<DOC>
[106th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:59995.wais]
THE SCHOOLS AND LIBRARIES INTERNET ACCESS ACT
=======================================================================
HEARING
before the
SUBCOMMITTEE ON TELECOMMUNICATIONS,
TRADE, AND CONSUMER PROTECTION
of the
COMMITTEE ON COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
on
H.R. 1746
__________
SEPTEMBER 30, 1999
__________
Serial No. 106-81
__________
Printed for the use of the Committee on Commerce
------------------------------
U.S. GOVERNMENT PRINTING OFFICE
59-995 CC WASHINGTON : 1999
COMMITTEE ON COMMERCE
TOM BLILEY, Virginia, Chairman
W.J. ``BILLY'' TAUZIN, Louisiana JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas RALPH M. HALL, Texas
FRED UPTON, Michigan RICK BOUCHER, Virginia
CLIFF STEARNS, Florida EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio FRANK PALLONE, Jr., New Jersey
Vice Chairman SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania BART GORDON, Tennessee
CHRISTOPHER COX, California PETER DEUTSCH, Florida
NATHAN DEAL, Georgia BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma ANNA G. ESHOO, California
RICHARD BURR, North Carolina RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California BART STUPAK, Michigan
ED WHITFIELD, Kentucky ELIOT L. ENGEL, New York
GREG GANSKE, Iowa THOMAS C. SAWYER, Ohio
CHARLIE NORWOOD, Georgia ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma GENE GREEN, Texas
RICK LAZIO, New York KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming TED STRICKLAND, Ohio
JAMES E. ROGAN, California DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING,
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland
James E. Derderian, Chief of Staff
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Telecommunications, Trade, and Consumer Protection
W.J. ``BILLY'' TAUZIN, Louisiana, Chairman
MICHAEL G. OXLEY, Ohio, EDWARD J. MARKEY, Massachusetts
Vice Chairman RICK BOUCHER, Virginia
CLIFF STEARNS, Florida BART GORDON, Tennessee
PAUL E. GILLMOR, Ohio BOBBY L. RUSH, Illinois
CHRISTOPHER COX, California ANNA G. ESHOO, California
NATHAN DEAL, Georgia ELIOT L. ENGEL, New York
STEVE LARGENT, Oklahoma ALBERT R. WYNN, Maryland
BARBARA CUBIN, Wyoming BILL LUTHER, Minnesota
JAMES E. ROGAN, California RON KLINK, Pennsylvania
JOHN SHIMKUS, Illinois THOMAS C. SAWYER, Ohio
HEATHER WILSON, New Mexico GENE GREEN, Texas
CHARLES W. ``CHIP'' PICKERING, KAREN McCARTHY, Missouri
Mississippi JOHN D. DINGELL, Michigan,
VITO FOSSELLA, New York (Ex Officio)
ROY BLUNT, Missouri
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Gerber, Lois M., Chairman of the Board, National Independent
Private Schools Association................................ 38
Lassman, Kent, Deputy Director, Technology and
Communications, Citizens for a Sound Economy............... 47
Levy, Kelly Klegar, Acting Associate Administrator, Office of
Policy Analysis and Development, National
Telecommunications and Information Administration, U.S.
Department of Commerce..................................... 34
Parrino, Cheryl, CEO, Universal Service Administrative
Company.................................................... 40
Tancredo, Hon. Thomas G., a Representative in Congress from
the State of Colorado...................................... 12
Weller, Hon. Jerry, a Representative in Congress from the
State of Illinois.......................................... 9
Wright, Christopher J., General Counsel, Federal
Communications Commission.................................. 30
(iii)
THE SCHOOLS AND LIBRARIES INTERNET ACCESS ACT
----------
THURSDAY, SEPTEMBER 30, 1999
House of Representatives,
Committee on Commerce,
Subcommittee on Telecommunications,
Trade, and Consumer Protection,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:17 a.m., in
room 2322, Rayburn House Office Building, Hon. W.J. ``Billy''
Tauzin (chairman) presiding.
Members present: Representatives Tauzin, Cox, Rogan,
Shimkus, Wilson, Ehrlich, Markey, Rush, Wynn, and Sawyer.
Staff present: Linda Bloss-Baum, majority counsel; Justin
Lilley, majority counsel; Mike O'Reilly, professional staff;
Cliff Riccio, legislative clerk; and Andy Levin, minority
counsel.
Mr. Tauzin. Good morning, my apologies. Among my many
duties around here is the deanship of the Louisiana delegation.
We had one of those rare delegation meetings this morning.
When Congress passed the Telecommunications Act in 1996,
they included the idea of a program for the discount of
advanced telecommuncations services for organizations that
would most need assistance acquiring the technology of the
Internet; namely, schools, libraries, and rural health care
centers. The FCC broadly interpreted the statute to require
subsidies not only for basic telephone service for schools but
also for Internet access, content based information services,
and equipment for internal connections.
They have even created now a new bureaucracy to take over
the administration of the program, the Schools and Libraries
Division of the Universal Service Administration Company.
Furthermore, the FCC took it upon themselves to create a $2.5
billion fund to be developed by excise taxes on every
consumer's phone bill. This type of what I consider to be
illegal taxation was certainly not the intention of Congress.
After some urging from Chairman Bliley and myself last May,
the FCC scaled back their original $2.5 billion program to $1.3
billion. The fact is, I believe that neither the FCC nor the
FCC-created USAC has the authority to levy taxes. Only
Congress, unfortunately, can do that. Unfortunately, we have to
take on that duty once in a while, which is why I introduced
the Schools and Libraries Internet Access Act, H.R. 1746.
With this bill, we reassert control over Congress' original
idea that the Schools and Libraries Internet Access Act would
cut taxes, not increase them. The bill cuts the existing
regressive 3 percent telephone excise tax, passed in 1913, by
fully two-thirds over 5 years. That tax was passed in 1913 to
fund World War I, which if history serves me right I think is
over, but the tax is not.
After the fifth year under our bill, when all the schools
have been connected to the information superhighway, the bill
completely repeals the rest of the tax. The bill removes the
program from the FCC and puts it into the hands of State
educational officials and the National Telecommunications
Information Administration of the Department of Commerce.
The bill would meet our goal of bringing advanced
telecommunications services and the Internet to our neediest
schools and libraries and will eliminate the need for improper
new taxes imposed by the FCC, which many have, unfortunately
for Mr. Gore, dubbed it the Gore tax.
I am proud to welcome my friends and fellow sponsors of the
bill, Representatives Tancredo and Weller, to testify before
the committee this morning. I am also pleased to welcome our
second panel of witnesses who will be composed of Mr.
Christopher Wright, the General Counsel of the FCC; Kelly Levy,
Acting Associate Administrator, Office of Policy Analysis and
Development of the NTIA; and Lois Gerber, Chairman of the Board
of the National Independent Private Schools Association; and
Cheryl Parrino, I am trying to get the names right, CEO of
Universal Service Administration Company; and Kent Lassman,
Deputy Director of Technology and Communications for Citizens
for a Sound Economy.
Again, let me thank my colleagues for coming. I am going in
a second welcome my friend and colleague from Massachusetts,
ranking member of our subcommittee, Mr. Markey for an opening
statement, but we do deeply appreciate when colleagues of ours
take time out to come and talk to us about issues before our
committee, and we welcome you two gentlemen in particular. Mr.
Markey is recognized.
Mr. Markey. This is such an incredibly important subject
for us to be discussing, and it is one of the things that I am
proudest of in terms of telecommunications policy. We included
this language in the 1993, 1994 Telecommunications Act that
passed the House 423 to 4. Unfortunately, that bill then died
in the Senate and we had to come back and go through it again
in 1995 and 96.
The key, of course, is for us to recognize that the world
has just fundamentally changed since 1900. In 1900, only 7
percent of 17-year-olds had high school diplomas, and yet the
people who were in leadership in our country at that time
decided to build a vast network of primary and secondary
schools with the intention of educating every person in our
country.
Just think about that. From all the way from the Garden of
Eden to 1900, five millennia, we were up to 7 percent of the
population with a high school diploma. And yet this bold
generation said for Irish, Italian, Poles, Jews, regardless, we
have to build a school system for them.
Mr. Tauzin. Cajuns.
Mr. Markey. Cajuns. Everyone. And what happens today is
that 60 to 70 percent of the children in the United States
graduating from high school this year are going on to college.
Not high school now, not 7 percent high school, but 60 to 70
percent college. What a transformation. What a commitment to
public education.
But the jobs in 1900 were industrial. Jobs for the 21st
century will be informational. They will, in fact, relate to a
skill set that is not available right now, unfortunately, to
the lowest income groups.
In fact, NTIA in doing a study on this subject found that
there not only is a digital divide but there is a racial ravine
for on-line access, the rates for whites are nearly three times
as high for blacks--for whites as they are for blacks and
Hispanics.
Now, the interesting thing is that by the year 2030, 50
percent of all the children in the United States will be
minorities. So if we want to have an economy, an Information
Age economy, a new economy, it is going to be largely populated
by workers who are minorities. And so the key for us to make
sure that Medicare and Social Security do have proper funding
for the white baby boomers, for all baby boomers 20 and 30
years from now is if we give a good Information Age education
right now to every minority. And we cannot allow this gap to
open up because otherwise the jobs will go overseas. That is
the core thought behind the E-Rate.
And for those of us who are Democrats that voted for GATT
and NAFTA, as I did, and there are only five of us above the
Mason-Dixon Line, we have a deal. Yes, we are going to have
more trade but at the same time we have to give a skill set now
to those who are in the lowest income groups to make sure that
they have a skill set that comports with the jobs that we are
going to target in this new information-based economy.
Now the good news is that the Fifth Circuit, the Federal
circuit has now upheld key components of the FCC's
implementation of the E-Rate provisions, in particular
rejecting arguments that universal service contributions
constituted a tax. So we have already got the Federal circuit
court decision on this issue. It is not a tax. It has been
resolved.
So that is really great news for the millions and millions
of children who come from the poorest communities in America
because now they can have these hookups in their classrooms and
can gain access. The communities can decide yes, we will now
spend money on computers, yes, we will spend the money on
teacher training, and of course that is another responsibility
for us, to make sure that the money is there for teacher
training so that they can integrate the traditional disciplines
of education with these new technologies, so that the children
in that bottom percentile are given that skill set.
I think it paints a wonderful picture for our country. It
shows that we understand that we need to have global trade and
at the same time give this skill set to the poorest in our
society. And then everyone is a winner, including our
generation, that will ensure that our Social Security and
Medicare trust fund will be filled by the high-skilled
employment of this generation that is hooked now in by the E-
Rate to this Information Age.
So I thank you, Mr. Chairman, for holding this hearing.
This is about as good a set of discussions as we are going to
have this year. It really talks about the key issue of our
generation. Thank you.
Mr. Tauzin. I thank my friend. Is there additional opening
statements? Anyone? Mr. Shimkus?
