By Larry Jones
December 8, 2003

The Conference and a broad coalition of state and local groups succeeded in blocking passage of proposed legislation (S. 150) that would have permanently banned state and local taxes on Internet access fees. A temporary ban in effect since 1998 expired on November 1. Although the House passed a companion bill (H.R. 49) last summer, S. 150 became bogged down in the Senate after facing strong opposition from state and local officials. Mayors, governors and other elected leaders expressed concerns about a provision in the bill that would expand the definition of Internet access and prevent state and local governments from collecting an estimated $9 billion in taxes on traditional telecommunication services.

With strong support from the telecommunications industry, the key sponsors of S. 150, Senators George Allen (VA) and Ron Wyden (OR), tried to get a permanent law enacted before the temporary law expired. But due to strong opposition from mayors, governors and other state and local officials, they were unable to generate enough support to pass the bill on the Senate floor. Calling the measure a huge unfunded mandate, Senators Lamar Alexander (TN) and Thomas Carper (DE) urged their colleagues to oppose S. 150 because it would cause state and local governments to lose revenue at a time when many are facing a fiscal crisis. They also pointed out that now is not the time to enact a permanent ban on Internet access when enormous technological change is redefining the telecommunications industry.

Instead of a permanent ban, Senators Alexander and Carper offered an alternative proposal that would have extended the ban on Internet access for two additional years and allowed state and local governments with taxes on Internet access fees since the 1998 ban to continue receiving such taxes. It would have also allowed state and local governments with taxes on Internet access fees provided over digital subscriber lines (DSL) to continue receiving them for two additional years but prohibit any new taxes.

Although Senators Allen, Wyden, Alexander and Carper made numerous attempts to negotiate a compromise, in the end they were unable to settle differences over how long the ban should last and the definition of Internet access. A number of alternatives ranging from a 6-month to a 5- year extension of the ban with a prohibition on new state and local taxes on DSL Internet access fees were discussed. But with the Bush Administration supporting the House passed permanent ban, Senate Majority Leader Bill Frist's push for a short-term simple extension of current law was rejected by Senators Allen and Wyden. Before leaving for the Thanksgivings Day recess, Senator Frist conceded defeat of the measure on November 25 but vowed to "make passing a meaningful Internet tax moratorium a priority for next year."

When members of Congress return next year, the Conference and other state and local groups will push for hearings on any new proposals and work closely with Senators Alexander and Carper in crafting a proposal that will be sensitive to the needs of local and state governments.