SENATE TAKES UP MORATORIUM BILL WITH BUSH'S BACKING

Frist found far more the 60 votes needed to reach cloture on S-150 late Mon. That, however, merely started the Senate toward a 2nd cloture vote today (Tues.) or Wed. to close debate formally and move to a floor vote. The 2nd cloture vote is expected to be highly contested, several Senate sources told us. Not only are some senators such as Alexander opposed to the overall bill, but some Senate Democrats plan to use the bill as a vehicle for legislation on overtime pay or the minimum wage. This strategy has been tried with other pieces of legislation that Frist has attempted to move on the floor, including the foreign sales corporation/extraterritorial income (FSC/ETI) bill. In each previous case, Frist has pulled the bill off the floor. In the FSC/ETI case, the result is that the U.S. faces rising economic trade sanctions stemming from U.S. World Trade Organization violations that the bill was supposed to address.

Alexander framed S-150 as a subsidy for the telecom industry. While not explicitly citing Bush’s Mon. speech, which called for universal broadband access by 2007, Alexander said it has become clear that many people don’t adopt broadband even if it’s available and inexpensive. If people don’t want broadband, Alexander asked, “why should we give the telecom industry a very big subsidy?”

Senate Commerce Committee Chmn. McCain was circulating legislative language for his proposal Mon., moving beyond a summary sheet distributed Fri. (CD April 26 p1). The language aims to explicitly exclude from the moratorium traditional phone service as well as other services provided over the Internet, such as e-mail and instant messaging. Alexander said he appreciated McCain’s efforts but didn’t embrace his compromise. A McCain spokeswoman couldn’t name a senator who had endorsed the compromise. She also was uncertain how McCain planned to introduce the compromise in the Senate floor process.

Telecom advocacy groups Mon. urged the Senate to pass S- 150 and oppose S-2048. USTA cited the Pociask study, calling it “timely” given the vote. Pres. Walter McCormick praised Bush for weighing in on the debate. The Hispanic Technology & Telecom Partnership (HTTP), in a letter to Frist distributed by the telecom industry-funded Consumer Internet Access Coalition, said Hispanic Internet use is growing and a tax on DSL would hinder that growth.

Sen. Voinovich (R-O.) praised McCain for trying to find a compromise, but said it came too late. “We're here at the last minute trying to get something done, with no idea what impact it will have,” Voinovich said of McCain’s offering. Voinovich, a supporter of Alexander’s bill, said one concern he had with McCain’s proposal is that while the moratorium would be extended 4 years, grandfathered taxes would expire in 2-3 years, ensuring there would be no grandfathered taxes when the bill was taken up again. The former gov. cited states’ rights, saying: “I stand opposed to taxation of Internet access and any taxation of e-mail [but] this debate is about federalism.”

“I believe the Senate will not be able to reach an agreement on the underlying bill,” Voinovich said, “which could be the end of the Internet tax moratorium.” He said that isn’t something he desires, and instead urged S-150 supporters to back Alexander’s bill. Noting the moratorium expired Nov. 1, Voinovich said no state or municipality has stepped forward to impose new taxes: “The sky that was predicted to fall has not.”

Taxes Could Cut USF $280 Million -- Study

The imposition of state and local telecom taxes on DSL services would decrease contributions to the Universal Service Fund (USF) by $280 million in the next 5 years, said a study released Mon. by the New Millennium Research Council (NMRC). “Because universal service programs… are financed by a levy on all interstate telecommunications revenues… a reduction in DSL revenues caused by imposing new taxes would produce a reduction in universal service contributions,” the study said. “Because universal service programs are already under financial strain, this substantial contribution loss would put these social programs in serious jeopardy,” economist Stephen Pociask, an NMRC scholar who wrote the study, said in a conference call.

The study, sponsored by the USTA, said Internet taxation would also lead to $4.3 billion in reduced industry revenue available for investment in new union jobs and broadband deployment over the next 5 years. “On the other hand, ending current DSL taxes would only lead to a loss of only $40 million of state and local taxes,” it said: “Clearly, this loss pales in comparison to the harm of imposing state and local taxes on DSL services.”

The DSL price increase caused by taxation would encourage consumers to switch to tax-exempt cable modem services or “disconnect high speed services all together, thereby avoiding taxes and universal service charges,” Pociask said: “Since cable operators do not pay into the Universal Service Fund, an increase in cable-modem demand would not help state and local governments raise taxes, nor would it help fund universal service programs.”

Assuming that telecom transport portions of DSL services are taxed at an average rate imposed on other telecom services, Pociask estimated the cost of transport would increase by 16.9%. That cost would be passed on to the ISPs and then to consumers as higher prices, he said. The price increase would be 12.2%, leading to an 18% decrease in demand and $4.3 billion loss in revenue to the industry over the next 5 years, he estimated. The reduction of industry revenue would lead to a one year loss of 11,900 direct jobs, including 7,600 unionized jobs, he said: “There will also be a sizable loss of jobs in other industries.”

“Simply extending the moratorium, I do not believe would be enough,” Pociask said. He said there was “a loophole” in the previous moratorium, which expired Nov. 1, permitting “some taxes” to be applied to DSL services: “This is because facilities that are used to transport DSL, if they can be classified as telecommunication service… they can be taxed by state and local governments. So, extending the moratorium would not prevent taxes from affecting DSL prices, and meanwhile, cable modem services, [which] remain untaxed, do not contribute to the Universal Service Fund.” He said public policy makers were “just giving a competitive advantage” to one form of high-speed service over another.

“Public policy makers need to resist taxing services like DSL… and they need to find other revenue sources that would not cause large market distortions,” Pociask said: “They also need to think about maintaining a competitive balance, about spurring IT investment, creating jobs, as well as being mindful of universal service itself. [The] proposal to tax DSL would be a bad public and economic policy.”