Mr. Shimkus. Mr. Chairman, just to briefly make sure that I
welcome my fellow Illinoian Congressman Weller. We have been
fighting on this issue for a long time. And also just to say
historically in the 1900's, there was a great move to public
education. That move was led by local and State governments.
The Federal Government really had no role at that time, to keep
things in historical perspective.
The power to tax is a power to destroy. We have heard that.
If we allow our government to allow agencies to tax, subverting
the will of the elected representatives of this country, where
does it stop and how often does it happen?
So I think the chairman's bill, which I am a cosponsor of,
is a great compromise to do a couple of things that we want to
do, decrease the burden of taxation on the American public
while making sure that we address the need to make sure our
schools have access to high speed Internet connections, and
that is why I am a proud sponsor of the bill. I appreciate the
work that the chairman has done. I welcome my colleagues, both
colleagues, Tom Tancredo and Jerry Weller, and I look forward
to their testimony.
Mr. Tauzin. Will the gentleman yield? I think it is
important to point out that very much of what the gentleman
from Massachusetts has said I agree with. There will be
witnesses who disagree with both of us that the government has
no business spending the money connecting the schools. I happen
to agree with the gentleman and with the gentleman from
Massachusetts. We do have some business doing that. How we do
it, who raises the tax and how it is spent is what is at issue
here.
And what we have done collectively is to offer a better
administrative solution and a better legal structure under
which taxation of phone bills can occur to support this kind of
a process. And the gentleman is absolutely correct about our
concern about Federal agencies like the FCC and the very
strained interpretations like the Fifth Circuit saying that a
tax is not a tax when everybody who got their phone bill--my
wife particularly last week said what is this new tax on the
bill? And I had to explain that the FCC and the Fifth Circuit
in New Orleans said it was okay. And she said you didn't
actually vote on the tax increase? And I said no, we didn't.
The FCC had some mysterious language that they interpreted to
give them that right.
Mr. Markey. Will the gentleman yield?
Mr. Shimkus. I think my time is up, but I am happy to
yield.
Mr. Markey. The Fifth Circuit ruled that it is not a tax.
You have to call it the Gore universal service contribution. It
is not the term----
Mr. Shimkus. I can use that. I can run with that.
Mr. Markey. That is the accurate description.
Mr. Tauzin. But like Gore, that is such a boring
description.
The gentleman is recognized.
Mr. Sawyer. Thank you, Mr. Chairman. I really appreciate
very much the comments of all three of the members who have
spoken prior to me. Let me just mention, though, that we talk
about where we will be in 2030. The truth of the matter is that
while we often think of the baby boom generation as the largest
population bulge ever to move through this Nation, the truth is
that the current enrollment in school has for the last 1\1/2\
years beaten the record that was set by the baby boom at their
height for school enrollment and will continue to beat that
record for the next 12 to 15 years at minimum.
And as a result, we have a window of opportunity here in
which to deal with exactly the kinds of concerns that the
chairman and the ranking member have been talking about with
regard to elevating the skill level of an entire Nation.
It is rare that you have the opportunity to move the
aggregate skill level of, well, I guess it depends on how we
count, but 265 to 275 million people in the country at once.
The last time we did this actually was at the turn of the
century and the 35 years before that where, in fact, there was
a Federal role in education when a Republican from Vermont by
the name of Justin Morrill, first in the House and then in the
Senate, put together an arrangement whereby the territory that
was ceded to the railroads to expand the Nation and to grow a
new kind of country where a portion of those lands that were
given to the railroads to increase commerce across this
continent was set aside for the creation of a new kind of
higher education institution. And from that grew the land-grant
colleges. And instead of having simply 40 or so institutions
largely for the sons of the well-to-do in this country of
classical education, schools that taught business and industry
and science and the practical skills of nation building grew in
this Nation and it changed the face of America. I would submit
that it is arguable that the 20th century in America was a
product of Justin Morrill's vision.
This is a very similar kind of undertaking. It is very
similar. It involves almost exactly the same set of principles
and our job and what this bill is all about is trying to make
those principles work right. It is not whether or not we should
be involved in doing this. This gives all the control that a
local community needs. It sends the dollars where they most
need to go, and I think that is important. We can talk about
this as it goes on, but I appreciate the comments of the
gentleman and I just hope that we can keep them into some kind
of perspective.
I appreciate this effort to provide a more stable funding
platform for that undertaking. I am concerned about what
happens to the dollars that we have been counting on for
scoring purposes and how we offset those once those dollars go
away. I hope we can talk about that.
I am appreciative of the effort that the FCC and the
Department of Education have made to work together to make sure
that these dollars do go where they most need to go. And I hope
that we can ensure that the NTIA will have a similar kind of
sound substantive relationship with education policy, although
it is clear that they would have to control the flow of the
funds.
And finally, Mr. Chairman, if I could, let me mention one
element that I never hear talked about. In the struggle that we
had over school safety in recent years, at no time more
intensely than this year, it seems to me that there is one
opportunity that we have overlooked when we talk about school
guards and metal detectors and all the other kinds of changes
that can be brought to schools. It seems to me that one of the
most fundamental kinds of security investments that we can make
is to make sure that every classroom is no longer isolated from
every other classroom as they are in American schools. The use
of the wiring that goes into schools to connect hardware, not
only with an electrical outlet but with the world of
information, could also be used to connect classrooms with the
school office via telephone.
Mr. Tauzin. Will the gentleman yield?
Mr. Sawyer. I would, but let me just say this, it is a
terribly important element in assuring the security of
individual classrooms. And while we know that there have been
decisions about the kinds of equipment that can be bought,
including modems and all that sort of thing, it seems to me if
we might make a specific reference to that in the course of
this bill it could go a long way toward allowing investments of
the kind that for a song, a fraction of the cost of metal
detectors could go a long way toward improving classroom
security.
Mr. Tauzin. First, we ought to give some real credit to the
Cellular Telephone Industry Association, which has a program
like Cable in the Classroom designed to provide mobile
equipment exactly for that purpose to teachers in the school
buildings and in the schoolyards of America. And I think they
deserve a lot of credit for their voluntary efforts in that
regard.
But also I want to point out to the gentleman wireless
technology, not wired technology but wireless technology, and
in particular some of the new technology. Yesterday Larry
Forlsom was in town, the guy who was the inventor of this new
ultrabroadband technology, which has a big technology summit on
in Washington today, may offer even greater security than
spending all of this money to rewire the insides of school
buildings.
One of the concerns we have in our bill is this effort to
focus on a single form of technology when there may be other
less expensive, much more competent technologies to accomplish
those purposes, but the gentleman is exactly right.
Communications inside the school can vastly increase school
safety and it is one thing we need to focus on.
Mr. Sawyer. I agree with everything you said. Thank you,
Mr. Chairman.
Mr. Tauzin. Further opening statements?
[Additional statements submitted for the record follow:]
Prepared Statement of Hon. Michael G. Oxley, a Representative in
Congress from the State of Ohio
Thank you, Mr. Chairman, and welcome to our witnesses.
As we all know by now, the FCC's program to wire all of the
nation's two million classrooms and 16,000 libraries directly to the
Internet has led to a new tax on consumers.
Allegedly based on provisions of the Telecommunications Act of 1996
calling for discounted telephone line rates for schools and libraries,
the concept of service discounts has been expanded beyond recognition
into a multi-BILLION dollar grant program.
While I support efforts by local school districts to wire
classrooms for Internet access if they so desire, and I have no
objection to the concept of discounted telecommunications rates for
educational institutions, I object strenuously to the FCC's perversion
of congressional intent and self-anointed role as tax collector for
this electronic white elephant sale. Upwards of 80 percent of schools
are already connected to the Internet, thanks to school board and
private-sector initiatives. The Gore Tax is unnecessary. The only
purposes it serves are political.
Under pressure from consumers and Congress, including this Member,
the FCC initially voted to cut the program approximately in half and
agreed to reform some of the more objectionable aspects of its
implementation. However, the Commission later reversed course and
ordered ``full'' funding of the Gore Tax program to the tune of $2.25
billion. I am of the firm opinion that this backdoor tax increase
imposed by unelected bureaucrats cannot be allowed to stand.
I support the legislation before us as the minimum we should do to
reign in an agency run amok. I also believe this case study confirms
the need to reform the FCC and impose some discipline and more
attention to congressional intent.
Thank you, Mr. Chairman. I yield back.
______
Prepared Statement of Hon. Barbara Cubin, a Representative in Congress
from the State of Wyoming
Thank you, Mr. Chairman, for holding this very important
legislative hearing on the bill H.R. 1746, the Schools and Libraries
Internet Access Act.
As a recent cosponsor of your legislation, I would like to commend
you on your thoughtfulness in putting together this bipartisan, well
crafted, and responsible bill.
For the past two years I have continually gotten comments from
angry constituents who are enraged about the federal charges on their
phone bills.
Today phone bills look more like tax statements than they do
utility bills.
H.R. 1746 would address this two-fold. First it would repeal one of
the federal charges by replacing the FCC's existing schools and
libraries program. Second, it would repeal altogether the three percent
excise tax on October 1, 2004.
Until the 2004 sunset of the excise tax, one percent of the tax
would go toward funding the telecommunication services to qualified
schools, libraries and rural health care providers.
One of the most attractive things to me about H.R. 1746 is that it
allows the funds to be allocated to all 50 states and used according to
the states' plans.
This effectively gets the federal government--namely the FCC--out
of dictating how these monies should be spent and alleviates the
uncertainty that the FCC could adjust, modify or eliminate altogether
the funding mechanism.
Let me be clear about one thing: schools, libraries and rural
health care providers deserve to have the best advanced services
available.
H.R. 1746 would provide a tremendous amount of resources to enhance
schools' and libraries' access to advanced telecommunications and
information services.
Mr. Chairman, I once again applaud your work on putting together
this very important piece of legislation. I look forward to hearing
from today's witnesses and look forward to one day seeing this bill
become law. I yield back the balance of my time.
______
Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
Thank you Mr. Chairman. I am anxious to hear the views of our
esteemed panel this morning on the Federal program that provides
telecommunications services to schools, libraries and rural health care
providers. I particularly would like to welcome my colleagues,
Representatives Tancredo and Weller, to the Commerce Committee this
morning to share their views on this important issue.
Mr. Chairman, I think it is safe to say that no one on this panel,
or around this entire country is opposed to having schools provide the
best education and information possible to children. As we move at
rapid speed into a digital arena, we should offer the most up to date
service and technology to as many U.S. citizens as possible. That said,
I do think rational minds disagree as to the best way to achieve this
worthy goal.
The program to provide these telecommunications services, sometimes
called the E-RATE program, and sometimes also referred to as the ``Gore
Tax'' is out of control. Currently there are over 2.45 billion dollars
worth of requests from eligible schools, libraries and organizations.
