Press Release from the Multistate Tax Commission
STUDY: 'NET TAX MORATORIUM WOULD COST CITIES, STATES
UP TO $9 BILLION A YEAR, CREATE BLANKET TELCOM TAX EXEMPTION'
Unintended Side-Effect: Bill Language Goes
Beyond Access Taxes to Wipe Out All Telcom-
Related Levies; States, Local Governments Understand Need for Unburdened
Internet Access
for Consumers.
Dan Bucks, Elliott Dubin and Ken Beier
Staff of the Multistate
Tax Commission
September 24, 2003
download
MTC's report
WASHINGTON, D.C. – September 24, 2003 – The Internet
tax moratorium passed by the U.S.
House of Representatives on September 17, 2003 would end up reducing
state and local revenue
collections by at least $4 billion and as much as $8.75 billion
annually by 2006, rather than the
$500 million estimated cost under the legislation's narrower original
focus. These figures are
contained in a study released today by the Multistate Tax Commission
(MTC). The prospect of
unintended -- but no less staggering -- new multi-billion-dollar
losses for local and state
governments would result from language in the House bill, H.R. 49,
that courts could interpret as
providing a blanket exemption from non-federal taxes for the telecommunications
industry,
granting it an unprecedented "church"-like status.
The MTC study concludes: " … H.R. 49 – by preempting
a variety of activities that go beyond
access by customers to the Internet and by expanding the scope of
the preemption to income,
property and other business taxes – will reduce revenues from
current taxes levied by the 50
states, the District of Columbia and local governments a minimum
of $4 billion and up to $8.75
billion annually by 2006. Whether the losses rise to the higher
level depends on the outcome of
anticipated litigation over the provisions of H.R. 49, if enacted.
The estimates above are
conservative because they do not include the full impact of services,
information and content that
can be exempted from tax by being bundled with Internet access or
offered as a service over the
Internet. In contrast, if the language of H.R. 49 were amended to
conform to Congress' intent of
preempting only sales taxes on solely Internet access to customers,
including broadband, and
extending the preemption to 'grandfathered' sales taxes of certain
states, the cost to state and
local governments would be limited to approximately $500 million
in 2006."
Commenting on the new MTC study, Tennessee Revenue Commissioner
Loren Chumley said:
"State revenue commissioners and other state and local officials
understand that consumers need
to be able to get Internet access and we are not disputing the original
$500 million 'bite' that
H.R. 49 presented to us. But state tax officials have many decades
of experience living with the
effects of laws passed by Congress. Our legal reading of the new
expansive language in H.R. 49
is that it will effectively rope off the telecommunications industry
from local and state taxes. It
does not matter if the legislation's proponents insist that was
not their intention here. Intention
doesn't count in court when it comes to tax matters. All that counts
is what the bill says – and
this bill provides a roadmap for the telecommunications industry
to sidestep as much as $9
billion annually by 2006 in taxes and succeed in doing what no other
industry has done: get
Congress to relieve it of potentially all local and state taxes."
Government Finance Officers Association President Ed Harrington,
who also is controller for the
city and county of San Francisco, said: "When the House voted
for H.R. 49 they were told that it
would cost state and local governments $80 to $120 million because
of the change to get rid of
the 'grandfather' clause affecting sales taxes in the prior temporary
moratorium. However, the
Congressional Budget Office noted that changing the definition of
what constitutes Internet
access could also affect other tax revenues – but could not
give an estimate. We believe that
losing $80 to $120 million annually – $45 million from Texas
alone – is reason enough to
question this bill. However, the grandfather clause as it applies
to sales taxes affects only about
10 states … Much more serious in our view is the expansion
of the definition of Internet access
to include telecommunications services. This could have a dramatic
impact on virtually all state
and local governments that collect any kind of tax on telecommunications
companies – utility
taxes, franchise taxes, gross receipts, property and other taxes
could be called into question. All
of this in a bill that has been touted as only making permanent
the current temporary ban on
taxes on Internet access charges."
Jim McIntire, chairman of the Washington state House Finance Committee,
said: "We've
addressed this legislative question already in Washington state,
so I know that the 'fix' that is
needed to H.R. 49 is a simple matter. I see this as a basic question
of business fairness. It is
inconceivable to me that we would grant a church-like status to
the telecommunications industry
while insisting that other industries pay their full share. Internet
access is one thing – but
stretching a $500 million tax relief measure into a gaping $9 billion
hole at a time when cities,
counties and states already are struggling is unconscionable."
OTHER KEY STUDY FINDINGS
The loss of telecommunications revenue will grow after 2006 until
the industry becomes
virtually exempt from state and local taxes. The Multistate Tax
Commission study notes: "H.R.
49 will eventually exempt all or nearly all of the telecommunications
industry from major state
and local taxes: sales, excise, income, property and other taxes.
The date when the virtual
exemption from state and local taxes occurs depends on the speed
at which the industry
completes the conversion of its services to the Internet –
a technological change now clearly
underway. The point of virtually complete exemption from state and
local taxes will occur earlier
in some states and localities than others. If the current language
of H.R. 49 had been in effect in
2002 and if the industry had completed the transfer of its services
to the Internet, the revenue loss to state and local governments
would have been $22 billion."
The study points out that the state and local consequences of losing
up to $9 billion in revenues
would be considerable. According to the MTC report: " …
the National Center for Education
Statistics projects that it will cost state and local governments
$8,557 for each pupil enrolled in
public elementary and secondary schools in 2005. Every $1 billion
that would be preempted by
this proposed legislation, and not made up by other revenues, or
reductions in other services
could have been used to provide education for nearly 117,000 pupils.
Similarly, at 2001
compensation rates, each $1 billion in state and local revenues
preempted by this legislation
translates to nearly 20,000 fewer policemen on 'the beat' or nearly
20,000 fewer firefighters, or
more than 27,000 hospital workers. Similarly, for each $1 billion
preempted, there could be
nearly 25,000 fewer instructional staff in public elementary and
secondary schools or more than
17,000 fewer instructional personnel in college classrooms and laboratories."
BACKGROUND: JULY 2003 TAX SHELTER STUDY
On July 15 2003, the MTC released a separate report showing that
corporate tax sheltering is
linked to as much as $12.4 billion in lost state tax revenues. The
July 2003 data indicate that
state corporate income tax revenue, which totaled $35.4 billion
in 2001, would have been as
much as $12.38 billion (or 35 percent) higher had such widespread
tax sheltering of income not
taken place. The full text of the earlier MTC study, including revenue
losses for individual
states, is available on the web at http://www.mtc.gov/statebudgetcrisis.html.
ABOUT THE MTC
The Multistate Tax Commission
was created in 1967 and 45 state governments now participate
in the MTC. The Commission encourages states to adopt uniform tax
laws and regulations that
apply to multistate and multinational enterprises. Greater uniformity
in multistate taxation
reduces compliance burdens for multistate businesses and helps ensure
that interstate commerce
is neither undertaxed nor overtaxed.
# # #
CONTACT: Christine Kraly, (703) 276-3258 or ckraly@hastingsgroup.com.
download
MTC's report
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Taxation page
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