Stateline Story

Governors Decry Permanent Ban on Internet Access Taxes

The nation's governors are urging the U.S. Senate to reject legislation that would permanently ban all taxes on Internet access services, claiming that the bill steals revenue from state coffers at a time when states have no money to spare.

The governors favor extending the current ban for two years to give state and federal lawmakers as well as Internet industry representatives time to work out a permanent solution.

Governors fear that as more and more phone, cable and Internet services are sold as bundled packages, a permanent ban could strip state and local governments of the ability to tax nearly all telecommunication services, many of which are now subject to various state and local taxes.

Estimates of the potential revenue loss range up to $9 billion annually, although these numbers are only hypothetical, since many of the long run effects of the ban are uncertain due to the industry's rapidly evolving technologies.

Tennessee, for example, estimates its annual revenue loss at $451 million, under a worst-case scenario. Using more conservative assumptions, Washington puts its losses at $43.1 million per year.

"Our fear is that in the coming years, sooner rather than later, Internet access, telephone service, cable service, telecommunications and data communications, will all come to a consumer over a single pipe. State and local governments need to have the ability to adjust to that reality," said David Quam, director of state and federal relations at the National Governors' Association (NGA), an organization that represents the governors' interests in Washington, D.C.

State and local governments have been banned from collecting taxes on Internet access services, such as dial-up and cable, since 1998, when Congress first exempted these products from government levies. Taxes on DSL, short for "digital subscriber line," were not included in the original ban.

With this ban scheduled to expire Nov. 1, Congress is considering enlarging the ban to include DSL and extending the moratorium in perpetuity. The House of Representatives passed legislation (H.R. 49) in late September that would accomplish this. The Senate is considering a similar bill (S. 150).

The governors said in a letter to Senate Majority Leader Bill Frist (R-Tenn.) and Senate Minority Leader Tom Daschle (D-S.D.) that they favor a temporary extension of the existing moratorium, with no expansion of the definition of Internet access.

"With little time to negotiate an appropriate definition of Internet access, we encourage you to support a simple, temporary extension of current law to allow Congress, industry, and state and local governments time to fashion a permanent moratorium that is thoughtful and fair," Oklahoma Gov. Brad Henry (D) and South Dakota Gov. Michael Rounds (R) wrote in the Oct. 22 letter.

The governors are joined by the National Association of Counties, the U.S. Conference of Mayors and the National League of Cities in favoring a two-year extension of the current moratorium.

"Congress is moving forward and preempting us in areas that we have had a traditional role in for 100 years, undercutting our tax base, creating regulatory uncertainty. I think one of the big unintended consequences of this bill is going to be massive litigation. The definitions are overly broad. It's going to be a lawyer's dream," said Juan Otero, a lawyer with the League of Cities.

Last week, Sen. George Allen (R-Va.), Sen. John Ensign (R-Nev.), Sen. Charles Grassley (R-Iowa), Sen. Gordon Smith (R-Ore.) and Sen. John Sununu (R-N.H.) offered a compromise to address these concerns. But the governors think the senators' proposal is still too vague. State legislators, however, disagree.

"We think the Senate has made a very good faith effort to narrow the definitions to meet the concerns that were raised," said Neal Osten, an analyst with the National Conference of State Legislatures (NCSL). Osten said NCSL would be pleased if the Senate passes its version of the moratorium as long as the compromise language is included.

The split between legislators and governors on an issue of such importance to states is an unusual one. NCSL and NGA insiders chalked their differences up to tactical disagreements over how best to lobby federal lawmakers on this and other Internet-taxation issues.