In order to meet this high level of demand, the FCC unilaterally
increased the cap for this program this past summer. By doing so, the
FCC not only raised the federal telephone E-Rate tax, but it also took
bold steps to prevent phone companies from identifying the tax on their
customers' phone bills. Whether one agrees or disagrees with the
specifics of the program, we all should agree that folks should at
least know when they're being taxed, and for what purpose.
I question why the FCC assumes that they have the authority to take
such action. The 1996 Telecommunications Act does not allow the FCC to
increase such a tax without Congressional approval.
In the Commonwealth of Virginia, even before the FCC doubled the
tax earlier this summer, Virginians paid 50.2 million dollars during
the first cycle of the Gore Tax, but in return, got back only 24.9
million dollars from the FCC. By contrast, Puerto Rico paid only 13.3
million dollars in the first cycle, but received a whopping 47.6
million dollars in subsidies! The Gore Phone Tax is fundamentally
illegal and unfair. It's unfair to all consumers, and it's certainly
unfair to three-quarters of the States.
I commend Chairman Tauzin for taking his initiative to address this
problem with his bill, H.R. 1746, the Schools and Libraries Internet
Access Act. This bill offers one possible solution which would address
some of the concerns about the FCC's implementation of the program.
I look forward to hearing more about this legislation, as well as
other possible solutions from our two panels of witnesses this morning.
______
Prepared Statement of Hon. Anna G. Eshoo, a Representative in Congress
from the State of California
Because of a markup in the Health and Environment Subcommittee, I
cannot attend this hearing on H.R. 1746, the Schools and Libraries
Internet Access Act this morning.
I'm troubled by the implications of H.R. 1746. The legislation
would revamp funding for the e-rate, slashing the 3% federal
communications excise tax by two-thirds and reallocating the remaining
revenue to fund the e-rate. This means a significant reduction in funds
to schools and libraries who need these funds to wire their schools to
the Internet.
In addition to funding the wiring of schools and libraries, this
program offers schools and libraries a discount in the cost of
accessing the Internet.
H.R. 1746 would sunset all funding in the year 2004. This means
that schools and libraries would no longer receive a discount. Our
nation's schools and libraries are already overburdened by the costs
associated with educating our children, and this legislation would be
another burden for them to shoulder.
This bill kills the e-rate. Republicans supported the e-rate when
it was included in the 1996 Telecommunications Act and now the same
Republicans are bashing it.
The funding mechanism for the E-rate was part of the
Telecommunications Act of 1996 and was passed in the House on a
bipartisan vote of 414-16 and 91-5 in the Senate. Not one House
Republican voted against the Act.
We should support full funding of the e-rate program and here's
why:
<bullet> The E-rate works. The E-rate program is playing a pivotal role
in bringing technology into our children's lives. The program
is making computers in the classroom the rule, not the
exception. Because of the E-rate we're closer to the day when
children, their parents and their teachers will walk into a
classroom filled with computers linked to the Internet, and not
give it a second thought.
<bullet> In just 18 months, the E-rate has connected over 600,000
classrooms in over 80,000 schools and libraries across America.
If the FCC funds the E-rate at $2.25 billion, the E-rate will
connect an additional 528,000 classrooms. For most schools and
libraries, the cost of both telephone and Internet access will
be cut in half. For some of our poorest schools, access will be
almost free.
<bullet> The E-rate is helping our country close the digital divide.
Because of the E-rate, children in the most isolated inner city
or rural town will have access to the same universe of
knowledge and technology as a child in the most affluent
suburb. The schools hurt most by attempts like H.R. 1746 to
slash the E-rate will be schools in rural America.
The Education Department has found that smaller and economically
disadvantaged schools are now just as likely to have Internet
connections as larger, wealthier schools. The survey also found 80
percent of the poorest schools have Net connections as of 1998,
compared to 87 percent of the wealthiest schools. But at the classroom
level, the poorer schools still lag in connectivity, with only 39
percent online.
Access to technology doesn't guarantee our children will succeed,
but lack of technology guarantees our children will fail. For America
to ensure that our children have a shot at the American dream, we must
have computers in the classroom. The E-rate makes that goal more
attainable.
If our children do not have the technological resources they need
to compete in an ever-changing global information economy, our nation
will be poorer for it. The E-rate provides students more access to
educational technology and empowers them with the tools they need to
succeed in the Information Age.
Being literate today means not only being able to read, but
possessing computer skills. Technological literacy and ongoing access
to information technology resources is essential, and for many school-
aged children and adults, our schools and libraries may be their only
opportunity to access and use a networked computer.
The American Electronic Association recently released a study that
shows while math and science test score levels have improved since
1990, fewer and fewer students are receiving degrees in either math or
science.
If America is going to keep competing and winning in this global
economy, more of our children must choose careers in math or science.
By putting computers in the classroom, the E-rate is helping to produce
the next generation of scientists and mathematicians.
I'm disappointed the Commerce Committee schedule prevents me from
attending this hearing. I'm confident that the testimony will be useful
in demonstrating how successful this program is and that there is
absolutely no need to destroy the funding mechanism of a successful
effort.
Mr. Tauzin. The Chair is pleased to welcome our guests on
the first panel. The Honorable Jerry Weller and the Honorable
Tom Tancredo. Jerry, you can begin. We have a 5-minute rule but
we are flexible. We appreciate your testimony.
STATEMENT OF HON. JERRY WELLER, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF ILLINOIS
Mr. Weller. Thank you, Mr. Chairman, Mr. Markey, and the
members of the subcommittee. Thank you for the opportunity to
testify today on an important issue. I come before the
subcommittee as a strong supporter of our Nation's goal of
ensuring that every child in America has access to the Internet
and computers through our local libraries as well as our local
schools. And the reason is I believe in the 21st century
knowledge and understanding of the Internet is a basic skill
not only at home but in the workplace and we should ensure that
every American child should have this opportunity and I think
we all could agree on that in a bipartisan way. And that is why
I appreciate the opportunity to testify today.
I particularly also want to thank Chairman Tauzin for your
leadership and the opportunity to work with you on legislation
which we all believe will bring stability as well as legitimacy
to an important program providing Internet access to local
schools and libraries not only through access discounts but the
installation of the wire, the fiber and the hardware in our
local schools and libraries. Our work on this bill began as an
effort to achieve a goal we all share, which is giving every
American child access to the Internet. And when we passed the
Telecommunications Act in 1996, it included a simple directive
that any telecommunications carrier serving a particular
geographical area must make any of its services under the
universal service fund, USF, available at reduced rates to
schools and libraries.
Unfortunately, the FCC misinterpreted the
Telecommunications Act and they have jeopardized the goal that
we all share, which is providing Internet access for all of
America's children.
First the FCC determined that as much as $2,250,000 in
funding should be made available to support universal service
to schools and libraries. Second, the FCC expanded the scope of
what was available for schools and libraries from just
discounted rates on telecommunications services and decided to
include Internet access costs and Internet connections, which
essentially is the wire, the fiber, and the hardware.
Third, the FCC created a whole new bureaucracy known as the
School and Library Corporation to administer the Internet
access program without authorization from Congress to do so.
Finally, probably the mostly questionable of all the
provisions, the FCC determined that the funds supporting the
Internet access for school and libraries should come from a tax
on all long distance telecommunications service providers.
Here are the problems we are now facing: FCC has taken
unauthorized action to create a new bureaucracy to administer a
program whose funding base may not be secure and, second, the
FCC has taken the act of imposing an unauthorized tax on
telephone users in order to cover the expense of this
enterprise.
The FCC is incorrect in its contention that this
unauthorized tax is a fee. A fee is a charge for a service
rendered. However, long distance users are not receiving a
service. Thus, if a charge is levied and no direct service is
provided, then it is characterized as a tax regardless of
whether it shows up on your 1040 form or your telephone bill.
And only Congress under our Constitution can impose a tax.
As a member of the House Ways and Means Committee which has
jurisdiction over tax issues, I believe this position taken by
the FCC is wrong. Today many schools and libraries across this
country have come to depend and look to the Internet access
program as a source of funding. And of course this funding
source, as we recognize it, is not secure, which means neither
are their technology programs.
In the district that I represent local school districts
have received some funding. Lincoln Elementary School in
Calumet City received over $51,000. Marseilles Elementary
school received over $22,000. La Salle Bruton High School,
which is over a century old, a building built like a fort, they
estimate it is going to cost well over a million dollars for
that school to put in the wire, the fiber and the hardware to
guarantee every child access to the Internet.
These and other schools across the country deserve to know
that their Internet access funding is secure. The fact of the
matter is the FCC implemented a program based upon a funding
source that many Members of Congress believe they did not have
the right to utilize.
Congress, not the FCC, is the only body under our
Constitution authorized to impose a tax. Chairman Tauzin and I
want to fix this problem by ensuring that a funding source for
school library Internet access is secure. The Schools and
Library Internet Access Act would protect the technology
assistance programs for the over 1,800 schools in Illinois
alone by slashing the World War I, 3 percent telephone excise
tax currently sent to the general treasury, to 1 percent and
earmarking this remaining revenue to fund this important
schools and library Internet access program through block
grants to the States. In addition the slash in the current tax,
the Schools and Libraries Internet Access Act would repeal the
3 percent unconstitutional tax on long distance customers.
Our legislation would save consumers $5 billion while
providing over $1.7 billion in the first year to equip our
Nation's schools and libraries with Internet access.
The legislation effectively kills two birds with one stone.
First, the legislation preserves and expands funding for the
important Internet access assistance programs to our schools
and libraries and places it appropriately under the
jurisdiction of the National Telecommunications and Information
Administration. Second, the legislation abolishes the FCC's
taxing mechanism and reduces an antiquated World War I tax
which disproportionately impacts the poor and our Nation's
senior citizens while guaranteeing a revenue stream of anywhere
from $1.7 to $2 billion a year for Internet access to our
schools and libraries.
We believe we can do it right this time. This legislation
corrects the problem. The FCC and its tax created the problem.
However, we all sit here today in support of the bipartisan
goal of giving every child in America through their schools and
libraries access to the Internet. And we believe we need to
solve this problem by enacting the Schools and Libraries
Internet Access Act. It is the right thing to do. Let's work in
a bipartisan fashion and get it done. Therefore, I ask my
colleagues on this subcommittee as well as members of this
committee and the full House and Senate, to give the Schools
and Library Internet Access Act favorable consideration.
I look forward to working with you. Thank you for the
opportunity to testify.
[The prepared statement of Hon. Jerry Weller follows:]
Prepared Statement of Hon. Jerry Weller, a Representative in Congress
from the State of Illinois
First, let me thank you for the opportunity to work with you on
this important legislation which will bring stability and legitimacy to
an important program which provides Internet access to local schools
and libraries through access discounts. I appreciate the opportunity to
testify here today.
Our work on this bill began as an effort to achieve a goal we all
share . . . giving every child access to the Internet through our local
schools and libraries.
