Net-Tax Ban Struggles

Senators last week struggled to strike a balance between states' rights to tax telecom services and encouraging the growth of the Internet as they wrestled with VoIP telephony's effect on the Internet-access tax ban.

Debate over extending the tax ban has been snarled by days of tricky parliamentary maneuvers, circuitous debate and failure to make progress on a compromise proposal introduced by Sen. John McCain (R-Ariz.), that is intended to appease opposing factions and smooth the way for a vote on the legislation.

A moratorium prohibiting state and local governments from taxing the means of Internet access has been a point of contention in the Senate since the original 1998 ban expired last November.


A bill to make the tax ban permanent (S.150) — introduced over a year ago by Sens. George Allen (R-Va.) and Ron Wyden (D-Ore.) — was debated again this week, but has met stiff resistance from a bipartisan group of lawmakers. Led by Sens. Lamar Alexander (R-Tenn.) and Thomas Carper (D-Del.), the latter group argues that the legislation sticks cash-strapped states with the bill for a federal policy.

McCain, chairman of the Senate Commerce Committee, is attempting to broker a compromise between the two factions by supporting a proposal that extends the current moratorium for four years, but specifically exempts voice-over-Internet protocol telephony from the tax ban.

The VoIP provision of the McCain compromise came in response to concerns from Alexander's camp, which worries that the migration of telephone calls to the Internet would erode the revenue states collect from taxing phone service.

Alexander likened that trend to driving "a Mack truck through the state budgets of virtually every state," making it necessary to compensate for the loss in revenue by imposing state income taxes or raising local property taxes in order to provide basic resources.

McCain said his proposal "would ensure that state and local revenues from traditional phone service would not be impacted in any way, shape or form." His package also extends a ban on taxes aimed at Internet commerce.

Allen has indicated that he supports a McCain amendment clarifying that the moratorium does not apply to VoIP, but Alexander refuses to get on board with the compromise, which he said defines Internet access too broadly and extends the moratorium for two years longer than necessary.

Last Wednesday, 35 consumer and telecommunications groups led by the Consumer Internet Access Coalition — and including the National Cable & Telecommunications Association — endorsed McCain's proposal, calling it a "fair compromise that will help promote an expansion of Internet access and broadband deployment to all Americans" in a letter to the Senate.

The pending legislation has suffered setbacks, including Minority Leader Thomas Daschle (D-S.D.) introducing an unrelated energy measure as an amendment and a subsequent attempt by Sen. Pete Domenici (R-N.M.) to push the entire deadlocked energy bill through by inserting it into an amendment to the Internet tax legislation.


The digression into energy policy led to an infuriated McCain chastising his colleagues for delaying an important debate and using sneaky tactics to resuscitate extraneous legislation.

"Why don't we just go home … rather than go through this charade of telling Americans that we are legislating?" he asked. "We have debated [the bill] for barely two days. And what do we have? The Energy bill as an amendment to the Internet-tax moratorium bill. What am I supposed to tell my constituents?"

Allen expressed disappointment that debate on his bill had been subject to such detours and urged fellow lawmakers to "act and not delay, not dawdle, not get off on tangents."

Majority Leader Bill Frist (R-Tenn.) has set a vote deadline for Thursday night, but some senators speculated that deliberations on the bill would have to spill over into next week.

States News Service