Congress Continues To Debate Internet Tax Freedom Extension

Telecom Policy Report, May 29, 2007

"It also identified other potential revenue losses, although unquantified, that could have grown in the future but that now seem to pose less of a threat. CBO's estimated annual losses by 2007 for states that had grandfathered taxes in 1998 were about 0.1 percent of the total 2004 tax revenues for those states. Because it is difficult to know what states would have done to tax Internet access services if no moratorium had existed, the total revenue implications of the moratorium are unclear. In general, any future impact related to the moratorium will differ from state to state."

>>Harley Duncan, executive director, Federation of Tax Administrators: "The Federation urges Congress not to extend the Act because it is disruptive of and poses long-term dangers for state and local fiscal systems. Moreover, the GAO and other researchers have found that the moratorium is not effective in achieving its purported purpose of expanding the availability of Internet access to the American public and bridging what has been termed as the 'digital divide.' If, however, Congress believes the Act should be extended, we believe there are three principles that should be followed:

The definition of "Internet access" in current law must be changed. As currently written, we believe that an ISP could bundle virtually all types of Internet services, content and information (some of which may be currently taxable) into a package of 'Internet access' and claim that the state would be preempted from taxing any part of that package. The danger to state and local fiscal systems over the long term from the current expansive definition is considerable.

Any extension of the Act should be temporary in nature. The nature of the online world and the manner in which the public accesses and uses that world continues to change rapidly. The long-term impact on state and local finances is still evolving. Given what everyone acknowledges will be continuing rapid change, it seems only prudent that any extension be temporary, and that Congress revisit the policy and its impact in a few years.

The provision of the Act preserving those taxes on Internet access that were 'generally imposed and actually enforced' prior to 1998 should be continued if the Act is extended. The intent when the original Internet Tax Freedom Act was passed in 1998 was not to disrupt existing practices and that commitment should be maintained.

>>Annabelle Canning, vice president/State Tax Policy, Verizon Communications: "There three important reasons why Congress should make the Internet tax moratorium permanent--

"First, at a time when state and local economic development experts are touting broadband as critical to economic competitiveness, new taxes on Internet access could have a chilling effect on broadband investment.

"Second, now that competition between different types of Internet access providers is lowering prices for consumers and making high-speed Internet access more accessible and affordable to lower income households, regressive new taxes on Internet access would create a new obstacle in efforts to close the 'digital divide.'