When we passed the Telecommunications Act of 1996, it included a
simple directive that any telecommunications carrier serving a
particular geographic area must make any of its services under the
Universal Service Fund (USF) available at reduced rates to schools and
libraries. Unfortunately, the FCC misinterpreted the Telecommunications
Act and may have jeopardized the goal we all share, which is providing
Internet access for all of America's children.
First, the FCC determined that as much as $2.25 billion per year
should be made available to support universal service for schools and
libraries. Second, FCC expanded the scope of what was available for
schools and libraries from just discounted rates on the
telecommunications services and decided to include Internet access
costs and internal connections (wiring). Third, the FCC created a whole
new bureaucracy, known as the School and Library Corporation to
administer the e-rate program without authorization from Congress to do
so. Finally, with probably the most questionable of all of the
provisions, the FCC determined that the funds supporting the e-rate,
for schools and libraries should come from an assessment, or tax, on
all long distance telecommunications service providers.
Here are the problems that we now face: 1) The FCC has taken
unauthorized action to create a new bureaucracy to administer a program
whose funding base may not be secure 2) The FCC has taken the
unconstitutional action of imposing an unauthorized tax on long
distance users in order to cover the expense of this enterprise.
The FCC is incorrect in its contention that this unauthorized tax
is a fee. A fee is a charge for a service rendered; however, long
distance users are not receiving a service. Thus, if a charge is levied
and no direct service is provided then it is characterized as a tax,
regardless of whether it shows up on your 1040 form or your telephone
bill, and only Congress can impose a tax under the Constitution. The
FCC's actions are being contested in court.
The result is that many schools across the country have come to
depend and rely on the E-Rate program. Without a secure funding source,
their technology programs may be in jeopardy. Some examples in the 11th
District of Illinois which I represent, Lincoln Elementary School in
Calumet City, Illinois received $51,214 for internal connections and
Internet access; Marseilles Elementary School received $22,055 for
internal connections.
These and other schools across the country deserve to know that
their E-rate is secure. The fact of the matter is, the FCC implemented
a program based upon a funding source that is unconstitutional.
Congress, not the FCC, is the only body able to impose a tax. Chairman
Tauzin and I want to fix this problem by ensuring that the funding
source for the erate program is secure.
The Schools and Library Internet Access Act would protect the
technology assistance program for over 1,800 schools in Illinois alone
by slashing the World War I three percent telephone excise tax
(currently sent to the general fund) to 1% and earmarking the remaining
revenue to fund the important school and library Internet access
programs through block grants to the states. In addition to slashing
the current tax, The Schools and Library Internet Access Act would
repeal the 3% unconstitutional Tax on long distance customers. Our
legislation will save consumers $5 billion while providing $1.7 billion
in the first year to equip our nation's schools and libraries with
Internet access.
The legislation effectively kills two birds with one stone. First,
the legislation preserves and expands funding for the important
Internet access assistance program to our schools and libraries and
places it appropriately under the jurisdiction of the National
Telecommunications and Information Administration. Second, the
legislation abolishes the FCC's unconstitutional funding mechanism and
reduces an antiquated World War I tax which disproportionately impacts
the poor and senior citizens.
Let's do it right this time. The FCC and its unconstitutional tax
created the problem. However, I support the bipartisan goal of giving
every child in school access to the Internet and believe we need to
solve this problem by enacting The Schools and Library Internet Access
Act. It is the right thing to do. Lets work in a bipartisan fashion to
get it done.
Therefore I ask my colleagues to give the Schools and Libraries
Internet Access Act favorable consideration in this committee.
Thank you, Mr. Chairman
Mr. Tauzin. Thank you, Mr. Weller, and now the Honorable
Tom Tancredo from Colorado.
STATEMENT OF HON. THOMAS G. TANCREDO, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF COLORADO
Mr. Tancredo. Thank you, Mr. Chairman. I want to thank you
for the opportunity to testify on H.R. 1746, the Schools and
Libraries Internet Access Act, and appreciate the forum that
you have provided to discuss the problems that frankly I
believe to be inherent in a bizarre and incredibly complex
world of telecommunications taxation.
As an original cosponsor of this bill, I look forward to
seeing its passage in the near future. The Schools and Library
Internet Access Act goes a long way toward bringing some degree
of relief to the confused and overtaxed phone customer. Simply
trying to decipher the typical charges on one's phone bill
today requires an analysis of a perplexing array of charges
that defy easy explanation or a defensible rationale.
Mr. Chairman, your bill could be called the telephone
taxpayer's Bill of Rights as it epitomizes three cardinals of
good tax policy: Simplicity, accountability and fairness, I
believe all three are lacking in the present--and I sort of
hesitate to use the word--system.
I brought with me a constituent's phone bill from this last
February, and I think it illustrates the point perfectly. We
have since received many similar in nature. In the course of 1
month the gentleman from Lakewood, Colorado, made a 1-minute
phone call to Minneapolis costing 15 cents. As you will see by
the facsimile of the bill that he sent me, he had $1.84 in
taxes and charges on that 15-cent phone call. He was confused
about this, of course. He thought that he might be actually
paying $1.84 in taxes for every minute he spent on the phone. I
don't know what it did to his long distance dialing from that
point on and access, but it certainly probably scared him to a
certain extent. I can only imagine that he has not used his
long distance since then, at least to any extent.
Although we can try to explain to the best of our ability
what these charges were for, and of course he would face many
of these inexplicable charges regardless of his calling
frequency, at least the way this particular company, AT&T,
chooses to bill for it. Other companies bill differently. They
do bill as a result of a percentage of your usage. In this
case, this company does not.
To recover the costs of the universal service fund which
funds the schools and libraries E-Rate program as well as other
more traditional universal service programs, this gentleman's
long distance phone company charged a flat rate of 93 cents per
customer. Add on the 85 cents line charge for local service
providers and the almost 100-year-old 3 percent
telecommunications excise tax, the total is $1.99.
Unfortunately, like all overtaxed phone customers, my
constituent remains a victim to the whims of the FCC. In May of
this year without so much as the expressed consent of Congress,
the FCC raised the E-Rate tax by $600 million. The Wall Street
Journal estimated that the increase could amount to an
additional 40 cents per month on the average bill. The FCC's
abilities to raise this tax has slipped through the cracks of
the 1996 Telecommunications Act and more recently through the
Federal judicial system, I think. It remains largely
unaccountable for the way it levies these charges on a day-to-
day basis. There is no doubt in my mind that the FCC will
appear before the Congress next year demanding statutory
increases above the $2.25 billion cap on the E-Rate program.
The first bill I introduced into the Congress was H.R. 692,
the E-Rate Termination Act, to end the FCC's program entirely.
I have consistently referred to the E-Rate program as a tax
because I believe it meets the criteria of a tax. I certainly
believe that my constituents, and this particular customer,
would think of all those charges as a tax. I guess I could
explain to them that they really are not a tax, that the FCC
said they are not a tax, that the Court says they are not a
tax. I don't really know whether or not he would believe that
this thing that waddles, quacks and has feathers is anything
but the duck that it really and truly is. It is a tax.
By levying the charge on telecommunications companies that
will not participate in providing services to schools and
libraries, the FCC has extended the intent of the 1996
Telecommunications Act. Testifying before the Ways and Means
Committee, Commissioner Harold Furtchgott-Roth explains that
quote: A tax confers no special benefit on the payee, is
intended to raise general revenue, and is imposed for some
public purpose. In contrast, a fee is a payment for a voluntary
act such as obtaining a permit.
Certainly the E-Rate program is not voluntary and the
Congressional Budget Office has determined that all universal
service contributions, including E-Rate contributions, should
be treated as Federal revenues.
The Schools and Libraries Internet Access Act will fund the
E-Rate program in a more honest fashion by eventually bringing
the program into the general fund where it can be subjected to
the annual scrutiny of the congressional appropriators.
Simplicity, accountability, fairness. Americans who support
these principles in our tax policy should support the Schools
and Libraries Internet Access Act, and I should say also, Mr.
Chairman, that I am fully aware of the altruistic motives that
were--that motivated the Congress of the United States in the
adoption of the original legislation, and I am not arguing with
them at all. But regardless of how altruistic they were, we
have to recognize that some problems may exist because they
were--because the bill developed in a vacuum to a certain
extent. It developed without a lot of discussion about what was
going on in this particular area to begin with. How many
programs were we funding in the Federal Government for
technology in the public schools?
I am on the Committee on Education and the Workforce. The
Secretary of Education came before our committee and I asked
him specifically that question: How much are we doing just in
the Education Department? How many programs do we actually use
to fund technology in the schools? He said he was not sure. I
said do you have any idea how many programs that other agencies
are involved with? He said he was not sure but he would get
back to us on that. He never has up to this point in time.
The fact is when it is as uncoordinated as this is, to add
another program of this nature, again no matter how altruistic
in nature, could be counterproductive if we do not know what
the government is doing in total, if we do not know exactly
what is being collected and spent for the technology in
classrooms and how that money actually produces some sort of
change in classrooms.
And we also make a--it is sort of a--well, an assumption
about the present system, the present sort of industrial model
educational system that we have in America as being the one we
are going to have for throughout the next century and the one
most able to accept this technology and deal with it
successfully. And I suggest to you that we really don't know
that this industrial model system where you have one building
brick-and-mortar facility, all kinds of kids coming in the
morning, all kinds of adults to meet them for 6 hours a day 184
days a year inside this facility and we call that education. We
don't know if that will really be the way we will be educating
children in the next century.
But we have made an assumption about that when we built the
process into this particular piece of legislation or in the
original Telecommunications Act. It is something I think that
needs to be fixed and I thank you again, Mr. Chairman and
members of the committee, for the opportunity to voice my
support for this bill.
[The prepared statement of Hon. Thomas G. Tancredo
follows:]
Prepared Statement of Hon. Thomas G. Tancredo, a Representative in
Congress from the State of Colorado
Good morning Mr. Chairman and Members of the Committee. I thank you
for the opportunity to offer testimony on H.R. 1746, the Schools and
Libraries Internet Access Act and appreciate the forum you have
provided to discuss the problems I believe to be inherent in the
bizarre and incredibly complex world of telecommunications taxation. As
an enthusiastic original cosponsor of this bill, I look forward to
seeing its passage in the near future.
The Schools and Libraries Internet Access act goes a long way
toward bringing some degree of relief to the confused and overtaxed
phone customer. Simply trying to decipher the typical charges on one's
phone bill today requires an analysis of a perplexing array of charges
that defy either easy explanation or a defensible rationale.
Mr. Chairman, your bill could be called the Telephone Taxpayer's
Bill of Rights as it epitomizes three cardinal principals of good tax
policy--simplicity, accountability, and fairness. I believe all three
are lacking in the present ``system.''
