to the documents, I couldn’t tell you whether it happened

in the subcommittee, the full committee or in the conference committee. But I’ll be happy to supply that information to the committee.

Mr. NEAL. I think it might have happened at conference. Do you

think that——

Mr. TAUZIN. I think that the final language agreed to in

conference——

Chairwoman JOHNSON of Connecticut. If the gentlemen would

yield, we did have earlier testimony on this and the committee can

clarify this for you.

Mr. TAUZIN. But I’ll be happy to submit the chronology. I would

also like if it would help you to submit for the record a copy of the

letter from Chairman Bliley to the FCC bitterly complaining about

the FCC’s attempt to force the carriers to hide this fee in their

rates without showing the customers that it was being collected.

Mr. NEAL. The only point I’m trying to raise is that we’ve agreed

that the goal is desirable and it’s interesting that Mr. Weller made

reference to the Gore Tax, when you could also suggest that Senator Snow from Maine was a full participant. So maybe we could

appropriately call it the Snow Tax, if that’s the rhetoric we’re going

to apply in hearings like this when there should be a better attempt to crystallize the issue so that we can intelligently focus on

the issue for the American people and we can help them help us

make a determination.

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There are unintended consequences of the Telecommunications

Act, including cable TV rates which none of us thought would increase at such a fast pace. My point is simply this, that in forums

like this, there is an opportunity to elevate the public debate. We

don’t elevate the public debate by suggesting things like the Gore

Tax when there are Republican members who were fully aware of

what was going to take place. In fact, an amicus brief filed in the

5th Circuit by Senator Snow, as well as Senator Rockefeller.

I don’t know what purposes are achieved when we come into a

forum like this and suggest that it’s the Gore Tax. Maybe you could

clarify that for me in your testimony.

Chairman JOHNSON of Connecticut. Mr. Neal, if we may. We are

terribly behind and I really would like to go onto to the next——

Mr. NEAL. Mrs. Johnson, I appreciate that.

Chairman JOHNSON of Connecticut. We’ve been through that before. Neither the chairman nor the ranking member are characterizing this discussion as anything other than a very importing discussion about where taxing authority lies in the constitution and

in this body. And how we hold ourselves accountable for the raising

of revenues and the expenditure of those revenues. And while I appreciate your point, and I regret that people characterize the tax

one way or another, we have been through this several time in this

hearing. We’ve been at this an hour and a half and we have yet

to call the commissioner.

Mr. NEAL. I understand the suggestion that you made, Mrs.

Johnson, and do appreciate the point on how this issue should be

characterized and the suggestion is fully accepted. Thank you.

Chairman JOHNSON of Connecticut. I’d like to move on now. I

thank the panel very much for your input.

Excuse me. Stop one minute. Sorry, I forgot that Mr. English arrived, and I will recognize him before we dismiss the panel, if the

three of you could remain for a moment.

My apologies, Mr. English.

Mr. ENGLISH. And I thank the chair for the opportunity. I’ll keep

my questions relatively brief. Having examined this issue, it seems

to me that the e-rate is a tax and I would like to get some comments on that in a moment, but I want to first raise a couple of

questions with my colleague, Mr. Tauzin, who has been pushing for

a national consumption tax very eloquently. Obviously it had not

occurred to him that we had given the FCC the power to impose

one unilaterally.

I wonder in you view, is the e-rate funding mechanism essentially an open-ended tax and is your tax proposal open-ended?

Mr. TAUZIN. First of all, to highlight your comment, you know

that I’m pushing for a general tax, not a special luxury tax. In fact

we repeal most excise tax.

I think the idea of special excise taxes is damaging to the success

of programs like telephone service for all Americans. It’s the most

regressive way to treat this issue. So I think it’s consistent with

our approach.

Secondly, our plan is not open-ended. Our plan is a five year

plan. Congress would have to extend it after five years if they

wanted to. Our plan says that for five years we would retain the

revenues from one-third of the 1914 luxury excise tax that was

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placed on telephones. And for that five year period that one-third

of those revenues, about 1.7 billion a year escalated to 2.1 billion

we estimate, would go into a trust fund for the administration of

this construction grant program for schools and libraries. At the

end of five years, that one-third of taxing authority in the trust

fund would terminate unless extended by Congress. So that our

plan terminates completely two-thirds of that old 1914 tax, it terminates completely the e-rate tax imposed by the FCC. So Americans would see immediately the benefit of $5 billion of tax relief

per year. But it retains one-third of that old 1914 tax, but only for

a period of five years, sunsetting at that point unless extended by

Congress.

Mr. ENGLISH. And I approve of the gentleman’s approach because

you are getting at one of the things that bothers me, and that is

the huge accretion of excise taxes that the Federal Government has

imposed over the years and has not reassessed in a long period of

time.

In your view, and examining your proposal, why do you feel we

need to create a trust fund in this case?

Mr. TAUZIN. Well, for two reasons. Number one, I think it’s very

clear that because of the FCC’s action to create the e-rate, there

has been a very large outpouring of expectations from the American education community and from rural hospitals and libraries of

America for this assistance.

Number two, I think it makes sense. I think we ought to help

if we are going to take full advantage in the 1996 act of the educational opportunities that are offered us in long-distance learning

through the Internet, if we are going to have telemedicine really

save us money in our Medicare, Medicaid programs, and save

money for all Americans in their insurance bills, we ought to make

sure that no hospital, no library, no school is not properly equipped

to take advantage of all these efficiencies that the Internet is rapidly bringing to us in these critical areas.

