Perspective: Yesterday's taxes stalk tomorrow's telephones

Good news: The IRS will refund part of your federal telephone tax when you file your 2006 income tax, with refunds averaging $30 to $60.

Thanks to a series of court rulings, the government realized that the archaic distinction among long-distance, local and bundled phone services is wholly unworkable for tax purposes. The bad news is that even so, telephone taxes still lurk everywhere.

While one is being reduced, others are growing or being reinvented. These minor taxes could actually take advantage of both telecommunications reform and the future of Internet taxation; this tail is wagging more than one dog.

The fastest-growing telecommunications tax is the so-called Universal Service Fund fee, a spin-off from the days when rural telephone service was hard to establish.

The Federal Communications Commission levies this tax, pursuant to deliberately vague legislative authority. Long after rural phone service was completed, the USF fee has been constantly reinvented to justify its existence--currently, as a slush fund for wiring schools, libraries and more to the Internet.

Surely if telecommunications taxes are to be changed, they should be rethought from the ground up.

That slush fund is so overspent, overcommitted and rife with fraud that it "faces a $350 million shortfall." The shortfall is blamed on the erosion of fund revenue to new competitors (Internet telephony, cellular service) not covered by the USF tax base rather than on the real culprit: pork barrel politics.

The FCC has now ordered VoIP (voice over Internet Protocol) services to contribute to the USF. It has also levied higher taxes on cellular service. So VoIP and cellular customers can welcome higher taxes on their bills.

This piecemeal approach isn't good enough for Senate Commerce Committee Chairman Ted Stevens (R-Alaska), whose telecommunications reform package broadens and deepens the scope of USF taxes (Alaska being a highly rural state).

This issue, along with the controversy over Net neutrality, has kept the issue of broad telecommunications reform (i.e., greater competition among video service providers, whether on cable, the Internet, wireless or satellite) on ice for the 109th Congress. If any reform plan moves now, it will be in a lame-duck (post-election) congressional session--always a good time for taxpayers to keep a close eye on their wallet.

Meanwhile, Senate hopes for repealing the (local calls) remainder of the Spanish-American War telephone tax, coupled with a permanent federal moratorium on Internet taxation, are also on hold. A moratorium proposal by Sen. George Allen (R-Va.) is tied up with Stevens' reform package.

While the Senate Finance Committee has approved complete telephone tax repeal (click here for PDF), this, too, has been a victim of congressional jockeying-for-position on tax cuts and will pop up, if at all, at lame-duck time.

When the dust settles, will telecommunications taxes go up or down? The only sure thing is the FCC's increase in USF taxes because that's already in force. But telecommunications is a tempting cash cow, one of the biggest growth areas in the U.S. economy.

That growth has been driven by a comparatively "hands off" approach from government. Surely, if telecommunications taxes are to be changed, they should be rethought from the ground up. The government's schizophrenia on this issue is a consequence of a backward-looking insistence on squeezing new technologies and growing markets into the tax and regulation boxes devised for the early 20th century. It makes absolutely no sense.

The only bright spot is that Congress clearly knows that the public isn't eager for more telecommunications taxes. When the House of Representatives approved an amendment supporting FCC authority to tax VoIP, it did so by voice vote; no one wanted to go on record as "for" higher telecommunications taxes.

The FCC, of course, is not directly accountable to any voters, anywhere. The Senate, always more sophisticated, continues to move in all directions at once on this issue. It is troubling, though, that the USF, the telecommunications tax most removed from taxpayer accountability, is the biggest telecommunications tax growth area.

Maybe we need to subsidize telecommunications services in remote areas. Maybe we even need to provide subsidies to libraries and schools, though 99 percent of schools are already wired but clueless as to how to use that resource effectively. But should one set of telecommunications customers have to subsidize another? Any public funding for USF-type slush funds should be open, honest and direct, with hard numbers to justify the scheme.

The free market has tackled much more difficult challenges than providing cable, wired, wireless and satellite services to rural America. A change in Washington's telecommunications tax climate--as in clearing the air--is long overdue.

Biography
George A. Pieler is senior research fellow at the Institute for Policy Innovation.

More Perspectives

[Noah Rafalko]

You hit the nail on the head

I have been a Telecommunications Consultant who donates services in helping Municipalities, Non-Profits and School Systems who could not afford such services reconfigure their core infrastructure. I have seen it all regarding the fraud and political not broken don't fix mindset.

In fact some School Systems like the City of Boston snub at the system and make bold statements such as "We pay pennies on the dollar for our services so we don't care how much we pay."

This is the reason for the abuse and ability for these E-Rate consultants who also happen to be equipment resellers to jack up the price of materials knowing full well they can explain it away to the schools system as a necessary price point. In other words there are still $75 dollar hammers being sold to our most crucial asset...our kids...our future.

I donate my companies time and resources to help keep books on the desks and lab kits in the classroom while the crooks of the industry find yet another way to fleece our tax dollars and misuse them.

The real kicker is that the USAC doesn't allow for technology improvements that could seriously impact the Schools ability to take advantage of the real internet and it's free applications for telecommunications.

The bottom line is that if in the right hands the program could reap benefits beyond the comprehension of the politicians and general public but reform is needed and hopefully by someone who knows the industry not a paper lion.

Noah E. Rafalko
CEO
www.tsgglobal.com

[adlyb1]

Yes and No

I despise the USF, but...
I live in a fairly rural area and the ONLY reason, we got DSL was because of a grant from the USF. Heck, we didn't even get Caller ID until just a couple years earlier.

So, I am a little conflicted on this.