Simplicity
I have brought with me a constituent's phone bill from this past
February that I think illustrates this point perfectly. In the course
of one month, this gentleman from Lakewood, Colorado, made only a one-
minute phone call to Minneapolis costing 15 cents, and as you will see
by the facsimile of the bill he sent me, he believed he was charged
what is essentially $1.84 in taxes and charges. In his confusion over
these charges, he feared he might be charged $1.84 in taxes for every
minute he spent on the phone! I can only imagine that this poor man has
not used his long distance service since!
A closer examination of his phone bill shows that he would face
many of these same inexplicable charges regardless of his calling
frequency. To recover the costs of the universal service fund, which
funds the Schools and Libraries E-Rate Program as well as other, more
traditional universal service subsidies to rural areas, this
gentleman's long distance phone company charged a flat rate of 93 cents
per customer. Add on the 85 cents line charge for local service
providers, and the 100-year-old three percent telecommunications excise
tax, and his total bill was $1.99.
The Schools and Libraries Internet Access Program would help
Americans like my constituent from Lakewood by immediately reducing,
and eventually phasing out the telephone customer excise tax, and by
bringing the charges associated with the E-Rate Program in to the
Treasury, and eventually on budget. No longer will the FCC have the
ability raise his taxes through this program, and no longer will he be
assessed a 100 year old federal tax originated as a luxury tax to fund
the Spanish American War.
Simplicity, my colleagues, is the message we want to support here,
and that the Schools and Libraries Internet Access Act moves toward.
Simplicity-not only in light of the myriad of taxes and surcharges that
deluge a phone customer-but also in the way we manage our funding for
the technology that schools receive. In a hearing before this
Subcommittee last year, the Government Accounting Office estimated that
at least 27 federal programs provide funding that may be used to
purchase this technology for Schools and Libraries. For three of these
programs that specifically target funding for technology in schools and
libraries, the President requested a funding level of more than $1
billion for Fiscal Year 2000.
As a member of the Education Committee, I am delighted that this
bill returns the control of technology funding in schools and libraries
to the nation's elected officials. There is much work to be done in the
Education Committee on this front. Of course, I find it ironic that the
only intriguing argument I have heard in favor of the program as it
currently stands, is that it is probably better managed than if it were
run under the Department of Education. Again, that is another matter
that Congress must address.
Accountability
Americans deserve to hold their federal agencies, and Congress,
accountable for the money spent on technology funding in schools and
libraries. Moreover, they deserve accountability for the charges they
pay on their phone bills.
In a recent testimony before the Senate Committee on Commerce, FCC
Commissioner Harold Furchtgott-Roth lamented that the FCC has made
little progress in addressing the problems that plague the E-Rate
program highlighted by the GAO in 1998 and denounced by many members of
Congress. In March of 1999 the GAO published a progress report on the
E-Rate program, riddled with evidence of poor, if any, accountability
for the issuance of discounts. Specifically, the GAO stated that the
FCC has not yet implemented the GAO's recommendation to cite adequate
goals, performance targets, and measures for the program. It also cited
a serious concern that too many schools were issued inappropriate
discounts, and that an increasing number of such problems may occur if
this program continues.\1\
---------------------------------------------------------------------------
\1\ GAO/RCED-99-5 1. GAO Report to the Chairman, Committee on
Commerce, Science, and Transportation, U.S. Senate, March 1999, pp. 7-
8.
---------------------------------------------------------------------------
In May of this year, without so much as the expressed consent of
Congress, the FCC raised the E-Rate tax by $600 million. The Wall
Street Journal estimated that the increase could amount to an
additional 40 cents per month on the average bill.\2\ The FCC's ability
to raise this tax has slipped through the cracks of the 1996
Telecommunications Act and more recently through the federal judicial
system. It remains largely unaccountable for the way that it levies
these charges on a day to day basis.
---------------------------------------------------------------------------
\2\ ``Gore Tax Hike'' The Wall Street Journal, May 12, 1999.
---------------------------------------------------------------------------
There is no doubt in my mind that the FCC will appear before
Congress next year demanding a statutory increase of the $2.25 billion
cap on the E-Rate program. Throughout the course of time that the FCC
has so zealously fought for billions in E-Rate funding, it has delayed
its consideration of revamping the more traditional channels of
universal service funding, particularly those programs serving rural
Americans.
Mr. Chairman, the first bill I introduced in Congress was H.R. 692
The E-Rate Termination Act, to terminate the FCC's program entirely. I
introduced that bill on the same day that the House passed the Mandates
Information Act, which will serve as a warning flag within bills we
consider that may cause unfunded mandates on the private sector and
consumers. This program is not only an unfunded mandate, it is an
uncontrolled one, and Americans deserve more accountability.
Fairness
The Schools and Libraries Internet Access Act will eliminate and
phase out the E-Rate tax and the telephone customer excise tax,
respectively. This is a measure of fairness for both taxpayers and the
many telecommunications companies that currently contribute to the E-
Rate Fund, a back-door tax masked with ludicrous misnomers such as a
``Mandatory Contribution.''
I have consistently referred to the E-Rate Program as a ``Tax''
because I believe it meets the criteria of a tax rather than that of an
administrative fee or charge. By levying the E-Rate universal service
charge on every interstate telecommunications company, the FCC has
exceeded the intent of the 1996 Telecommunications Act by charging
companies, such as wireless phone companies, that will not see a
financial return by providing services to schools and libraries.
Testifying before the Subcommittee on Oversight of the House Committee
on Ways and Means on August 4, 1998, Commissioner Furtchgott-Roth
stated the following:
In general, taxes can be distinguished from administrative
fees by determining the recipient of the ultimate benefit: a
tax ``confers no special benefit on the payee,'' ``is intended
to raise general revenue,'' or is ``imposed for some public
purpose.'' In contrast, a ``fee'' is a ``payment for a
voluntary act, such as obtaining a permit.'' As the Supreme
Court has held, and the D.C. Circuit further explained, a
``fee'' is a payment ``incident to a voluntary act, e.g., a
request that a public agency permit an applicant to practice
law or medicine or construct a house or run a broadcast
station. The public agency performing those services normally
may exact a fee for a grant which, presumably, bestows a
benefit on the applicant, not shared by other members of
society.''
Here, all these factors point toward the category of a tax:
the fund, which creates internet access for schools and
libraries, confers no particular advantages upon
telecommunications carriers in exchange for their
contributions, such as a license or permit; the funds have not,
as far as I can tell, been segregated from other government
monies; the purpose of the fund is a broad, social one,
purportedly to improve education for all Americans; and the
payment requirement is not triggered by a voluntary act on the
part of telecommunications carriers, such as the filing of an
application, but is a flat mandate.\3\
---------------------------------------------------------------------------
\3\ The Honorable Harold Furchtgott-Roth, Commissioner, Federal
Communications Commission before the House Subcommittee on Oversight of
the House Committee on Ways and Means. August 4, 1998.
---------------------------------------------------------------------------
Therefore, the current E-Rate program is funded by a backdoor tax--
collected in a mandatory rather than voluntary fashion. In fact, the
Congressional Budget Office has determined that all universal service
contributions should be treated as federal revenues, supporting the
argument that this is federal revenue generated in the form of a tax.
The Schools and Libraries Internet Access Act will fund the E-Rate
program in a more honest fashion, by first establishing a trust fund
program through a reduced telecommunications excise tax, and eventually
bringing the program into the general fund, where it can be subjected
to the annual scrutiny of Congressional appropriators. No longer will
constituents pay for the E-Rate program through the funds described as
a ``Universal Charge'' or ``Mandatory Contribution.''
Finally, this bill should provide an enormous tax relief for those
companies that do not see a return of business through the E-Rate
program. The arbitrary and unfair charges on companies levied by the
FCC to fund the E-Rate program will cease. Billions of dollars will be
returned to the nation's growing high-technology business sector.
Simplicity, accountability, and fairness. Americans who support
these principles in our tax policy should support the Schools and
Libraries Internet Access Act. I thank you again, Mr. Chairman and
members of the Committee, for the opportunity to voice my support for
this important bill.
Mr. Tauzin. Thank you both. The Chair recognizes himself
quickly. I appreciate both of your comments and the
contributions. And I would like at this point to ask unanimous
consent that written statements for all members be made a part
of the record as well as our witnesses and also to ask
unanimous consent to file under the record of this proceeding a
new recent study entitled ``The High Cost of Taxing Telecom,''
prepared by Jeffrey Eisenach of the Progress and Freedom
Foundation.
[The information referred to follows:]
The High Cost of Taxing Telecom
by jeffrey a. eisenach <SUP>1</SUP>
---------------------------------------------------------------------------
\1\ Jeffrey A. Eisenach is president and co-founder of The Progress
& Freedom Foundation. The views expressed here are his own and do not
necessarily reflect those of The Progress & Freedom Foundation, its
officers or Board of Directors.
---------------------------------------------------------------------------
Introduction and Summary
Driven by technological progress, the telecommunications industry
is nearing the end of a 30-year transition from natural monopoly to
competitive market. Public policy has recognized this change through
substantial deregulation and creation of a legal framework designed to
facilitate competition. Tax policy, however, has not kept pace with the
changing nature of the telecommunications business. As a result, the
telecommunications industry is subjected to a vast array of taxes that
have no apparent justification in the modern era and can be explained
solely as holdovers from all but forgotten era. Simply put, there are
too many taxes on telecommunications services, and they are far too
high.
Taxes on telecommunications are, inevitably, taxes on the Internet.
Whether through dial-up access or Digital Subscriber Lines (DSL), over
cable modems or wireless ones, access to the Internet takes place over
the telecommunications network. Thus, high telecommunications taxes
slow the spread of Internet access and discourage deployment of the
broadband networks needed for the next generation of Internet growth.
They raise the costs of electronic commerce for every business, big or
small, and raise the price of Internet access for every household, rich
or poor. Their impact is probably greatest, however, on poor
households, small businesses and rural communities.
The convergence of previously separate telecommunications
technologies--cable, telephone, satellite, wireless--into a single
marketplace adds further urgency to the need for telecommunications tax
reform. Each of these different industry sectors is subject to its own
tax regime, meaning that the same service can be subject to very
different tax treatment depending on the type of firm that offers it,
and efforts to eliminate such consistencies are hampered by the extreme
complexity of the system.
This paper represents a first step in an effort to reassess and to
recommend reforms in telecommunications taxes. It describes the current
regime and presents very preliminary findings about the impact of
current policies in terms of both economic efficiency and fairness. The
paper concludes with a brief discussion of potential policy
implications.\2\
---------------------------------------------------------------------------
\2\ This paper was prepared for presentation to the Advisory
Commission on Electronic Commerce, September 14, 1999. It presents
preliminary results from an ongoing study of telecommunications
taxation underway at The Progress & Freedom Foundation. All results are
tentative and subject to further modification. The final study is due
out in mid-2000.
