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An Open Letter to the Senate Finance Committee: Eliminate -- Don't Expand -- the Antiquated Federal Excise Tax On Communications Services

February 3, 2005

Dear Chairman Grassley, Ranking Member Baucus, and Members of the Committee:

On behalf of the 350,000 members of the National Taxpayers Union (NTU), I write to offer our views concerning the Joint Committee on Taxation's (JCT's) January 27th report Options to Improve Tax Compliance And Reform Tax Expenditures. While this study contains many ill-advised proposals, we specifically urge you to rule out consideration of the report's suggestions for expanding the federal excise tax on communications services. Instead, we urge you to pass out of committee legislation that would either eliminate this age-old burden on taxpayers and the economy, or at least prohibit its expansion to new services.

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. Additionally, we fail to understand why the JCT would include options for raising excise taxes in a report dealing with tax compliance and reforming tax "expenditures."

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 being wasted on regulatory petitions and judicial proceedings at both the federal and state level over how services the 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. However, given that the economic costs of the federal communications tax far outweigh the relatively insignificant revenues it generates for the U.S. Treasury, Congress should do away with this nuisance once and for all.


Tad DeHaven
Economic Policy Analyst