So, for the reason that I think it is a legitimate purpose; and

number two, that the expectations have been developed, I think we

ought to make sure that as we repeal one, we are leaving no doubt

that we are establishing a trust fund to carry out the purposes that

were intended by the e-rate program.

Mr. ENGLISH. Thank you. Madame Chair, I have a number of

other questions, but this panel has been here a long time. I appreciate their testimony and I appreciate the opportunity to engage a

little bit on this debate. Again, I believe that the e-rate program

clearly is tied in to a tax, rather than a fee, and I believe should

have come under the jurisdiction of this committee.

I appreciate your efforts to reassert our role in this process, and

I thank the panel.

Mr. TAUZIN. Thank you, Mr. English.

Chairman JOHNSON of Connecticut. I thank the panel very much.

I would like to call forth Commissioner Harold Furchtgott-Roth

of the Federal Communications Commission, and Christopher

Wright, the General Counsel of the Federal Communications Commission.

Mr. Furchtgott-Roth, if you would proceed, please.

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STATEMENT OF HAROLD FURCHTGOTT-ROTH,

COMMISSIONER, FEDERAL COMMUNICATIONS COMMISSION

Mr. FURCHTGOTT-ROTH. Madam Chair, distinguished members of

the House Ways and Means Committee, it is a great honor for me

to appear before Congress and to appear before this Committee in

particular. I have a prepared statement that I would like to have

entered into the record.

Even the most casual observer of Congress knows of the importance of the Ways and Means Committee. It is not just that most

Members want to be on this Committee. It is not just that it has

jurisdiction over important issues ranging from taxes to social security. And, it is not just that it has a beautiful committee room.

This Committee is important because it is rooted in the Constitution. Its jurisdiction is squarely in Article I, and its singular importance within Congress and within the House of Representatives is

guaranteed by the Origination Clause. ‘‘All bills for raising revenue

shall originate in the House of Representatives.’’

Why was this sentence, of all sentences, included in a Constitution remarkable for its brevity? The answer lies in a theme that

influenced both the founding of our Nation and our history ever

since. Americans should be taxed only, only by elected representatives. There should be no taxation without representation, and the

House was originally the only popularly elected body.

Taxation and overregulation of commerce characterize the intolerable acts that the British Parliament, without American representation, placed upon the American colonies that precipitated

the Revolutionary War. Disputes over taxation and duties have

scarred much of American history since.

This Committee has a solemn duty under the Constitution. First,

it alone must originate legislation that results in taxes and revenue. Second, as a corollary, it alone must ensure that other elements of the Federal Government, whether in Congress or elsewhere, do not create taxes or raise revenues without specific and

direct authority from legislation originating in this Committee.

It is with respect and admiration, reverence and humility that I

come before this Committee. I have been asked to comment on

whether the e-rate program, as implemented by the FCC, is a tax

or a fee. Let me note that my views on this topic are my own. They

do not represent a majority of the FCC. I have articulated these

and related views in a series of statements and dissents over the

past several months.

But my views are not outside the mainstream. The Republican

and Democratic leadership of both the House and Senate Commerce Committees have written to the FCC expressing their dismay at the entire implementation of universal service and suggesting bluntly that the Commission start over.

The underlying statute, the Telecommunications Act of 1996,

does not, in any way, establish authority for taxes. During the legislative process, the underlying bill was vetted by the Parliamentarian to ensure that there was no language that was properly

under the jurisdiction of this Committee. The Act can and should

be implemented in such a manner that no revenues are raised and

no fees are promulgated that are, in fact, taxes.

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The issue before this Committee is not whether its jurisdiction

has been usurped by another Committee of Congress. The answer

to that question is an unambiguous ‘‘No.’’ The issue is whether the

jurisdiction of this Committee has been usurped by an independent

agency.

Let me be clear: the issue before this Committee is not one of

policy. The issue is not whether spending Federal money on computer equipment and services for schools and libraries is a good

idea. Everyone likes education. Many, perhaps most, Americans

would like the Federal Government to spend more money on education. As the father of six children, I would only welcome more

Federal money to subsidize my children’s education.

But my responsibility as a Commissioner of the Federal Communications Commission, however, is not to set tax policy or to set

Federal education policy, or frankly, even to make telecommunications policy. Congress, not the FCC, sets Federal policy in all

areas, whether education or telecommunications. The responsibility

of the Federal Communications Commission is simply to follow the

Communications Act and other laws governing the FCC.

Perhaps collecting more money for telecommunications carriers

and customers to support additional spending on infrastructure for

schools and libraries is a good idea. The authority for that good

idea, however, should be based in law and should originate in this

Committee. To the best of my knowledge, it has not.

In my prepared statement, I explain why the FCC’s implementation of schools and libraries program resulted in the creation of a

tax. Fees for schools and libraries are assessed at a fixed percentage of both the interstate and intrastate revenues of telecommunications carriers, but the receipts are disbursed primarily to nontelecommunications carriers to provide ‘‘internal connections’’ for

schools and libraries.

Please understand what this means. Every telephone company in

your district is paying a tax on every customer’s telephone bill. The

receipts from this assessment are not used to benefit the consumer

directly by expanding the number of low-income or high-cost consumers who remain on the telecommunications network only as a

result of the fee. There are other universal service programs for

this purpose, and those programs are clearly based on fees, not

taxes.