---------------------------------------------------------------------------
Telecommunications Taxes in the United States
Telecommunications services in the United States are subject to an
almost incomprehensible array of taxes at the local, state and Federal
levels. Indeed, there are so many taxing entities levying so many
taxes, fees and other charges that there literally is no comprehensive
data source from which a complete listing can be obtained.
Nevertheless, it is possible to paint a fairly accurate picture of the
overall level of telecommunications taxes.<SUP>3</SUP>
---------------------------------------------------------------------------
\3\ A major new study by the Committee on State Taxation (COST)
provides a wealth of data on state and local taxation of
telecommunications services. See Committee on State Taxation, 50-State
Study and Report on Telecommunications Taxation (Washington, DC:
Committee on State Taxation, 1999). This study will make possible far
more sophisticated analyses of telecommunications taxes than have been
possible in the past. While the study was not completed in time for its
results to be incorporated in this paper, the author wishes to thank
COST for an advance copy.
---------------------------------------------------------------------------
Federal Taxes: The Federal government taxes telecommunications in
three significant ways. First, it levies a three-percent excise tax on
all telecommunications services. Second, it imposes fees on long-
distance carriers that are used to subsidize the provision of
telecommunications services, wiring and computer-related equipment at
schools, libraries and rural health care centers. Third, it oversees a
system of ``access charges'' through which long-distance phone carriers
subsidize the below-cost provision of local telephone service to
selected customers. Of these, only the first is universally agreed to
be a ``tax.'' <SUP>4</SUP>
---------------------------------------------------------------------------
\4\ While these are the three most significant Federal taxes, they
are by no means the only ones. Telecommunications carriers pay a wide
variety of regulatory fees, participate in extremely complex cross-
subsidization programs, are subject to a number of unfunded mandates
and face numerous unfavorable depreciation and related provisions.
---------------------------------------------------------------------------
The Federal telecommunications excise tax (FET) adds three percent
to the cost of every telecommunications bill. It covers both long
distance and local telephone service for both residential and business
customers. Revenues from the tax are treated as general revenues. The
FET is projected to raise about $5 billion in FY 1999. As shown below,
this makes it the third largest general revenue excise tax in the U.S.
budget, just behind alcohol and tobacco. Nevertheless, the tax accounts
for less than four tenths of one percent of Federal revenue. By
comparison, the Office of Management and Budget estimates the FY 1999
Federal budget surplus at $99 billion.
Table One:
General Fund Excise Taxes \5\
------------------------------------------------------------------------
Share of On-
Product Revenue (FY 1998, Budget Federal
millions) Revenue
------------------------------------------------------------------------
Alcohol........................... $7,215 0.53%
Tobacco........................... $5,657 0.44%
Telecommunications................ $4,910 0.38%
------------------------------------------------------------------------
\5\ Beginning in 1998, revenues from the excise tax on motor fuels were
removed from general revenues and dedicated virtually entirely to the
highway trust fund. At nearly $40 billion, the tax on motor fuels is
far and away the largest Federal excise tax in terms of revenue
raised. Source: Office of Management and Budget, Budget of the United
States: Historical Tables (Washington: Government Printing Office,
1999).
Source: Office of Management and Budget
The second major tax on telecommunications services is the tax
levied on long distance carriers to support the Federal Communications
Commission's ``e-rate'' program. In May 1999, the FCC voted to raise
the annual amount of this tax by approximately $1 billion to $2.25
billion annually.<SUP>6</SUP> These taxes are passed through by long
distance carriers to individual customers, increasing monthly bills by
just over $1 per month per line.<SUP>7</SUP>
---------------------------------------------------------------------------
\6\ See Federal Communications Commission, In re: Federal-State
Board on Universal Service: Twelfth Order on Reconsideration in CC
Docket No. 96-45 (May 27, 1999). See also Dissenting Statement of
Commissioner Harold Furchtgott-Roth (August 5, 1999). The FCC has gone
to great lengths to ensure that the charges associated with the e-rate
are not seen by the public as taxes. [See, for example, In re: First
report and Order and Further Notice of Proposed Rulemaking, Truth-in-
Billing and Billing Format; CC Docket 98-170 (May 11, 1999). In this
``truth in billing'' proceeding, the FCC effectively prohibited long
distance carriers which pay into the fund from including on their bills
a line showing the portion being passed through to consumers.] All
documents available at www.fcc.gov.
\7\ The e-rate program has been roundly criticized by academic
economists. See, for example, Jerry Hausman, Taxation by
Telecommunications Regulation: The Economics of the E-Rate,
(Washington: The AEI Press, 1998).
---------------------------------------------------------------------------
The third major Federal tax levied on telecommunications services
is the most ambiguous and controversial of all: It is the system of
access charges imposed on long-distance carriers to compensate local
carriers for use of the local facilities used to complete long distance
calls. While a comprehensive analysis of the access charge system is
far outside the scope of this paper, it is generally agreed that the
charges are higher than can be justified by the economics of local
access per se, and in fact are part of the ``universal service'' regime
that holds prices for some customers below cost by raising prices on
other customers. To the extent access charges represent de facto
government mandated transfers from some customers to others, it is
difficult to argue that they are not ``taxes.''
State and Local Taxes: While Federal taxes on telecommunications
services are both high and complex, state and local taxes are both much
larger and far more complex.
As shown in Table Two below, there are approximately 37 different
types of taxes levied on telecommunications services by state and local
governments in the United States. These include excise taxes, franchise
fees, right of way charges, gross receipts taxes, license fees, 911
fees, public utility taxes and even special levies for programs such as
poison control centers. In some cases these taxes apply to local
telephone services only; in others they extend across state borders and
apply to long distance services as well. Wireless services are often
taxed differently from landline services, and--as discussed further
below--telecommunications services offered by non-traditional carriers
such as competitive local exchange carriers (CLECS) may in practice be
taxed differently from the same services when offered by traditional
carriers.
Table Two:
State and Local Telecommunications Taxes
------------------------------------------------------------------------
State Local/Municipal
------------------------------------------------------------------------
Franchise Taxes........................... Franchise Taxes
Sales & Use Taxes......................... Sales & Use Taxes
Telecommunications Excise Taxes........... Local 911 Tax
Gross Receipts Taxes...................... Excise Taxes
License Fees.............................. Telecommunications Taxes
Utility Taxes, Utility User Taxes, PUC Gross Receipts Taxes
Fees.
Rental/Lease Taxes........................ License Fees
Utility Sales Taxes....................... Utility Taxes
Business & Occupation Taxes............... Access Line Tax
Infrastructure Maintenance Fees........... Rental/Lease Taxes
911 Fees, Emergency Operation Charges, 911 Telephone Relay Surcharge/
Database Charges, 911 Equalization Universal Lifeline
Surcharge. Surcharge
Intrastate Surcharge...................... Public Service Taxes
High Cost Fund Surcharge.................. Utility Users Tax
Relay Service, Communications Devices Infrastructure Maintenance
Surcharges, Universal Access Charges. Fees
Access Line Charges....................... Right-of-Way Charges
Infrastructure Fund Reimbursement......... 911 Fees
Poison Control Surcharge (TX)............. Business & Occupation Taxes
Public Utility Commission Fees............
Teleconnect Fund..........................
Universal Service Charges, Universal
Lifeline Telecommunications Surcharge.
------------------------------------------------------------------------
Source: AT&T, The Progress & Freedom Foundation
One important data base for analysis of telecommunications taxes is
contained in a survey published annually by the Federal Communications
Commission. The FCC survey reports on 21 types of actual taxes, fees
and other charges appearing on local telephone bills for 95 communities
in 41 states.
The FCC data do not include taxes levied on long distance services,
nor do they distinguish between taxes levied by state governments and
those levied at the local level. However, they do make it possible to
determine the overall level of Federal, state and local taxes on local
phone bills in both absolute and percentage terms.
Table Three below summarizes this FCC survey data for the 20
highest-tax major metropolitan areas for 1997, the last year for which
the Commission has made available the disaggregated data required for
our purposes.<SUP>8</SUP> It shows that taxes on local telephone
service amount to as much as 35 percent of the total phone bill,
accounting in some jurisdictions for over $4 per month, or as much as
nearly $60 per year. For the 95 jurisdictions overall, taxes average
just over $2 per month, or about 16 percent of the total local service
bill.<SUP>9</SUP>
---------------------------------------------------------------------------
\8\ While data from its 1990-1997 surveys is posted on the FCC's
Web site, Commission staff have refused without explanation repeated
requests to make available the 1998 data needed to break out the
various components of taxes and fees that make up local bills. We
remain hopeful this data will be made available in the immediate
future.
\9\ These figures are broadly consistent with those reported in the
COST study, which found an overall average rate of 18 percent
nationally, with the highest state-average rate approaching 30 percent.
---------------------------------------------------------------------------
The FCC data also permit us to compare the relative magnitude of
different types of taxes. As shown in Figure One (on the following
page), state and local excise taxes account for over half (52 percent)
of the taxes on a local telephone bill. State and local fixed fees add
another four percent of the total, while 911 fees (also levied by state
and local governments) make up yet another 22 percent. The Federal
excise tax accounts for less than one fourth (22 percent) of the taxes
on a local phone bill.
Table Three
Telecommunications Taxes in the Twenty Highest-Tax Cities \10\
------------------------------------------------------------------------
Tax
City ---------------------
Amount Rate
------------------------------------------------------------------------
Richmond, VA...................................... $4.85 35.7%
Corpus Christi, TX................................ $2.57 27.7%
Tampa, FL......................................... $3.06 25.9%
Chicago, IL....................................... $2.74 25.3%
Baltimore, MD..................................... $4.15 25.1%
Dallas, TX........................................ $2.63 24.9%
St. Louis, MO..................................... $2.57 22.7%
Kansas City, MO................................... $2.55 22.5%
Brownsville, TX................................... $1.99 22.2%
Houston, TX....................................... $2.44 21.7%
Los Angeles, CA................................... $2.43 21.6%
San Antonio, TX................................... $2.10 21.0%
Fort Worth, TX.................................... $1.93 19.2%
Oakland, CA....................................... $2.14 19.0%
Atlanta, GA....................................... $3.31 19.0%
Salinas, CA....................................... $1.97 17.5%
San Jose, CA...................................... $1.85 16.5%
Miami, FL......................................... $1.73 16.2%
Detroit, MI....................................... $2.15 16.2%
Huntsville, AL.................................... $2.48 15.2%
Weighted Average (95 Cities)...................... $2.04 15.7%
------------------------------------------------------------------------
\10\ Calculated based on data collected by the Federal Communications
Commission. Listed cities include only those over 100,000 population.
