August 15, 2006
Telecommunications Tax Reform: Will It Affect State and Local Revenues?
By Joe White
Nashville Bureau for NCSL
NASHVILLE – Telecommunications companies have been after states to make changes in how their services are taxed with little success over the past six or seven years. Now they may lose the arena to the feds, suggested Scott Mackey, a partner of the firm Kimbell Sherman Ellis and a consultant to NCSL’s legislative task force on the Internet sales tax debate.
The telecom lobbyist told attendees at the National Conference of State Legislatures' 2006 Annual Meeting that telecommunications companies, taxed under the old “telephone monopoly” rules, need to get those regulations and revenues changed. “We would like to work with all state and local governments” on the issue, Mackey said. “But my clients are coming to me and saying, ‘We’ve been at this for seven years. We have a few states we can point to where we've been successful, but more where we haven't.”
Mackey, who was once a chief economist at NCSL, said the wireless industry is discouraged with legislative and court setbacks at the state level, and clients are telling him, “This is important enough that we need to start a discussion at the federal level.” The same national outlook that deregulated truck freight, removing state oversight over such industries, might simply take away state authority from the booming telecommunication business, Mackey said.
NCSL staffers expect legislation to be introduced in Congress to bar discriminatory state and local taxes on telecommunication services. The “video franchise reform” measure, HR 5252, already had a John McCain amendment that would impose a moratorium on new cell phone taxes.
The Annual Meeting session, “Telecommunication Tax Reform: Will it affect state and local revenues?” was led by South Dakota State Senator Orville Schmidt, chair of the NCSL Communications, Technology & Interstate Commerce Committee.
Speakers included Deborah Bierbaum, director of external tax policy for AT&T in Bedminister, NJ; Dan Hesse, CEO of Embarq Corp. in Kansas; Tillman Lay, a lobbyist for the National League of Cities and the National Association of Counties, and Mackey.
Hesse illustrated different rules that apply to different forms of telecommunication. A call on a “smart-connect” phone may arrive via wireless tower signal but as the person talking on the phone enters his or her office, the call would be transferred to a “wi-fi” connection which is connected to a landline, he said. Different rules and different types of taxes apply to the two types of calls, he said.
Hesse’s Embarq Corp. is a spin-off/breakaway from Sprint with 2,000 employees and 7 million access lines in 18 states, he said. “We operate in a competitive environment, but the laws are left over from a long time ago.”
As “carrier of last resort” (COLR), his company must offer service in low-density populated areas at a high per-line cost, Hesse explained. Competitors who provide the same service under a different structure “come in and serve the cream-section,” the highly populated areas, because they aren’t bound by the COLR responsibility, he said. “It made sense a long time ago in a monopoly environment. AT&T could use profits from the urban centers to subsidize rural centers. “It makes absolutely no sense today,” he argued. Regulators should either dispense with COLR requirements or decide to provide universal service fund support – federal funds – to all telecom companies, Hesse suggested.
Telecom companies are similarly over-taxed compared to general business, Hesse said. States tax general business at 4.8 percent but telecom companies at 9.1 percent. Local governments tax general business at 1.3 percent and telecom companies at 7.1 percent. In Virginia, a tax rewrite bill goes into effect Jan. 1 setting a 5 percent sales tax on all telecom services, including telecom, VoIP, CATV, video and wireless, according to Hesse.
Bierbaum cited Virginia and North Carolina as successfully addressing tax reform according to useful principles: tax policy shouldn’t drive customers’ choice; companies providing the same service should be taxed alike; “right-of-way” should be used only on rights of way, and ROW access should be non-discriminatory; taxes on telecom should be limited to the amount paid by general business, she said.
Bierbaum said 21 states impose taxes on the industry at 14.5 percent or more. “That’s double the rate on other goods and services,” she calculated.
And those taxes are “overly complicated,” she said. In both states the process took time, she said. In Virginia the revamp took four years of negotiation and compromise, with only satellite companies finally refusing to sign on. In North Carolina the process began in 2001 with a repeal of a gross receipts tax, continued in 2005 with leveling taxes to cable companies and satellite services, and was completed in 2006 with the repeal of all franchise fees, she said.
“I think it’s possible for states to do this,” Bierbaum said. “In both these states the end product was revenue-neutral,” she said.
But Lay, whose firm Spiegel and McDiarmid represents national associations of local governments as well as the U.S. Conference of Mayors, sent up warning signals. “There are perfectly legitimate reasons” for differential taxes for telecom companies, he said. “If you equalize that,” the difference between telecom taxes and general business taxes, “you’re going to lose revenue,” he said. “That’s not dollar-for-dollar … but generally speaking… you come up with a loss of state and local revenue of $8 billion,” he said. An Ernst & Young study shows that loss at $10 billion, he said.
Cutting taxes inevitably results in raising taxes somewhere else or cutting government services, he said. Telecom taxes cab be justified on the basis that they are public utilities, he said, with access to right-of-ways and the possibility of using eminent domain that “the corner drug store,” or general business, does not have, he said.
Mackey quoted an earlier statement by FedEx Corp.'s CEO Fred Smith, who warned legislators at the NCSL meeting that over-regulation has “a hidden cost of what doesn’t happen” – infrastructure that doesn’t get built. Mackey suggested that when businesses are not making money they won’t re-invest.
“Every state and local government is trying to get broadband out there as soon as possible,” he said. Current taxes and regulation discourage that, he said.
“NCSL policy supports reform of the monopoly-era taxation of telecommunication services.”
###
This summary is provided for information purposes only. NCSL does not endorse any views it contains. |
