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March 9, 2000


Mr. Chairman and Members of the Subcommittee, it is an honor to appear before you today to discuss H.R. 3011, the Truth in Billing Act of 1999 and H.R. 3022, the Rest of the Truth in Billing Act of 1999.

Before continuing, I should note that while I serve as President of The Progress & Freedom Foundation, a non-partisan research and educational institution1, and also on the faculty of the George Mason University Law School, the views I express are my own and do not necessarily represent those of the Foundation, its board or other staff; nor those of George Mason University. However, my testimony is based in large part on research now underway at The Progress & Freedom Foundation to examine the nature, extent and consequences of taxes on telecommunications services.

H.R. 3011 and H.R. 3022 represent efforts to make it easier for consumers to understand what they are paying for telecommunications services. Both of the bills correctly identify the main source of complexity in telecommunications billing, and hence of confusion among consumers, as the extremely complex array of taxes, fees and cross-subsidies imposed on telecommunications services by government. My testimony this morning focuses on the nature of these taxes, fees and cross-subsidies.

Telecommunications Taxes in the U.S.

Telecommunications services in the United States are subject to an almost incomprehensible array of taxes at the local, state and Federal levels. Indeed, there are so many taxing entities levying so many taxes, fees and other charges that there literally is no comprehensive data source from which a complete listing can be obtained. Nevertheless, it is possible to paint a fairly accurate picture of the overall level of telecommunications taxes.2

Federal Taxes: The Federal taxes on telecommunications are of three main types. First, the Federal government levies a three-percent excise tax on all telecommunications services. Second, it imposes fees on telecommunications carriers that are used to subsidize the provision of telecommunications services, wiring and computer-related equipment at schools, libraries and rural health care centers. Third, it oversees a complex "universal service" system designed to lower the costs of telecommunications services below costs for some consumers while raising them above costs for others.

The Federal telecommunications excise tax (FET) adds three percent to the cost of every telecommunications bill. It covers both long distance and local telephone service for both residential and business customers. Revenues from the tax are treated as general revenues. The FET is projected to raise about $6 billion in FY 2000. As shown below, this makes it the third largest general revenue excise tax in the U.S. budget, just behind alcohol and tobacco.

Table One:
General Fund Excise Taxes


(FY 1998, millions)

Share of On-Budget Federal Revenue










Source: Office of Management and Budget

The second major tax on telecommunications services is the tax levied on telecommunications carriers to support the Federal Communications Commission’s "e-rate" program. In May 1999, the FCC voted to raise the annual amount of this tax by approximately $1 billion to $2.25 billion annually.4 These taxes are passed through by telecommunications carriers as part of their universal service charges to individual customers.5 Under the FCC’s so-called "truth in billing" rule, of course, phone companies are prohibited from identifying the e-rate fee as a "tax."

The third major category of Federal taxes levied on telecommunications services resides in the system of charges and fees access charges associated with "universal service." While a comprehensive analysis of this system is beyond the scope of this testimony, it includes both explicit cross-subsidies, typically identified as "universal service charges," and implicit cross-subsidies that are incorporated in the access fees local service companies charge long-distance companies for use of the local loop.

Finally, the Federal government oversees the pricing rules that require telephone companies to charge "subscriber line charges" (a different amount for the second line than for the first) and number portability charges. These items are essentially discrete components of the price of local telephone service, distinguished from the remainder of the bill by regulatory fiat.

State and Local Taxes: While Federal taxes on telecommunications services are both high and complex, state and local taxes are both much larger and far more complex.

As shown in Table Two below, there are approximately 37 different types of taxes levied on telecommunications services by state and local governments in the United States. These include excise taxes, franchise fees, right of way charges, gross receipts taxes, license fees, 911 fees, public utility taxes and even special levies for programs such as poison control centers. In some cases these taxes apply to local telephone services only; in others they extend across state borders and apply to long distance services as well. Wireless services are often taxed differently from landline services, and telecommunications services offered by non-traditional carriers such as competitive local exchange carriers (CLECs) may in practice be taxed differently from the same services when offered by traditional carriers.