The receipts from this fee do not defray the costs for the carrier

to provide telecommunications service and thus, ultimately benefit

the telecommunications consumer. There are Federal and State

programs for that purpose, which are not taxes.

Some of the schools and libraries’ fees do go for telecommunications services under section 254(h)(1). Support for these services,

while reasonable people may differ on priorities, are clearly based

on fees, as they defray the cost of service to carriers.

But the vast majority of funds from the schools and libraries corporation could not be supported under section 254(h)(1) alone. They

require an expansive, and I believe, unlawful interpretation of section 254(h)(2) to provide subsidies for internal connections of

schools.

And let’s be sure the discussion is not just about wire and fiber.

It is about sophisticated computer equipment, about servers, about

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routers that cost tens of thousands of dollars each, and that the

computer industry of America comes to the FCC and lobbies for

with their hands out. Of the requests for 1998, $1.3 billion of the

total of $2 billion was for this hardware.

The telecommunications customer does not benefit from this

transfer to the computer industry, nor does the telecommunications

carrier. It is unambiguously a transfer to schools, libraries, and

computer companies without any benefit to those paying the fee. It

is, in short, a tax.

What authority does the FCC claim to establish this tax? The

usual citation is section 254(h)(2). This section authorizes the FCC

to establish rules to enhance access to advanced telecommunications and information services. Based on this language, the Commission established rules that have led to requests for Federal subsidies of more than $1 billion for computer equipment.

This sentence does not require any Federal funds. It does not require any discounts. It does not require taxes. It does not require

anything other than rules to enhance. In short, the statutory language does not lead to a tax; only the Commission’s peculiar interpretation of this language does.

Who is shortchanged in this process? The American consumer

who pays the tax, telecommunications carriers who pay the tax,

and this Committee that did not authorize the tax. I trust that this

Committee will find an appropriate remedy.

Madam Chair, members of the Committee, I am available to answer questions.

[The prepared statement follows:]

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Chairman JOHNSON of Connecticut. Thank you very much.

Mr. Wright.

STATEMENT OF CHRISTOPHER J. WRIGHT, GENERAL

COUNSEL, FEDERAL COMMUNICATIONS COMMISSION

Mr. WRIGHT. Thank you. It is a pleasure to be here today as

Chairman Kennard’s representative to discuss the FCC’s universal

service program for schools and libraries.

As Congressman Neal noted earlier, I’d like to emphasize that

Senators Snowe and Rockefeller, the principal drafters of section

254(h), filed an amicus brief in the 5th Circuit fully endorsing the

Commission’s interpretation of the statute.

I’d like to first read three brief excerpts from section 254. The

first, section 254(d), provides that ‘‘every telecommunications carrier that provides interstate telecommunications services shall contribute’’ to ‘‘mechanisms established by the Commission to preserve

and advance universal service.’’ So all telecommunications carriers

contribute.

Section 254(h), which contains a subsection specifically addressed

to ‘‘educational providers and libraries,’’ first provides that ‘‘all telecommunications carriers’’ must provide services to ‘‘elementary

schools, secondary schools, and libraries’’ at a discounted rate that

the Commission, ‘‘determines is appropriate and necessary to ensure affordable access to, and use of such services by such entities.’’

That is section 254(h)(1). It plainly provides that schools get discounts for telecommunications services. Internet services are not

telecommunications services; they are information services.

The third section I’d like to quote is section 254(h)(2), which

Commissioner Furchtgott-Roth has just mentioned. It directs the

FCC to ‘‘establish competitively neutral rules to enhance, to the extent technically feasible and economically reasonable, access to advanced telecommunications and information services for all public

and nonprofit elementary and secondary school classrooms.’’

If there is a source for Internet services, it is in that sentence.

The Commission has concluded that both Internet services and inside wiring, both of which are information services, should be funded under this provision.

The Commission reasonably interpreted the statute to reach this

result. Internal connections are necessary to provide services to

classrooms. And as Senators Snowe and Rockefeller have emphasized, they wrote ‘‘classrooms’’ into section 254(h)(2) because that

is where the students are. It is hard to imagine what section

254(h)(2) covers if it does not cover internal connections and Internet access.

The telephone companies that have challenged the Commission’s

interpretation of that provision have not suggested what it covers,

even though it is a basic rule of statutory construction that a statutory provision should not be construed to be meaningless.

In their amicus brief, Senators Snowe and Rockefeller specifically

endorsed the Commission’s decision to provide discounts for internal connections and Internet access.

Let me turn now to the Origination Clause issue. With respect

to this issue, I understand that this committee would like to focus

on the schools and libraries program and not the aspects of the

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Commission’s order funding support to rural areas and low-income

Americans.

However, the issue cannot be severed in that manner. If the

schools and libraries program is an unconstitutional tax, so are the

much larger high-cost and low-income programs. Fortunately, there

is no merit to this Origination Clause challenge.

Prior to the enactment of section 254, when the Communications

Act did not even contain the words ‘‘universal service,’’ the D.C.

Circuit heard and rejected an Origination Clause challenge to the

Commission’s universal service program in the ALC Communications case. The Court held that the assessments at issue were not

taxes and were not fees, but instead were ‘‘transfers from interexchange carriers to high-cost, local exchange carriers, and low-income telephone subscribers that fit comfortably within the range of

special purpose levies that are consistent with Congressional authority to regulate commerce.’’

In the Rural Telephone Coalition case, the D.C. Circuit rejected

an argument brought by some telephone companies that the Commission’s universal service program was a tax for purposes of the

tax clause. The Court said that a regulation is a tax only when its

primary purpose is raising revenue.

