By Larry Jones
February 9, 2004

Jackson (MS) Mayor Harvey Johnson told mayors attending the January 21 Urban Economic Policy Committee meeting that this year Congress would most likely consider a proposal that would permanently ban state and local taxes on Internet access fees. A separate proposal that would assist state and local governments in collecting taxes on remote sales is also on the congressional agenda. Both proposals could significantly affect city revenues. Senator Lamar Alexander (TN), who is leading the fight against the permanent ban, said it could cause state and local governments to lose billions in telecommunications taxes. Representative Ernest Istook (OK) provided mayors a progress report on a bill he is sponsoring that would authorize state and local governments to require out-of-state merchants to collect their sales and use taxes. The elimination of sale-lease back transactions and draft criteria for the next round of base closings were also addressed.

Internet Tax Moratorium

Senator Alexander (TN) told mayors at the committee meeting that he would continue to fight S. 150, which would permanently ban state and local taxes on Internet access fees and broaden the definition of Internet access to exempt digital subscriber lines (DSL) and all other forms of technology used to provide access to the Internet from state and local taxes. With support from mayors and other elected leaders, Alexander said he and Senator Thomas Carper (DE) prevailed last year in blocking Senate floor action on S. 150. He called the bill "an unprecedented unfunded mandate," pointing out it could cause state and local governments to lose up to $20 billion in revenues.

Alexander told mayors that while proponents of S. 150 argue that the Internet must be protected to ensure continued growth, he cautioned that Congress should not be in the business of exempting one industry from taxes over another, and sending the bill to state and local governments. He pointed out that it wasn't done for the automobile or other lucrative industries and it should not be done for telecom industry.

As an alternative to S.150, Alexander told mayors he and Senator Carper (DE) would introduce a free standing bill within the next few weeks that would provide a two-year extension of a provision banning new state and local taxes on Internet access fees; continue the grandfather clause that allows the collection of taxes on Internet access fees that were in place before 1998, and exempt new taxes on DSL Internet access fees. He said the Senate is likely to take up S. 150 by the end of February and he encouraged mayors to contact their Senators and urge them to support the Alexander/Carper alternative, which will not cause them to lose any revenues. He explained that neither S. 150, which is sponsored by Senators George Allen (VA) and Ron Wyden (OR) nor his initiative has the votes to pass on the Senate floor. But he said the telecom industry is lobbying aggressively to increase support for S. 150. In response, he encouraged mayors to follow the example in California where over 130 mayors wrote their Senators and urged them to oppose S. 150 and support the Alexander/Carper alternative.

Collection of Taxes on Remote Sales

Representative Ernest Istook (OK) reminded mayors of the significance of the sales tax, pointing out that it accounts for approximately one third of all state revenues. However, state and local governments are losing out on sales tax revenues as an increasing amount is lost to Internet and other remote transactions because out-of'state merchants are not required to collect their taxes. It is estimated they will lose $45 billion in annual revenues by 2006. Istook told mayors to continue to urge their congressional delegations to support the Streamlined Sales and Use Tax Act, H.R. 3184/S. 1736, a proposal he is sponsoring on behalf of state and local governments that would give them the authority to require out-of'state merchants to collect their sales and use taxes. He explained that his proposal does not create a new tax but merely provides an enforcement mechanism to help state and local governments collect taxes that are currently due.

Although the proposal enjoys broad bipartisan support, Istook told mayors he is likely to face problems getting the bill scheduled for a vote on the House floor. "If it gets to the floor, we will have the votes to pass it," Istook said. He asked mayors to urge their Representatives to cosponsor H.R. 3184 and make a special effort to urge members on the House Judiciary Committee to cosponsor the bill.

Elimination of Sale-Lease Back Transactions

Mayors were told by Kenneth Kies, managing director of federal policy at Clark Consulting in Washington, D.C., that the Senate Finance Committee and the U.S. Treasury Department are sponsoring legislation that would increase the cost of leasing equipment and real property (i.e. vehicles, copiers and computers) for state and local governments. Kies said the proposed legislation would deny tax write-offs for legitimate losses that, under current law, may be incurred by companies that lease equipment and property to local governments and other tax- exempt entities. It would also slow tax depreciation on property used by these companies to provide services to governments and other tax-exempt organizations. The effect of these changes will increase taxes and force such companies to charge higher lease payments to cover the cost of the tax increase.

Former Representative Jimmy Hayes, a consultant in Washington, D.C., told mayors that the proposed legislation would virtually eliminate sale-lease back transactions, which are currently used by states, localities and other tax-exempt entities to finance infrastructure projects. In these transactions, a public asset (such as a transportation system, a water line or a stadium), is sold to a company or investor for a temporary period. Under this arrangement the company gets an annual tax break from depreciating the value of the asset over a period of time and the local government gets funds from the sale of the asset that can be used to expand or improve the infrastructure project. At the end of the period, ownership of the asset reverts back to the local government.

Both Kies and Hayes told mayors that they should contact their congressional delegation and urge them to oppose the proposed changes in S. 1637, the Jumpstart Our Business Service Act (JOBS Act). Mayors were told they should let their Senators and Representatives know how these changes will impact their cities, particularly at a time when many are struggling to recover from a financial crisis.

Base Closing Update

Philip W. Grone from the Department of Defense told mayors that draft selection criteria, which will be used by the Department to recommend base closings, were published in the Federal Register on December 23. Recognizing the importance of military bases to local governments, mayors were urged to review the criteria and provide any comments to the Department of Defense by February 16. The final selection criteria must be published no later than February 16. However, Congress will have until March 15, 2004 to disapprove the criteria. If Congress fails to act, the criteria will become final.

Grone told mayors that the Department of Defense will continue to provide assistance to local communities faced with base closings.