Table Two:
State and Local Telecommunications Taxes



  • Franchise Taxes
  • Sales & Use Taxes
  • Telecommunications Excise Taxes
  • Gross Receipts Taxes
  • License Fees
  • Utility Taxes, Utility User Taxes, PUC Fees
  • Rental/Lease Taxes
  • Utility Sales Taxes
  • Business & Occupation Taxes
  • Infrastructure Maintenance Fees
  • 911 Fees, Emergency Operation Charges, 911 Database Charges, 911 Equalization Surcharge
  • Intrastate Surcharge
  • High Cost Fund Surcharge
  • Relay Service, Communications Devices Surcharges, Universal Access Charges
  • Access Line Charges
  • Infrastructure Fund Reimbursement
  • Poison Control Surcharge (TX)
  • Public Utility Commission Fees
  • Universal Service Charges, Universal Lifeline Telecommunications Surcharge
  • Franchise Taxes
  • Sales & Use Taxes
  • Local 911 Tax
  • Excise Taxes
  • Telecommunications Taxes
  • Gross Receipts Taxes
  • License Fees
  • Utility Taxes
  • Access Line Tax
  • Rental/Lease Taxes
  • Telephone Relay Surcharge/Universal Lifeline Surcharge
  • Public Service Taxes
  • Utility Users Tax
  • Infrastructure Maintenance Fees
  • Right-of-Way Charges
  • 911 Fees
  • Business & Occupation Taxes
  • Teleconnect Fund


Source: AT&T, The Progress & Freedom Foundation

A recent study by the Committee on State Taxation (COST) found that, taking into account all of the various state and local taxes on telecommunications in the United States, there are over 300 separate state and local taxes and fees applied to almost 700 different tax bases. Altogether, the COST study finds that a telecommunications provider operating throughout the U.S. would have to file over 55,000 tax returns annually. In just one state, my home state of Virginia, a statewide telecommunications company files 4,341 tax returns each year.

Are Phone Taxes Too High?

While the main focus of my testimony is on the complexity of telecommunications prices, including taxes, it should be noted that consumers may well be frustrated not just by the complexity of all of the various taxes and fees, but also by their level. Not counting universal service charges, access charges, subscriber line charges or number portability charges (that is, counting only funds that go to the government to fund government programs), the average tax rate on residential telecommunications services in the U.S. is over 18 percent. Federal taxes account for roughly four percent of this total, while local and state taxes account for 14 percent. In some localities, taxes account for over one third of a typical telephone bill. (See Attachment One.)

The research now underway at The Progress & Freedom Foundation suggests that these levels of taxation are excessive when judged by generally agreed upon standards of tax analysis.6

Is Truth in Billing an Achievable Goal?

Given the complexity of the system described above, it is worth considering whether truth in billing is an obtainable goal – that is, whether it is possible in any global sense to provide consumers with sufficient information for them to fully understand what is on their phone bills. The unfortunate but obvious answer is that it is not. This does not mean, however, that we should not try to create as much transparency as possible. As I understand it, H.R. 3011 would represent a step in the right direction. H.R. 3022, while its objectives are laudable, would appear to be a step too far.

Before commenting further on the two bills, let me discuss briefly why global transparency does not seem to me to be an achievable goal. Simply put, while the transition to a competitive environment initiated by the Telecommunications Act of 1996 is well underway, the telecommunications business remains very heavily regulated – more regulated, arguably, than in 1996 when the Act was passed. From the subscriber line charge (higher for second lines than for first lines) to the geographically averaged rates mandated by state regulatory commissions, from access charges (levied on traditional long distance service but not IP service) to "life-line" services for low-income consumers, from the Federal universal service fund (subsidizing rural and high cost areas) to the TELRIC pricing scheme (intended by the FCC as a subsidy for new entrants), telecommunications prices are essentially nothing but a patchwork of cross subsidies mandated by government regulation.