As Senators Snowe and Rockefeller have emphasized, extending

universal service support to schools and libraries did not transform

previously valid transfer payments into taxes. To the contrary, because section 254 ‘‘creates a particular governmental program rather than raising revenue to support government generally’’—I am

quoting there from the Supreme Court’s decision in Munoz-Flores,

it plainly is not a tax under the test enunciated by the Supreme

Court.

In that same case, the Supreme Court squarely rejected the notion now being advanced before the 5th circuit that an assessment

is a tax unless those required to pay the assessment receive a direct benefit from it.

In short, attacks on universal service by telecommunications

companies are nothing new. In 1988, at a time when there was no

universal service provision in the Communications Act, the D.C.

Circuit upheld the Commission’s efforts to provide affordable telephone service to all Americans and rejected the telephone companies’ claims that the universal service program was a tax not authorized by Congress.

The analogous claims recently advanced in the 5th Circuit have

even less force now that Congress has adopted section 254 and explicitly extended universal service for schools and libraries.

I very much appreciate the opportunity to testify, and I will be

pleased to answer any questions that you may have. Thank you.

[The prepared statement follows:]

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Chairman JOHNSON of Connecticut. I thank the panel.

Mr. Furchtgott-Roth, would you go through, as explicitly as possible, exactly who pays and exactly who gets paid, who benefits.

Mr. FURCHTGOTT-ROTH. Madam Chair, would this just be for the

schools and libraries program or for the other universal service programs as well?

Chairman JOHNSON of Connecticut. For the school and libraries

program, although you may, if you wish, contrast it with the universal service program.

Mr. FURCHTGOTT-ROTH. Yes, ma’am. Right now, all telecommunications carriers pay a tax for the schools and libraries program

from both their interstate and intrastate revenues. It is a fixed percentage that was established first by a Commission notice, and

subsequently an order in December of 1997 that covered the first

two quarters of 1998. In May of this year, I believe we issued a

subsequent notice that covered the third and fourth quarters of

1998 and the first two quarters of 1999. So this is simply a percentage of telecommunications service revenue.

Who receives funds is very complicated, and there is a very complicated mechanism to apply for funds from the Schools and Libraries Corporation, an independent corporation established by the

Commission in 1997. This is, from all I can tell, a private corporation, private nonprofit; it is not a government entity. It was incorporated in the State of Delaware.

And as noted in the last panel, more than 30,000 schools and libraries have applied for funds from this program. It requires a very

complicated form. Many schools have invested a great many hours

in filling out these forms, and when you go from doing nothing to

trying to disperse more than $1 billion to 30,000 applicants, it is

a very complicated process. And something that, frankly, the FCC

has never done before and does not have a great deal of expertise.

Chairman JOHNSON of Connecticut. In your testimony, you mentioned that there were nine telecommunications companies that

benefited, though all paid. Would you clarify that and then the

other aspect of that, those who don’t pay and do benefit.

Mr. FURCHTGOTT-ROTH. Yes. There are two parts of 254(h) that

are used to establish benefits for schools and libraries. The first is

under 254(h)(1), which is the traditional discount program which

clearly says that only telecommunications carriers can receive

these discounts, no one other than a telecommunications carrier.

In my view, (h)(1) by itself would just be a fee, as the Commission has interpreted; (h)(2), however, is where the Commission has

engaged in some extraordinarily complicated legal gymnastics. And

not being a lawyer, I am not quite sure how they got there. I am

not sure if I were a lawyer, I would understand how they got there.

But what they said is that the beneficiaries can be anyone, and

it doesn’t have to be a telecommunications carrier. And it is under

the advanced services that the internal connections enter, and $1.3

billion out of the $2 billion requested for 1998 are for internal connections.

I wish I could give you a precise breakdown of how much of this

is going to telecommunications carriers, eligible telecommunications carriers under section 214, or to folks who are not telecommunications carriers at all.

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I have requested some of this information from Schools and Libraries Corporation and they have not been able to give it to me

at this point. But it is very clear that many companies that are not

telecommunications carriers at all have applied for a great deal of

money from the Schools and Libraries Corporation.

On the contributions side, right now it is just telecommunications

carriers that pay in. Other companies that may, in fact, receive

money or that the Commission has designated as eligible to receive

money, do not pay in. And this would include Internet access providers, construction companies that might be providing internal

wiring, and perhaps most importantly, it does not include the computer companies that come in to lobby me and say this is a billion

dollar business for them and they’d like some of this money.

Chairman JOHNSON of Connecticut. Thank you. Then what I

would interpret your testimony to be is that you are not arguing

that all of universal service or even all of the e-rate program are

an illegal tax, but that basically 24(h)(2), a limited part of the erate program, is an illegal tax.

Mr. FURCHTGOTT-ROTH. Let me be clear, Madam Chair. There

are two points I would like to leave you with on this. First of all,

I think that the Commission has completely misinterpreted paragraph (h)(2), independent of whether it is a tax or not. I just do

not see how you get from the plain language of the statute to the

creation of a multi-billion dollar program. I don’t see how you get

to any Federal dollars. And then above and beyond that, I don’t see

how you get to a tax from it.

Chairman JOHNSON of Connecticut. Thank you.

Mr. Coyne.

Mr. COYNE. Thank you, Madam Chair. Mr. Wright, how many

schools and school districts nationwide have applied for Internet

and related telecommunications assistance?

