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New taxes on your monthly cell phone bill?

Debate over whether Congress should override local tax decision-making ensnares the Cell Tax Fairness Act, which would ban what it calls any "new discriminatory tax" for five years.

In an economy gone sour, local governments seeking new sources of tax revenue have begun hungrily eyeing their residents' monthly cell phone bills. But some members of Congress would like to block that, which has sparked a debate in Washington about federalism, tax policy, and fairness.

Introduced in April by Rep. Zoe Lofgren, D-Calif., the Cell Tax Fairness Act would impose a five-year moratorium on what the bill describes as any "new discriminatory tax" on wireless services and providers. Foes and supporters of the measure showed up Thursday in front of the House Judiciary Committee's subcommittee on commercial and administrative law.

"Wireless services and mobile devices play a growing role in affordable broadband access in this country," Lofgren said at the hearing. "Especially for low-income people, this is going to be the way to the Internet superhighway."

The average tax rate on wireless services is double the average sales tax rate--it stands at 15.19 percent, according to one study. That high tax rate "disproportionately impacts low-income consumers," said James Clayborne, an Illinois state senator. "For millions of Americans, these services are crucial to their everyday lives."

However, some local government officials say the legislation would unfairly constrain state and local governments' abilities to collect much-needed taxes.

Most state and local governments are required to balance their budgets, argued Gail Mahoney, the commissioner of Jackson County, Mich. The rough economy has made that increasingly difficult, though. At least 29 states face a combined budget shortfall of $48 billion for fiscal year 2009, according to the Center on Budget and Policy Priorities.

"It is so important officials have every revenue opportunity they can," Mahoney said. "The last thing Congress needs to do is enact legislation that would preempt the taxing authority of state and local governments."

Scott Mackey, an economist with Kimbell Sherman, said there would be no fiscal impact on state or local governments because it would not affect taxes already in place. Additionally, he said, "It would allow new taxes provided those taxes were not singling out wireless services."

Clayborne said the bill would help stimulate telecommunications tax reform because "you'd force the state and local and county governments to come together to address this issue."

Others disagreed. Attorney Tillman Lay, testifying on behalf of the National League of Cities, the National Association of Telecommunications Officers and Advisors, and other associations, said the Cell Tax Fairness Act would only stagnate tax reform by giving preferential treatment to the wireless industry.

Moreover, he said the preferential treatment would "open the door to other industries asking Congress for similar special exemptions," putting state and local tax revenues at dire risk.

The bill would not set a precedent, though; Lofgren pointed out the legislation is similar to the Internet tax moratorium implemented four years ago.

As with the Internet tax moratorium, Lofgren said a cell tax moratorium is important because of the industry's important role in increasing national productivity. She noted that providing affordable broadband access for all Americans is part of the Innovation Agenda she developed with Rep. Anna Eshoo, D-Calif., and House Speaker Nancy Pelosi, D-Calif.

Sen. John McCain, the Republican presidential candidate, introduced a similar bill, the Cell Phone Tax Moratorium Act, into the Senate in 2007. Rep. Ric Keller, R-Fla., asked Clayborne if he would be able to convince Barack Obama, Clayborne's former colleague on the Illinois state senate, to vote for McCain's bill. Clayborne did not answer, but Mahoney declared, "I would say you would not be able to convince the senator on this issue."