Taxes only complicate the picture further. As the National Governors’ Association points out in a report released last month, "Taxes imposed on telecommunications are a remnant of the days when the industry was a regulated monopoly."7 Indeed, tax policy has not kept up with either the move towards competition nor with technological change.

For example, broadband services offered by cable companies appear generally to be subject to cable franchise fees levied by local governments. Similar services offered through the telephone company infrastructure are, of course, not subject to cable franchise fees, but may or may not be subject to telecommunications taxes, depending on who is offering the service and what other services (e.g. Internet access) are bundled with it. Such inconsistencies represent discrimination in favor of some companies (and their consumers) and against others.

As Mr. Bliley accurately pointed out in his remarks last October upon introducing H.R. 3011, "rather than make the case for more government spending directly to the people, governments instead levy the tax on telecommunications service providers. . . . [R]egulators then pressure the service provider to bury the tax in its rates."8 The result of this process is the extraordinarily complex set of local and state taxes discussed above.

Again, changing technology is exacerbating the problem: Last week, for example, CTIA President Tom Wheeler testified on legislation in the Senate that would provide for "uniform sourcing" on taxes applied to cellular telecommunications services by state and local government. In his testimony, he pointed out that, during the course of a trip from Baltimore, MD to Philadelphia, PA, a cell phone user passes through 12 different taxing jurisdictions, each with its own rates and rules – rates and rules which are not only complex but may well be inconsistent.

With all this in mind, imagine trying to provide today’s telecommunications consumers with a "global" understanding of their phone bills. It brings to mind what Appeals Court Judge Learned Hand once said of the Income Tax:

In my own case, the words of such an act as the Income Tax, for example, merely dance before my eyes in a meaningless procession; cross-reference to cross-reference, exception upon exception – couched in abstract terms that offer no handle to seize hold of – leave in my mind only a confused sense of some vitally important, but successfully concealed, purport, which it is my duty to extract, but which is within my power, if at all, only after the most inordinate expenditure of time.9

In short, we have created a system which is complex beyond the ability of even the experts to understand. Only by reducing the complexity of the system can we hope to achieve the ultimate objective of more comprehensible telecommunications prices.

We can begin this process by adopting incremental reforms that reduce complexity. At the Federal level, some proposals now under consideration would represent important moves in the direction of greater simplicity:

  • implementing the so-called "CALLS" proposal, which would simplify access fees, the Subscriber Line Charge, and the universal service system,

  • adopting the uniform sourcing legislation mentioned earlier,

  • repealing the Federal Excise Tax on telecommunications services.

States should also be looking at incremental reforms, including simplifying their own universal service programs and following the recommendations of the National Governors’ Association report referenced above to consider tax reduction and simplification.

Ultimately, however, complexity is an unavoidable consequence of a regulatory system designed for the very purpose of driving prices away from the levels that would be set in the marketplace. Thus, simplification of telecommunications pricing will come only with thoroughgoing deregulation of the telecommunications marketplace.

Truth In Billing: What Can Be Done

In the meantime, as I indicated earlier, public policy can and should pursue a more limited goal. Specifically, it should attempt to provide consumers with as much information as is practicable about the nature and level of telecommunications taxes and fees.

Insofar as it requires telecommunications providers to identify and accurately describe specific assessments levied under Sec. 254 of the Telecommunications Act, H.R. 3011 would appear to achieve this goal. To the extent the bill goes beyond Sec. 254, to include "any other governmental mechanism, fund, tax or program," I would hope the Subcommittee would take into account some of the discussion above with respect to whether such a requirement would be workable in practice.

H.R. 3022 goes still further than H.R. 3011, essentially requiring receiving carriers to identify not just the payments side of the equation, but also any offsetting subsidies. While the idea may seem – as the name of the bill implies – to simply require the telling of "the rest of the story," in fact the two sides of the story are fundamentally different.