Mr. WRIGHT. We have received 30,000 applications.

Mr. COYNE. How many?

Mr. WRIGHT. Thirty thousand applications covering more than

100,000 schools. Some of the applications are multischool applications.

Mr. COYNE. Can you tell us what the total universal service subsidy breakout is State by State. In other words, which States or

areas are subsidized and which pay to subsidize other areas or

States? Do you have that breakdown?

Mr. WRIGHT. I don’t have that on the tip of my tongue. Not surprisingly though, with 30,000 applications and 100,000 schools, this

is spread around the country. Just before this hearing started, I

was handed this purple document which I was told was given to

staff of each member of this committee which does break it down

by each State.

Mr. COYNE. Okay. There seems to be a perception in the general

public that Congress and the FCC has increased phone costs. In

your research and work that you do, can you give any indication

of why you think that is?

Mr. WRIGHT. Well, you started off by admonishing all of us to

avoid political rhetoric, so I will. But let me just stick to the facts.

The facts are that since the 1996 Act was passed, we’ve reduced

access rates by more than $4 billion, and these programs, including

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the explicitly high-cost program, are smaller than $4 billion. So

there has been a net reduction.

Mr. COYNE. Thank you.

Chairman JOHNSON of Connecticut. On that point, Mr. Wright,

you say since the 1996 Act was passed, that we’ve reduced access

rates by $4 billion.

Mr. WRIGHT. Yes.

Chairman JOHNSON of Connecticut. Then why is it necessary for

the telephone company to use a billing mechanism that clearly includes, by some accounts, 19 cents for this purpose, and by other

accounts, 36 cents for this purpose. If we’ve reduced their charges

that much, why are they including this in the billing rate?

If they include it in the billing rate, then it is an identifiable entity, and we have to decide whether that entity is a fee or a tax.

But if we’ve saved them $4 billion, why was Congress wrong to assume that deregulation would bring them so much more profit that

they could fund this, which is the assumption that we made?

Mr. WRIGHT. I don’t have the all the long-distance carriers’ billing plans at the tip of my tongue, but some of them, like AT&T,

didn’t offer 10 cents a minute three years ago. They offered 15

cents a minute. Now they offer 10 cents a minute and they add in

a half-penny for schools and libraries.

Chairman JOHNSON of Connecticut. Why do you allow them to do

that? You are the regulators. The bill was to say, we’re going to

give you free open competition and it’s going to cut your costs. But

one of the things you are going to do is make sure that we do this

and that that gets folded in. And yet, you are allowing them to put

in their universal rate, either 19 cents or 36 cents, and that is an

identifiable either fee or tax.

Mr. WRIGHT. Madam Chairman, you referred earlier—described

us as rate regulators. That’s not true. Over the past 25 years, we

have very aggressively deregulated the long-distance market and

we do not regulate their rates.

Chairman JOHNSON of Connecticut. Mr. Weller.

Mr. WELLER. Thank you, Madam Chair. This is an extremely

helpful hearing. I really want to again commend you for conducting

today’s hearing as we look at a challenge. It is clear, I think, from

the statements of members on both sides, as well as those who

have testified this morning, that every one of us stands here in

support of increasing access to the Internet and computers for

every school library in our nation.

Of course, the question is how can we accomplish it, and the real

question of this hearing is how do we fund, how do we finance that

goal. And in listening to the testimony of the Commissioner, as

well as the legal counsel, the chief lawyer for the FCC—we have

a disagreement here, so we’ve got both sides represented. And the

Commissioner indicated—and confirm with me—it’s my understanding that you agree with the notion that many have, that the

so-called fee is actually a tax, is that correct, Commissioner?

Mr. FURCHTGOTT-ROTH. I believe that that portion that goes to

nontelecommunications carriers under (h)(2) is a tax, yes.

Mr. WELLER. And then, Mr. Wright, you argue that what he believes is a tax is actually a fee.

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Mr. WRIGHT. No, we’ve never defended this as a fee. The language of the statute is ‘‘specific mechanisms.’’ The language of the

relevant cases are things like ‘‘special purpose levies.’’ But some

cases have been cited under something called the Independent Offices Administration Act, and it is alleged that we’ve claimed that

these are fees under that Act; we’ve never made that claim, so it’s

setting up a straw man to beat that one down.

Mr. WELLER. So then if you don’t believe it’s a fee, then you believe it’s a tax.

Mr. WRIGHT. No, we believe it’s what Congress called it, and

Congress called it a ‘‘specific mechanism.’’

Mr. WELLER. A specific mechanism?

Mr. WRIGHT. What the D.C. Circuit called——

Mr. WELLER. Kind of like a revenue-enhancer and all the other

terms that politicians have used over the years to label a tax something else.

Mr. WRIGHT. I’m just a lawyer. But the courts have said that a

regulation is a tax only when its primary purpose is raising revenue, and the courts have regularly approved——

Mr. WELLER. Sure. Well, reclaiming my time, Mr. Wright, I am

not an attorney, so I turn to attorneys at times and ask for advice

and counsel. And I know that the Commissioners look to you for

advice and counsel, and they say this is what we want to achieve,

we are asking you to figure out a way we can legally do it. And

of course, you are charged with that.

As has been stated earlier, there are roughly 1,800 schools in my

State of Illinois that have requested help through the e-rate program, not only for the reduced rate but also for the assistance in

putting in the wire and the fiber so they can hook up computers.

