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An Open Letter to the United States Senate: Support Senator Allen's Legislative Effort to Prevent Application of Antiquated Federal Excise Tax to Internet Communications Services

April 14, 2005

Dear Senator:

On behalf of the 350,000 members of the National Taxpayers Union (NTU), I write to offer our support for Senator George Allen's introduction of "The Federal Internet Tax Prohibition Act of 2005" (S. 758). In addition, we ask you to support this legislation as it weaves its way through the Senate. Given that Democratic Senator Ron Wyden has signed on as the lead co-sponsor, we believe this legislation represents a good opportunity for the Senate to foster a healthier bipartisan atmosphere.

The impetus for Senator Allen's legislation was the Joint Committee on Taxation's (JCT's) January 27th report entitled Options to Improve Tax Compliance And Reform Tax Expenditures. While this study contains many ill advised proposals, the report's suggestions for expanding the federal excise tax on Internet communications services were particularly odious. Although NTU understands that the JCT report is an advisory document, we are also aware that such papers can produce bad ideas that proceed to get pushed down the path to enactment. S. 758 is a preemptive strike on a bad idea that will ensure it remains just that: a bad idea.

The fact is the telecommunications landscape is evolving too fast for regulators and politicians to keep up with and interpret. The decision in the mid-1990s to leave "communication" services subject to taxation, but not "information" services, is evidence of this conflicted stance. The result has been incalculable time and money wasted on regulatory petitions and judicial proceedings at the federal and state levels, in a maddening effort to determine how services that government officials never envisioned should be taxed and regulated.

At a time when business models in the telecommunications industry are completely restructuring to deliver on the promise of new technologies, the last thing Congress should do is expand a stale old tax regime that is guaranteed to leave consumers with higher prices and fewer choices. To expand the reach of this tax to include all forms of communication, including broadband, VoIP, or any other emerging technology, would not only inhibit further technological progress-it would harm the very core of our information-based economy.

The federal excise tax on communications is the lingering artifact of a levy that was originally passed in 1898 to pay for the Spanish-American War. It disappeared and reappeared until 1941, from which point it has remained permanent. Several attempts have been made to phase it out, but each time Congress's desire for revenues halted its demise. The economic costs of the federal communications tax far outweigh the relatively insignificant revenues it generates for the U.S. Treasury. Thus, after passing Senator Allen's legislation, Congress should do away with this nuisance once and for all.


Tad DeHaven
Economic Policy Analyst