As a general matter, taxes are levied for the purpose of providing "public goods," which is to say goods that would be underprovided by the marketplace because of economic externalities or insufficiently defined property rights. In the case of universal service programs, for example, it is generally agreed that there are "network externalities" associated with universal access to telephone services. With respect to the schools and libraries program, an argument can be made that there is a strong public goods element to having a well educated population, and that access to the Internet is an important aspect of achieving that goal.

In both cases, the benefits associated with these programs accrue to the public at large, as well as to individual citizens. By their very nature, these benefits are impossible to measure and difficult to estimate. Furthermore, any estimates would be subject to the same type of controversy that typically accompanies benefits estimates for other government programs – e.g., environmental programs – and there would be considerable debate, and certainly no ultimate consensus, over the correct numbers to put on individual bills. The costs, by contrast, are both known and easily assigned. We can observe directly the precise amount of tax collections and the persons from whom they are collected.


To the extent that the bills now before this Subcommittee would force telecommunications carriers to provide consumers with information about specific, easily-identified taxes, they would contribute significantly to a better public understanding of the tax component of telecommunications prices. H.R. 3011, as it relates specifically to programs under Sec. 254 of the Telecommunications Act, would represent a positive step towards the goal of greater transparency and better informed consumers in the telecommunications marketplace



1. The Progress & Freedom Foundation was founded in 1993 to study the digital revolution and its implications for public policy. A 501[(c)(3) research and educational organization under the Internal Revenue Code, PFF is funded entirely by private contributions and accepts no government contracts or funding of any kind. More information on PFF is available at its Web site, at www.pff.org.

2. A major new study by the Committee on State Taxation (COST) provides a wealth of data on state and local taxation of telecommunications services. See Committee on State Taxation, 50-State Study and Report on Telecommunications Taxation (Washington, DC: Committee on State Taxation, 1999). This study will make possible far more sophisticated analyses of telecommunications taxes than have been possible in the past.

3. Beginning in 1998, revenues from the excise tax on motor fuels were removed from general revenues and dedicated virtually entirely to the highway trust fund. At nearly $40 billion, the tax on motor fuels is far and away the largest Federal excise tax in terms of revenue raised. Source: Office of Management and Budget, Budget of the United States: Historical Tables (Washington: Government Printing Office, 1999).

4. See Federal Communications Commission, In re: Federal-State Board on Universal Service: Twelfth Order on Reconsideration in CC Docket No. 96-45 (May 27, 1999). See also Dissenting Statement of Commissioner Harold Furchtgott-Roth (August 5, 1999). The FCC has gone to great lengths to ensure that the charges associated with the e-rate are not seen by the public as taxes. [See, for example, In re: First report and Order and Further Notice of Proposed Rulemaking, Truth-in-Billing and Billing Format; CC Docket 98-170 (May 11, 1999). In this "truth in billing" proceeding, the FCC effectively prohibited long distance carriers which pay into the fund from including on their bills a line showing the portion being passed through to consumers.] All documents available at www.fcc.gov.

5. The e-rate program has been roundly criticized by academic economists. See, for example, Jerry Hausman, Taxation by Telecommunications Regulation: The Economics of the E-Rate, (Washington: The AEI Press, 1998)

6. See Jeffrey A. Eisenach, "The High Cost of Taxing Telecom," Progress on Point 6.6 (September 1999).

7. Scott Palladino and Stacy Mazer, Telecommunications Tax Policies: Implications for the Digital Age (Washington, DC: National Governors' Association, 2000).

8. Rep. Thomas Bliley, Congressional Record, October 5, 1999, p. E2027.

9. Jeffrey L. Yablon, "As Certain as Death – Quotations About Taxes (Expanded 2000 Edition)," Tax Notes, January 10, 2000.



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