Yesterday's taxes stalk tomorrow's telephones

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.

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.