Weighted average includes all 95 cities in sample. Taxes include the
Federal excise tax (3%), state and local excise taxes, state and local
fixed taxes, 911 excise taxes and 911 fixed taxes appearing on local
residential telephone bills. Additional taxes (e.g. franchise taxes,
public utility taxes, property taxes, etc.) not shown on the
customer's bill are not included, nor is the Federal Subscriber Line
Charge. See 1999 Reference Book of Rates, Price Indices, and
Expenditures for Telephone Service (Industry Analysis Division, Common
Carrier Bureau, Federal Communications Commission, February 1999),
Table 14.1. The disaggregated data used to calculate the figures in
this table are posted on the FCC's Web site, at www.fcc.gov/Bureaus/
Common--Carrier/Reports/FCC-State--Link/lec.html
Figure 1: Composition of Telecom Taxes
[GRAPHIC] [TIFF OMITTED] T9995.001
Because these figures include only taxes that are imposed on local
telephone service, they do not reflect the Federal ``e-rate'' tax
(which is imposed on long-distance carriers and passed through to
consumers on long-distance bills). Similarly, they do not account for
the portion of the Federal excise tax applied to long distance charges,
or whatever portion of Federally mandated access charges one might
attribute to universal service and thus appropriately characterize as a
tax. Even if these charges were included, however, they would not
change the basic conclusion that emerges from Figure One: On average,
states and localities tax telecommunications even more heavily than
does the Federal government.<SUP>11</SUP>
---------------------------------------------------------------------------
\11\ Again, this conclusion is consistent with the findings of the
COST study.
---------------------------------------------------------------------------
The FCC data also permit an examination of the trend in
telecommunications taxes over time. As shown in Figure Two below, the
trend is towards significantly higher taxes. Since 1986, the average
tax rate on local phone bills has risen from 10.7 percent to 17.6
percent. In dollar terms, taxes on the average monthly phone bill have
risen by 62 percent during this period, from $1.51 in 1986 to $2.41 in
1998.
Figure 2: Telecommunications Tax Rates 1986-1998
[GRAPHIC] [TIFF OMITTED] T9995.002
Source: Federal Communications Commission, Trends in Telephone
Service (February 1999), Table 14.1.<SUP>12</SUP>
---------------------------------------------------------------------------
\12\ The PFF estimates in Table Three above are based on a somewhat
more conservative methodology than that used by the FCC to calculate
the percentages in Figure Two above. Thus, the FCC estimates the
average tax rate in 1997 as 17.4 percent, compared with PFF's 15.7
percent.
---------------------------------------------------------------------------
In summary, telecommunications taxes in the United States are
numerous, complex, and high relative to other goods and services--and
getting higher.
The High Cost of Taxing Telecom
Economists and other policy analysts agree on three broad criteria
by which tax policy should be judged: Efficiency, equity and
enforceability. The efficiency criteria implies that taxes should
reduce overall economic welfare as little as possible. The equity
criteria suggests that taxes should contribute to (or at least not
detract from) some generally accepted sense of fairness in the
distribution of income and wealth. The enforceability criteria simply
means that taxes ought to be designed in a way that minimizes the
administrative and other costs of collecting them.
In the pre-competition, pre-Internet world of plain old telephone
service, telecommunications taxes probably looked relatively good by
these traditional standards of tax analysis:
<bullet> Efficiency: Historically, telecommunications taxes probably
caused relatively small welfare losses. This is because the
quantity of plain old telephone service (POTS) purchased
(especially local service) was relatively insensitive to price
(it was price inelastic), and thus unresponsive to any price
increases caused by high tax rates.<SUP>13</SUP> So long as
taxes did not produce large changes in the quantity or types of
telecommunications services purchased, the misallocation of
economic resources caused by telecommunications taxes was
small.
---------------------------------------------------------------------------
\13\ The demand for basic local telephone service is highly
inelastic. See, for example, Hausman, 1999.
---------------------------------------------------------------------------
<bullet> Equity: Telecommunications taxes were part and parcel of a
system of price regulation that provided significant subsidies
for those at the lower end of the income spectrum or who, for
whatever reason, were felt to deserve relatively low telephone
prices. And, because telecommunications carriers were
guaranteed a regulatory rate of return, neither they nor their
shareholders suffered when taxes were raised.
<bullet> Enforceability: Telecommunications taxes were levied on a
single provider, the monopoly telephone company, which was
sufficiently large and sophisticated to comply efficiently with
even a fairly complex tax regime. To the extent there were
ambiguities in the system, these could be worked out between
the lawyers for the phone company and the tax collectors,
probably in conjunction with the state regulators.
As discussed in the Appendix, however, there are massive changes
underway in the telecommunications marketplace. These changes turn the
calculus of telecommunications taxes on its head. Whereas
telecommunications taxes may once have been relatively desirable (as
compared with other taxes), they are now arguably the most destructive
taxes being levied on the American economy.
The work now underway at The Progress & Freedom Foundation aims to
present a complete analysis of the impact of telecommunications taxes,
and the objective of this paper is not to anticipate or prejudge the
results of that analysis. At the same time, it is already quite
apparent that, in today's converged, digital, Internet-defined
marketplace, telecommunications taxes do not hold up well to the
scrutiny of the traditional analysis described above.
Telecom Taxes and Economic Efficiency: From the perspective of tax
analysis, the most significant change in telecommunications markets may
lie in the changing nature of telecommunications demand. Whereas demand
for POTS was relatively inelastic, demand for the vast array of new
telecommunications products appears to be relatively price elastic.
Technically, this means that a relatively small percentage change in
the price of telecommunications products results in a relatively large
percentage change in the quantity purchased. In practical terms, it
means that telecommunications taxes may cause many people to purchase
fewer telecommunications services than economic efficiency would
require.
Consider, perhaps most importantly, the market for broadband
communications--i.e. for high-speed connections to the Internet. In the
past, high-speed Internet access was available only through so-called
``T-1'' lines which, at $2,000 or more per month, were affordable only
by large corporations or the very wealthy. Recently, however, two new
technologies have emerged that make broadband access potentially
affordable for virtually everyone. Digital Subscriber Line (or ``DSL'')
technology allows a standard telephone line to be converted into a
high-speed data line. Offered by the major telephone companies, as well
as a growing cadre of competitive ``CLECs'' and ``DLECs,'' DSL services
are being offered in many areas of the country for $40-$60 per month.
At the same time, Cable Modem technology is now offering very similar
services at competitive prices.<SUP>14</SUP>
---------------------------------------------------------------------------
\14\ See Federal Communications Commission, Inquiry Concerning the
Deployment of Advanced Telecommunications Capability (CC Docket 98-146,
August 7, 1998).
---------------------------------------------------------------------------
Making affordable broadband services available to all Americans is
one of America's highest economic priorities. As FCC Chairman Bill
Kennard put it in a recent speech, ``despite all the technical advances
and globalization, the formula for economic success has remained the
same: economic prosperity relies on high-speed access to the critical
network of information and commerce. That network is the Internet, and
the type of access needed is broadband.'' <SUP>15</SUP>
---------------------------------------------------------------------------
\15\ Hon. William Kennard, ``The Road Not Taken: Building a
Broadband Future for America,'' Speech to the National Cable Television
Association, June 16, 1999.
---------------------------------------------------------------------------
The available evidence suggests that demand for broadband services
is highly elastic--that is, sensitive to price. A recent study by
Robert Crandall and Chuck Jackson, for example, estimated that only
four million consumers would be willing to pay $70 per month for an
upgrade from 56.6 kb/s Internet access to 1.1 Mb/s, but 20 million
would pay $25.<SUP>16</SUP>
---------------------------------------------------------------------------
\16\ See Robert W. Crandall and Charles L. Jackson, Eliminating
Barriers to DSL Service, unpublished manuscript, May 1998.
---------------------------------------------------------------------------
Applying the available evidence on elasticities of demand for
broadband services to current telecommunications tax rates yields
disturbing results. Indeed, as shown in Table Four below, the available
evidence suggests telecommunications taxes already are having a
significant impact in slowing the adoption of high speed Internet
access to American households. And, as the number of households with
access to broadband services grows, this effect will grow in the
future. Specifically, at the national average telecom tax rate of 16
percent, we estimate that at least 165,000 households, and perhaps as
many as 2.9 million households, are being effectively priced out of the
market for broadband Internet access in 1999. As the availability of
broadband services spreads, and the number of potential customers
grows, these estimates go up significantly over time. By 2002, at
current tax rates, we estimate that between 1.2 million and 4.2 million
households will be denied broadband Internet access by high
telecommunications taxes.
If telecommunications taxes were to continue to rise, the impact
would grow more than proportionately. For example, a 20 percent tax
burden (similar to current rates in Baltimore, Dallas, Los Angeles and
Tampa) is estimated to reduce broadband penetration by approximately 11
percent. However, a 33 percent burden (similar to the current rate in
Richmond, Virginia) reduces predicted broadband penetration by nearly
20 percent.
Table Four:
The Impact of Telecommunications Taxes on Broadband Penetration
----------------------------------------------------------------------------------------------------------------
Children in Households
Tax Rate \17\ Impact on Penetration Households Denied Denied Internet Access
(Percent) \18\ Internet Access \19\ \20\
----------------------------------------------------------------------------------------------------------------
1999
16%.................................. -7.5%................. 0.2 million-2.9 million 0.1 million-1.9 million
20%.................................. -9.3%................. 0.2 million-3.6 million 0.1 million-2.3 million
33%.................................. -18.9%................. 0.4 million-7.3 million 0.3 million-4.8 million
2002
16%.................................. -7.5%................. 1.2 million-4.2 million 0.8 million-2.7 million
20%.................................. -9.3%................. 1.5 million-5.2 million 1.0 million-3.4 million
33%.................................. -18.9%................. 3.0 million-10.6 1.9 million-6.9 million
million.
----------------------------------------------------------------------------------------------------------------
Source: The Progress & Freedom Foundation
\17\ Actual tax rate applied to sales of broadband services, per month per line, irrespective of whether applied
on a percentage or per line basis.
\18\ Arc price elasticities of demand are assumed to be -0.51 in the $40-$50 range and -1.23 in the $50-$60
range. See Crandall & Jackson, p. 26. Costs are assumed to be constant at $40 throughout the range of output.
\19\ Upper bound based on estimate of 38.8 million Internet connected households in 1999; 56.0 million Internet
connected households in 2002. Lower bound based on estimate of 2.2 million broadband-connected households in
1999; 15.8 million broadband connected households in 2002. Both estimates by Forrester Research. See Erran
Carmel, Jeffrey A. Eisenach and Thomas M. Lenard. The Digital Economy Fact Book (Washington: The Progress &
Freedom Foundation, 1999), pp. 7,35. Hereafter cited as Fact Book.
\20\ Based on U.S. Census Bureau, Current Population Reports, March 1998 Update (Approximately 35 percent of
American households have children under 18 living at home, and these families have an average of 1.86 children
per family).
Telecom Taxes and Equity: The equity consequences of
telecommunications taxes are also being affected by the changing
marketplace. As noted above, telecommunications taxes in the pre-
competition, pre-digital environment were part and parcel of a
regulatory regime that set virtually all prices at levels designed to
ensure equity while offering a fair return to telephone companies.
