Washington Outlook

House Approves Phase Out of 3 Percent Federal Telephone Excise Tax

By Larry Jones
May 29, 2000

By an overwhelming majority, the House voted 420-2 on May 25 to approve H.R. 3916, a bill that would phase out the 3 percent federal excise tax on telephone services. Under the proposed legislation, the tax would be reduced to 2 percent 30 days after the enactment of legislation and decline to 1 percent on October 1, 2001 and be completely phased out by October 1, 2002. This is the second recommendation in the Advisory Commission on Electronic Commerce majority members report adopted by the House. The first was approved on May 10, H.R. 3709, a bill opposed by the Conference that would extend the existing moratorium on Internet taxes for an additional five years without providing a way for the collection of state and local taxes on remote sales.

A number of ACEC members have long argued that the 3 percent federal excise tax was approved over a hundred years ago to fund the Spanish-American War and that it has long out lived it purpose. However, the primary sponsors of H.R. 3916, Rep. Robert Portman (OH) and Robert Matsui (CA), argued convincingly that the tax should be repealed because it is regressive and hurts mostly low and middle income workers.

Senate Majority Leader Trent Lott is considering options for taking action on the bill in the Senate. He is considering whether the senate will take up a clean bill or whether to include it in a reconciliation tax bill later in the year. The White House has indicated that it may not support the legislation unless the Congress finds the funds to offset the cost which is estimated at $19.8 billion over five years. The White House has further warned that under the budget rules members are required to find the funds to pay for this tax break or it could later "cause a significant sequester of federal resources." This means the federal governments could be forced to make reductions in other federal programs to offset the cost of the tax break.

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