Of course, they use LaSalle-Peru High School as the example

where it is most expensive. They estimate that it is going to cost

them roughly $1 million. Ottawa, which is 10 minutes away, they

estimate $100,000. So it varies from school district to school district

what the costs are to achieve this goal.

One of the concerns I have, because many, including the General

Accounting Office, and many in the Congress, including myself,

question the constitutionality of what you label, I forgot the term

again, but what most of us label a tax. And that if the court action

in the 5th circuit finds the FCC’s interpretation of subsection (h)(2)

and its subsequent action unconstitutional, in the case of my State

we have 1,800 schools that are left hanging.

And the question I have for you is if the 5th circuit rules against

you and declares your funding mechanism, what we call a tax, a

tax and unconstitutional, because it was not levied by Congress,

what happens to your program?

Mr. WRIGHT. That would be a major problem then. I think your

bill would be a great thing if the 5th circuit should take that action.

Mr. WELLER. Of course, I am one who believes that the Fifth—

I am not an attorney, but listening to those who are—that the 5th

circuit will rule it unconstitutional, which does jeopardize the funding. And that’s why I worked with my colleagues and Mr. Tauzin

and Mr. Hulshof and others to come up with a solution to the problem.

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And I was wondering, should they rule against you and the solution we’ve offered, which is earmarking one cent of every dollar of

an existing revenue source, an excise tax that was put in place in

1914 to finance World War I, do you feel that that is a legal funding mechanism that would solve the problem if the 5th circuit court

rules against you?

Mr. WRIGHT. Oh, it certainly sounds like it would. I don’t know

all the details of the bill. I don’t know whether it’s specific with respect to internal connections and Internet access. But in what I

would regard the unlikely event the 5th circuit rules against us,

that would sure be a great backup.

If I could just make two brief points. You know, the telephone

companies did go in and seek a stay. And we opposed it and they

said this was an unconstitutional tax. The Court didn’t grant the

stay. And we then took the very unusual step, because we’d like

to get this settled quickly, of moving to have the case expedited,

which is something the defendant rarely does.

The telephone companies wouldn’t join with us in our motion to

expedite, but we filed it anyway. We are anxious to get this sorted

out.

Mr. WELLER. Madam Chair, could I just have a brief followup?

Of course, in Congress we are running out of time, we’ve got roughly 30 days in the legislation session left between now and the first

week of October, and we can move this solution fairly quickly to

solve the problem and ensure that the funds are available to those

1,800 schools in Illinois like LaSalle-Peru, and Ottawa and others

in the Gilette library district.

From your standpoint, do you believe that if the Court rules

against you, that the FCC should continue to administer the distribution of these funds or would you be willing to accept from the

FCC standpoint, allowing as we propose, through the chief technology agency within the Commerce Department, to use that agency to block-grant the funds back to the States. Do you have any

problem with shifting the administrative responsibility elsewhere

for distribution of those funds?

Mr. WRIGHT. Of course, we abide by decisions of the courts. This

brown book I am holding is the Communications Act. It is our job

to administer it and anything Congress writes into it, we will administer.

Mr. WELLER. So you’d work with us, then. That’s good. Thank

you, Madam Chair, and thank you.

Chairman JOHNSON of Connecticut. Thank you, Mr. Weller. Mrs.

Thurman.

Mrs. THURMAN. Thank you, Madam Chairman. Staff just brought

to my attention—and I am curious, since this is my first time on

Ways and Means—that there evidently is a parliamentary procedure that can be used when a revenue issue has not originated in

the House, called blue-slipping. And it’s my understanding that the

staff of Ways and Means went to the parliamentarian to get clarification as to whether or not they could blue-slip this so the Ways

and Means Committee could take it. Their answer was no.

And even to the point where the Senate had said they would go

back and clarify any language to make sure that it wasn’t considVerDate 11-MAY-2000 11:38 Jun 21, 2000 Jkt 010199 PO 00000 Frm 00082 Fmt 6633 Sfmt 6602 E:\HEARINGS\63683 pfrm02 PsN: 63683
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ered to be a tax. Are you familiar with this procedure that took

place, or any of the inquiry that took place on this issue?

Mr. FURCHTGOTT-ROTH. Mrs. Thurman, I had the privilege of

being a staff member on the House Commerce Committee when the

1996 Act was going through the House in conference, and I do have

a recollection of the Parliamentarian reviewing it. I don’t have the

specific recollection of the Ways and Means Committee staff requesting a blue slip, but I would be very surprised if the Ways and

Means Committee staff did not, in fact, review the language.

Mrs. THURMAN. And that process is not open just to the chairman or the ranking members? It’s open to all members of Congress?

Mr. FURCHTGOTT-ROTH. Yes, ma’am.

Mrs. THURMAN. Secondly, Mr. Wright, let me ask you a question.

I am trying to get to the bottom of this. In your beliefs in this dialogue, is the universal issue a tax or a fee? Or is it just what we

are now looking at in this new provision, the tax?

Mr. WRIGHT. Well, let me make clear that there is only one funding provision in the Act. That is 254(d). It covers high-cost, low-income and schools and libraries, says all telecommunications carriers pay. There is only one funding provision in the Act, and it applies without distinction to any of the them.

Mrs. THURMAN. So then what we are really doing is dissecting

this issue into, first of all, the school and libraries issue, and then

into the construction issue. Is that——

Mr. WRIGHT. Right. Let me make clear that in the 5th Circuit,

the telephone companies claim that all of this is an unconstitutional tax.