The problem with letting the market fix this, is the market isn't interested in providing service unless there is a strong return on investment and rural areas just don't make the numbers.

Competition?

The local cable company only provides service outside of town where the government makes them. Cellular? Only two local providers, only one offers data, and the coverage is spotty, expensive and slow.

So, until someone proposes a solution that deals with both issues, I'll gladly give my bucks to the fund.

[ddc1234]

Universal Service means Universal Service For All

Mr. Pieler's analysis seems to miss the point on many levels. First, the USF mechanisms support a number of different programs that are not "fraught" with fraud but continue important social goals. These programs include the schools and libraries program, the rural health care programs, low income programs, as well as high cost support programs. Without these programs many rural areas would be without basic services let alone services such as DSL, telemedicine, and connections at libraries for consumers that do not have the advantages of computers.

Furthermore, these funds go to support networks that provide many of the services that Mr. Pieler would advocate as lower cost replacements. I have not yet heard anyone explain how Voice over Internet Protocol (VoIP) can exist or be provided without some underlying network connection to the customer. VoIP assumes the customer has a DSL network in order to provide service at all. This connection to the customer must be in place and must be affordable before any of these alternatives can be provided. In fact, in many rural areas, these networks provide the infrastructure for competitive alternatives. Wireless towers need underlying cable infrastructure to transport calls between towers and to wireless company switches. These networks provide emergency services to 911 operators, and an all over network for national security. When some of the cellular companies claim they have the most network coverage or the fewest dropped calls, they don't mean that they cover the rural areas and they don't reach the kind of reliability that many of the rural companies do.

Contribution to these programs (fees) for companies that take the network providers revenues, impose costs on the network provider, but do not pay anything for that network are indeed appropriate. This should apply to VoIP, internet and cellular service as all benefit from this network. In addition, there are many benefits to the consumers paying the "fees" associated with telephone services. Rural customers have a strong economic base in nearby urban communities, supporting their business and buying their products. In addition, government seats, schools, and healthcare are in these nearby communities necessitating communications.

Yes, there are problems with this system as there are with almost any system. Scrapping the system is not the answer. And promoting usage of a network without any form of compensations will only lead to an inferior network. New applications such as VoIP won?t run without networks.

[ddc1234]

Universal Service means Universal Service For All

Mr. Pieler's analysis seems to miss the point on many levels. First, the USF mechanisms support a number of different programs that are not "fraught" with fraud but continue important social goals. These programs include the schools and libraries program, the rural health care programs, low income programs, as well as high cost support programs. Without these programs many rural areas would be without basic services let alone services such as DSL, telemedicine, and connections at libraries for consumers that do not have the advantages of computers.

Furthermore, these funds go to support networks that provide many of the services that Mr. Pieler would advocate as lower cost replacements. I have not yet heard anyone explain how Voice over Internet Protocol (VoIP) can exist or be provided without some underlying network connection to the customer. VoIP assumes the customer has a DSL network in order to provide service at all. This connection to the customer must be in place and must be affordable before any of these alternatives can be provided. In fact, in many rural areas, these networks provide the infrastructure for competitive alternatives. Wireless towers need underlying cable infrastructure to transport calls between towers and to wireless company switches. These networks provide emergency services to 911 operators, and an all over network for national security. When some of the cellular companies claim they have the most network coverage or the fewest dropped calls, they don't mean that they cover the rural areas and they don't reach the kind of reliability that many of the rural companies do.

Contribution to these programs (fees) for companies that take the network providers revenues, impose costs on the network provider, but do not pay anything for that network are indeed appropriate. This should apply to VoIP, internet and cellular service as all benefit from this network. In addition, there are many benefits to the consumers paying the "fees" associated with telephone services. Rural customers have a strong economic base in nearby urban communities, supporting their business and buying their products. In addition, government seats, schools, and healthcare are in these nearby communities necessitating communications.

Yes, there are problems with this system as there are with almost any system. Scrapping the system is not the answer. And promoting usage of a network without any form of compensations will only lead to an inferior network. New applications such as VoIP won?t run without networks.

[Chad Miles]

Universal Service is Critical to Our Nation's Advance in Telecommunications

Railing against the Universal Service Fund is not the way to help our nation advance in telecommunications.

We all dislike taxes, and I agree that telecommunciations taxes are sometimes outrageous. However, attacking the highly successful Universal Service Fund is the wrong approach. In fact, the USF is more important today than ever.

Every American has the right to access communications services at affordable prices no matter where they live. Because of the Universal Service Fund, millions of Americans are able to enjoy the many benefits of a high speed network.

Just think about it. Because America has one of the best communications systems in the world, grandmothers can now watch videos of their grandkids? first steps even through they may be thousands of miles away; patients are able to have medical procedures without having to drive hundreds of miles to the nearest medical facility; mothers and wives are able to see and talk to their husbands, brothers and sisters in Iraq and Afghanistan. All this is possible because our nation believes that all Americans ? no matter where they live or how much money they have ? should have the right to a robust communications network. By attacking the USF or suggesting that it should be eliminated, we are jeopardizing the very program that makes all this possible.

Again, we are all tired of paying excessive taxes, but Americans understand that if a program is worth it, then we should support it. The Universal Service Fund is one of those programs. We should not eliminate the Universal Service Fund at a time when telecommunications advances are bringing Americans closer together and providing important educational and information resources to millions of rural Americans. Instead, we should be thankful for a system that provides us the opportunity to communicate with anyone anywhere in the world.

Signed,

Chad A. Miles
President & CEO
Enhanced Telecommunications Corp.
Sunman, Indiana