June 28, 2006 1:33 PM PDT

Senators target Net, phone taxes

WASHINGTON--Americans will pay less in Internet, mobile and local telephone taxes in the future, according to multiple proposals approved by U.S. Senate committees Wednesday.

One set of tax changes comes from the Senate Committee on Finance, where Sen. Ron Wyden, an Oregon Democrat, won approval of legislation that would rescind a 3 percent telecommunications tax on local phone calls that dates back to the Spanish-American War. A congressional tax committee and the Internal Revenue Service have proposed extending that tax to the Internet.

Another set came from the Senate Commerce Committee, which is considering a series of amendments during its efforts to rewrite federal telecommunications laws. It adopted amendments--opposed by some Democrats--that would restrict Internet access taxes and cellular phone taxes.

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"If we allow state or local governments to impose these discriminatory, harmful taxes on the Internet, it will clearly destroy and limit the opportunities for tens of millions of our citizens," said Sen. George Allen, a Virginia Republican.

The Internet tax moratorium amendment, which passed by a 19-to-3 vote, would make permanent an existing law dating to 1998 that bars state governments from taxing Internet access services. Right now, that ban is scheduled to expire on Oct. 31, 2007.

The proposal is expected to encounter resistance on the Senate floor. North Dakota Sen. Byron Dorgan, one of three Democrats who voted against the amendment, said he and at least four other senators are "very opposed" to the amendment and planned to engage in "extended debate" with the full Senate.

"It's a Congress that largely says, 'Let's tax work, and let's exempt investment,'" Dorgan said. "I've never quite understood the philosophy of that."

The cell phone tax moratorium, which passed by a 21-to-1 vote, is more limited. It would prohibit states from levying new taxes, singling out wireless bills within the three years after the rule goes into effect, but would not affect any existing taxes. It would also leave states the option of imposing new taxes on cell phone bills, provided that they were not "discriminatory" toward the wireless industry--meaning that a tax that affects all types of telephone calls would be permissible.

Arizona Republican John McCain, who offered the amendment, said he wants to prevent taxes from climbing higher. Taxes on the wireless industry grew 9 times faster than the rate on other taxable goods between 2003 and 2005, and they currently hover around 17 percent, he said.

"Today's telecommunications services should not be taxed as utilities so that companies can invest in broadband and other networks," McCain said, adding that lobbying groups for the nation's governors and state legislatures have backed curbing such fees.

The sole opponent of the proposal was West Virginia Democrat John D. Rockefeller IV. "There are a lot of people that are getting taxed pretty heavily," he said. "Along comes wireless, which is currently gangbusters, and all of a sudden, they're sacred."

Also at Wednesday's meeting, senators shot down by a 20-to-2 vote a McCain-sponsored amendment aimed at allowing cable subscribers to purchase only the channels they please. The proposal, which had received backing from Federal Communications Commission Chairman Kevin Martin, stopped short of explicitly requiring such "a la carte" offerings but would have made it more difficult for cable and other video service providers to obtain franchises in local areas unless they offered such an option.

A handful of senators from both parties said they reluctantly opposed the amendment but issued a warning to cable operators to address the issue. "I would encourage the industry to get on with it," said Missisippi Republican Trent Lott, who quipped, "This is going to be the last time I'm not going to vote for this."

The U.S. Telecom Association, which represents telecommunications providers, applauded the Senate Finance Committee's vote on the Spanish-American War tax, which currently applies to local phone calls.

"Basic communications should not be taxed as a luxury, and repealing this regressive tax is long overdue," the association said in a statement. The IRS, after being repeatedly rebuked by federal appeals courts, recently said it will stop trying to collect the tax on long-distance calls.

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