Mrs. THURMAN. Have they ever done this before?

Mr. WRIGHT. Yes, twice in the last decade, they went to the D.C.

Circuit making the same case. Look, I am in the business of defending the constitutionality of the acts of Congress. It does not

come easily to my lips to say that an act is unconstitutional or even

that there is a grave question. But to the extent there was a grave

question, it was with respect to the high-cost fund before the 1996

Telecommunications Act was enacted.

The high-cost fund, there was nothing in the act saying anybody

paid anything and the way we put together a program to make

service affordable to all Americans, we had the inter-exchange carriers or the long-distance companies pay, they didn’t get any

money. The local exchange carriers, the Bell Atlantics and

Ameritechs, collected all the money. And we won that case. So this

case seems easy in comparison.

Mrs. THURMAN. Mr. Roth.

Mr. FURCHTGOTT-ROTH. Mrs. Thurman, I’d just like to make a

couple points on that. First of all, Mr. Wright is entirely correct

that 254(d) is the only source of funding. But I would note that

today the telecommunications carriers pay different rates on different bases for different funds. The Commission has set up a very

complicated structure, so for instance, for schools and libraries,

they pay a certain percentage on both inter and intrastate funds,

entirely separable from a different rate that is applied only to

interstate funds that is used for high-cost and low-income programs.

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The other issue which I think is relevant to the question of

whether or not it is a tax is how the money is spent. And for both

high-cost and low-income, all of the money consistent with section

214(e) and 254(e) only goes to eligible carriers. The eligible carriers

are all telecommunications carriers, so all of the money stays within the telecommunications industry. It is a shifting of funds from

one telecommunications carrier to another.

Mrs. THURMAN. But in the final analysis, once the connection or

the wiring—I wouldn’t call it construction, but wiring—they still

then are the beneficiary in the final analysis by this rewiring, is

that correct?

Mr. FURCHTGOTT-ROTH. No, ma’am, I would not——

Mrs. THURMAN. Well, when they broke up and deregulated, a lot

of what they stopped doing—they have a lot of subcontractors out

there that do wiring and those kinds of things today. But to provide the service, if I am correct, later on once when they get the

wiring done, then the whole universe gets the opportunity to participate.

Mr. FURCHTGOTT-ROTH. Not under 254, not for schools and libraries. A lot of that service will not go to telecommunications carriers at all.

Mr. WRIGHT. If I could add just a word, of course if the schools

are connected and they need the inside wiring to get the Internet

access, of course, the telephone companies end up benefitting.

World Com and MCI are the largest owners of the Internet backbone in this country. That’s one of the problems in their pending

merger. Of course, if the schools and libraries have Internet access,

they will use it, and the telephone companies that contribute will

benefit, it’s just like high-cost.

Mr. FURCHTGOTT-ROTH. Eighty percent of schools and libraries in

the United States are connected to the Internet without a nickel

of money from the FCC. The vast majority of these schools and libraries receive today free or discounted service to the Internet.

In fact, of the $2 billion that has been requested for 1998, less

than $100 million of that is for Internet services. Most of this

money is not going for Internet services. A third of the money is

going for just regular telephone service discounts, and two-thirds of

the money is going for what is euphemistically being described as

internal connections, but what is in fact primarily money to pay for

extraordinarily sophisticated computer equipment.

Mrs. THURMAN. For schools and libraries.

Mr. FURCHTGOTT-ROTH. For schools and libraries.

Mrs. THURMAN. So that universe still stays.

Mr. FURCHTGOTT-ROTH. But those people are not paying into the

fund.

Mrs. THURMAN. Okay. Thank you.

Chairman JOHNSON of Connecticut. Mr. Hulshof.

Mr. HULSHOF. Thank you, Madam Chairman. So, in essence, the

telecommunications carriers are paying into the e-rate program,

but then companies that are not telecommunications carriers are

receiving disbursements under the program. Commissioner, is that

essentially——

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Mr. FURCHTGOTT-ROTH. That is true for only a portion of the

schools and libraries program, yes. It is not true for the other universal service programs.

Mr. HULSHOF. Mr. Wright, following up on what Ms. Johnson

asked earlier, somewhere in all the information given us, I saw

some information that reduced access charges have saved long-distance carriers $2 billion, is the number that comes to mind. Is that

accurate, more or less?

Mr. WRIGHT. It’s more like $4 billion.

Mr. HULSHOF. Four billion, okay. Is it your testimony or statement that reduced access charges to long-distance providers should

pay for the e-rate program?

Mr. WRIGHT. The e-rate program is separate, but I think in understanding the whole system, it’s certainly nice that they balance

out this way.

Mr. HULSHOF. Well, hasn’t the FCC stated that reduced access

charges should be passed on to the consumers?

Mr. WRIGHT. Again, we are not in the direct business of rate regulation. But it is our understanding that in a competitive market,

rate reductions should be passed on to the consumers. We’ve declared this a competitive market; that’s why we’ve deregulated it.

Mr. HULSHOF. And hasn’t the fact been long-distance carriers

have reduced their rates in excess of the savings from the reduced

access charges?

Mr. WRIGHT. Some of them are offering some very good deals

these days, yes.

Mr. HULSHOF. So I guess my question is how can the savings be

spent twice? That is a nonlegal way to say it, but ultimately, it

seems that we are spending the savings more than once, are we

not?

Mr. WRIGHT. Again, there is no direct tie. The long-distance companies set their own rates. You are certainly right that the e-rate

program costs money; it comes from somewhere.

If I could give you an example, though, of why it’s very important

that some nontelecommuncations companies get money, I think

look at this from the point of view of a school district. You want

to buy Internet service. The telephone companies are arguing that

only telecommunications companies should provide that, so around

here you could get Bell Atlantic.

But, of course, there are lots of Internet service providers that

are not telecommunications carriers. They are not eligible under

the telephone companies’ argument. Under the telephone companies’ argument, a school has to choose the high-cost telephone company and can’t choose AOL, can’t choose Gateway, can’t choose

Erol’s, even if they are lower cost and better priced.

Mr. HULSHOF. Let me explore just a bit—and even, Mr. Weller,

as an attorney, I am not sure that I am conversant, certainly not

on the scale that you are, Mr. Wright and I acknowledge that—but

one of the things Mr. Weller talked about is there are some questions being raised by the General Accounting Office regarding the

constitutionality of the corporation that has been established to administer the program.

Do you have any quick comment on that?

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Mr. WRIGHT. Well, the quick comment is that we directed the

universal service group to reorganize itself. They are in the process

of doing it. We believe that that fully responds to GAO’s complaints.

Mr. HULSHOF. Regarding your comments about the 5th circuit—

and I am not holding you to this—but the case has been argued,

or are we simply waiting for the Court’s opinion at this point?

Mr. WRIGHT. No, the case hasn’t been argued yet.

Mr. HULSHOF. Okay, it has not been argued.

Mr. WRIGHT. It has been briefed, but not argued.

Mr. HULSHOF. You wanted to put this on an expedited track, but

the other parties have not. Any anticipation of when? What is the

normal course as far as when briefs and arguments and ultimately

an opinion? What’s your best guess?

Mr. WRIGHT. Briefs are in. Unless expedited, the argument probably won’t be held until the winter.

Mr. HULSHOF. Okay. Let me ask you this question. You state

that these issues are raised in the 5th circuit litigation. But I’m not

sure that your brief responds to the argument that the e-rate program, as distinct from the entire universal service program, raises

the separation of powers issue.

You talk about the Origination Clause issue. Can we be confident

that the 5th circuit will address the issue of the separation of powers, because I am not sure your brief quite addresses that point.

Mr. WRIGHT. The way the issue is teed up in the 5th circuit, the

tax issue has been separate from whether we interpreted 254(h)

properly. And we filed about a 200-page brief there. You will find

a few pages on the tax issue. There are about 25 pages somewhere

else on whether we’ve interpreted 254(h) properly to cover internal

connections and Internet access.

Mr. HULSHOF. So hopefully, the 5th circuit, although again,

drawing upon past experience, oftentimes courts will only give us

a narrow holding. So even though some of the witnesses previously

say we should wait until the 5th circuit returns its opinion, it could

very well be that the 5th circuit is only going to narrowly address

the issue and we still may have this discussion at a later time.

Mr. WRIGHT. Yes. I would say that in the normal course, we

won’t get an opinion from the 5th Circuit until next summer, and

as already noted, we’ve got 30,000 applications pending, 100,000

schools. And we are getting a lot of complaints from the schools

that we ought to move more quickly.

Mr. HULSHOF. Thank you, Madam Chair.

Chairman JOHNSON of Connecticut. I thank the panel for testifying. I think the number of applications you received attests the

importance of this program and the importance of resolving the

problems around it.

I would also want to comment on the fact that the bill wasn’t

blue-slipped does indicate that the parliamentarian judged that

this was not a tax, presumably in consultation with either the

Joint Tax Staff or with the staff of the Ways and Means Committee. The issue really is whether or not it becomes a tax by virtue of the way the FCC implemented it. And I think this hearing

has given us a great deal of insight into that issue.

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I personally am very impressed with the fact that two-thirds of

the money is going to wiring and computers. And I would just remind both the members and the public that this Congress doubled

the money for school technology in last year’s budget to over half

a billion dollars, because we do believe it is our responsibility to

help schools become state-of-the-art technologically.

This Congress also passed just last year in the tax bill tax incentives to help schools be able to get state-of-the-art technology and

to improve the partnership between the business community and

the schools in terms of the transfer of modern technology into the

school system for their usage.

So there are many indications that the Congress feels responsible

for achieving the goal of assuring state-of-the-art technology in our

schools and libraries, and certainly, the directive to the FCC of a

discounted rate is harmonious with achieving not only the goal of

creating that system, but assuring its functioning and assuring it

in a way that is harmonious with the history of our effort to subsidize those who are least able to pay the rates for communications

services.

But I do think that the nature of the grant subsidy program that

the FCC developed raises very significant questions about whether

a fee has then become a tax by virtue of who pays and who benefits, and also whether we can afford to have administrative agencies make that kind of interpretation and put in place programs

that, in many ways, duplicate the administrative efforts of the government to achieve the same goal in other parts of the bureaucracy.

So I think we have gained a lot more insight into both the constitutional and legal issues that the recent actions of the FCC

raise, and I think we also have given ourselves a lot more information about the variety of ways in which we can go about assuring

that the goal, on which we all agree, of high technology and modern wiring into our schools can be achieved.

So I thank you for your participation today, and I thank the

members for their constancy in staying until the end. Thank you.

[Whereupon, at 12:25 p.m., the hearing adjourned subject to the

call of the Chair.]

[A submission for the record follows:]

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