Thus, prices could be set in such as way as to offset the inherently
regressive nature of fixed and excise (i.e. percentage) taxes on
telecommunications.
In a competitive environment, of course, such cross-subsidies are
simply unsustainable, and indeed the Federal Communications Commission
is moving gradually in the direction of reducing and/or eliminating
such cross subsidies.
For products, like POTS, where elasticities of demand are low and
prices (even if allowed to rise to full cost) are affordable for most
families, the impact of removing such cross subsidies should be
relatively small. Again, however, the analysis is quite different when
one considers the full impact of telecommunications taxes on products
with high elasticities of demand.
Returning again to the example in Table Four above, we have
estimated the impact of current and possible future telecommunications
taxes on the availability of at-home broadband Internet access for
children. As shown in the table, we estimate that, at current tax
rates, between 800,000 and 2.7 million children will be denied such
access over the next three years.
It should also be noted that these figures reflect the average
impact of telecommunications taxes on all customers, assuming all are
equally sensitive to price changes. This assumption is open to
question, in at least two specific ways. First, households with lower
incomes are likely to be more sensitive to changes in
telecommunications prices than those with higher incomes.<SUP>21</SUP>
Thus, telecommunications taxes are likely to deny broadband access to
proportionately more ``poor'' families (and their children) than to the
rich. Second, because the costs of deploying broadband services in
rural areas are higher and rural incomes are lower than the national
average, it is also likely that high telecommunications taxes will have
a greater impact on rural areas than on urban or suburban ones. Thus,
telecommunications taxes contribute directly to the digital divide,
whether it is expressed in terms of geography, income or both.
---------------------------------------------------------------------------
\21\ See, for example, U.S. Department of Commerce, Falling Through
the Net (July 1999), p. 81.
---------------------------------------------------------------------------
Telecom Taxes and Enforceability: As discussed further in the
Appendix, the emerging market for telecommunications services is the
antithesis of a monopoly. As former White House Internet Advisor Ira
Magaziner put it in a recent Progress & Freedom Foundation paper,
``with the Internet and this new environment of convergence, we are
going to have the greatest amount of competition the world has ever
seen.''
The competition now breaking out in the telecommunications
marketplace is of two types. First, it consists of numerous companies
all competing to offer the same product in the same market. Thus,
nearly all U.S. markets now have more than one company offering local
telephone service, and most states have literally dozens of companies--
many of them small and relatively young--offering telephone services in
their states. An obvious implication of this sort of competition for
telecommunications taxes is to increase administrative costs for both
tax collectors and for the companies. And, because such costs are, in
effect, fixed costs of entering new markets, they end up serving as
barriers to entry, thereby reducing economic efficiency.
The second type of competition is even more problematic for tax
authorities: It is competition to offer new and different services,
often through new and different means. It is here that the current tax
regime begins simply to collapse.
When, for example, is a service a ``telecommunications service''?
This used to be a pretty straightforward question: It was a
telecommunications service if it was offered by the phone company. Then
along came wireless (i.e. cellular) telephony. For the most part,
wireless telephony was also treated as a telecommunications service. At
about this same time, AT&T was broken up into its local and long-
distance components. Could the states tax the long distance
(interstate) part of the bill? As it turned out, under a 1989 Supreme
Court decision, they could: Interstate calls were telecommunications
services too.
Once data services are added to the pot, however, the question
becomes far more ambiguous. Is ``Internet access'' a telecommunications
service? The answer, at the moment, is that no one knows for sure.
Indeed, just two weeks ago, on August 25, 1999, the U.S. Court of
Appeals for the District of Columbia granted the FCC's request to
remand an August 1998 order determining that ``advanced''
telecommunications services are either ``telephone exchange'' or
``telephone access'' services.<SUP>22</SUP> In other words, even the
national authority on telecommunications policy--the FCC--isn't sure
what counts as telecommunications anymore.
---------------------------------------------------------------------------
\22\ See Federal Communications Commission, ``Comments Requested in
Connection with Court Remand of August 1998 Advanced Services Order''
(Public Notice, September 9, 1999).
---------------------------------------------------------------------------
In fact, the question of who should pay telecommunications taxes,
and on what tax base, is certain to get more complex before it gets
simpler. For example: <SUP>23</SUP>
---------------------------------------------------------------------------
\23\ The issues described below are illustrative of a vast array of
questions now facing taxing authorities with respect to
telecommunications taxes. For one thoughtful review of such issues, see
Richard McHugh, Sales Taxation of Telecommunications Service in the
State of Utah (Georgia State University School of Policy Studies,
February 1997).
<bullet> When telephone companies bundle Internet Service Provider
services with DSL services, are those services taxable as
telecommunications services? Or are they exempt from taxation
under the moratorium imposed by the Internet Tax Freedom Act?
Perhaps they are taxable only in part. If so, how should taxing
authorities decide where to draw the line?
<bullet> Does the answer to the above question change if the same
service is provided by an Internet Service Provider using DSL
lines leased from a telephone company? (The answer, apparently,
is that it depends what state you are in, as some states in
fact treat the two situations differently while others treat
them the same.)
<bullet> Is broadband Internet access offered by a cable television
company a telecommunications service? What if the service is
offered over telephone lines leased from a phone company? If it
is offered over the cable company's own phone lines?
The list of such questions could go on indefinitely--and, on the
current path, it will, as each of these questions and literally
thousands more will need to be decided by taxing authorities all across
the U.S. It seems unlikely that the decisions they reach will be
consistent with one another, forcing telecommunications providers to
create increasingly complex compliance systems--or, again, to choose
not to enter some markets in order to avoid the administrative burdens
of doing so.
In summary, applying the current, highly complex system of
telecommunications taxes to the new, competitive telecommunications
market will create serious problems of enforceability, imposing high
compliance costs on both tax collectors and companies.
Conclusions and Tentative Policy Implications
The circumstances that made it possible to subject
telecommunications services to a complex system of extremely high tax
rates have changed. In fact, the same traditional tax policy analysis
that suggests that telecommunications taxes were relatively efficient
ways to raise revenue in the pre-competition, pre-Internet environment
strongly suggests that they are quite costly and highly inefficient
today.
Policymakers need to re-examine the panoply of taxes currently
applied to telecommunications with an eye towards both tax
simplification and tax reduction. For states and localities, which
together account for more than three-fourths of all telecom taxes,
there is an urgent need to put such reforms in place at a pace
consistent with the rapid development of the marketplace. In this case,
at least, tax policy needs to be worked on ``on Internet time.''
Appendix:
the changing market for telecommunications
The market for telecommunications has changed dramatically in
recent years. It has changed from a natural monopoly to a competitive
market. It has changed from technologically homogenous and stable
market to one with many competing and rapidly changing technologies.
And, it has changed from a market that followed the overall economy to
one that is, more than any other, leading it.
For most of its history, the telecommunications industry has been
thought of as a natural monopoly and regulated as a traditional public
utility. During the 1970s and 1980s, however, technological progress
began to transform the telecommunications marketplace into one in which
competition was both possible and desirable. In the 1980s, digital
switching technologies first made it economical to interconnect
multiple long distance and wireless carriers to the local switching
system. The results were the breakup of AT&T, the creation of the
cellular telephone industry and the development of competitive markets
for both long distance and wireless telephone services. Local telephone
service, however, continued to be viewed as a natural monopoly and
regulated as a public utility.
By 1996, it was generally agreed that further technological
progress was rapidly making competition possible not only in the long
distance and wireless markets, but also in the market for local
telephone service. Similarly, most policymakers agreed that, thanks
largely to competition from direct satellite broadcasting, the market
for cable television was also becoming competitive. Recognizing these
changes, Congress passed Telecommunications Act of 1996, which ended
rate regulation of cable television and initiated a transition to a
competitive market for local telephone service.
Importantly, the Telecommunications Act also called for an end to
the use of hidden cross subsidies, concealed within regulated prices,
that previously had kept some prices (e.g. rates for basic telephone
services in rural areas) below cost while artificially raising others
(e.g. rates for urban business customers). As Congress correctly
recognized, a precondition for competition was that prices reflect the
actual costs of providing services, and thus that any cross-subsidies
be made explicit.
One phenomenon the Telecommunications Act could not and did not
anticipate was the explosive growth of the Internet and its impact on
the telecommunications network.<SUP>24</SUP> The Internet has resulted
in very rapid growth in the volume of data travelling on the public
switched telephone network, to the point that data traffic will soon
exceed voice traffic. The resulting demand for data transport
(especially for the high-capacity broadband transport needed to
facilitate increasingly rich Internet-based applications and to support
electronic commerce), combined with the competitive framework
established by the Telecommunications Act, has led to an explosive
growth in the number and the types of both telecommunications services
and telecommunications providers.
---------------------------------------------------------------------------
\24\ While growth of the Internet has slowed somewhat since 1995,
it continues to grow by 50 percent or more per year, as measured by the
number of Internet host computers (and faster by some other measures).
See Erran Carmel, Jeffrey A. Eisenach and Thomas M. Lenard. The Digital
Economy Fact Book (Washington: The Progress & Freedom Foundation,
1999).
---------------------------------------------------------------------------
The impact of these changes on the nature of the telecommunications
marketplace is quite profound. As former White House Internet advisor
Ira Magaziner explains in a recent Progress & Freedom Foundation
publication:
With the Internet and this new environment of convergence, we
are going to have the greatest amount of competition the world
has ever seen. We are going to have telecom companies, computer
companies, software companies, satellite companies, wireless
companies, consumer electronics companies, and electric
utilities all competing to build out this infrastructure, and
the best thing we could do is let that competition take place
and not try to regulate it or interfere with it.<SUP>25</SUP>
---------------------------------------------------------------------------
\25\ See Ira Magaziner, ``Creating a Framework for Global
Electronic Commerce,'' Future Insight 6.1, (Washington: The Progress &
Freedom Foundation, July 1999).
---------------------------------------------------------------------------
As Magaziner explains, technological convergence has brought
previously separate sectors of the telecommunications industry into
direct competition with one another. Most notably, the cable industry
has become a major competitor in the market for telecommunications
services of all kinds, especially broadband communications offered
through cable modems.<SUP>26</SUP>
---------------------------------------------------------------------------
\26\ See Barbara Esbin, Internet Over Cable: Defining the Future in
Terms of the Past (Office of Plans and Policy, Federal Communications
Commission) OPP Working Paper No. 30, August 1998. See also
---------------------------------------------------------------------------
These changes are no longer a matter of speculation. Indeed, in the
first paragraph of its recently released restructuring proposal, the
Federal Communications Commission states unequivocally that:
In five years, we expect U.S. communications markets to be
characterized predominantly by vigorous competition that will
greatly reduce the need for direct regulation. The advent of
Internet-based and other new technology-driven communication
services will continue to erode the traditional regulatory
distinctions between different sectors of the communications
industry.<SUP>27</SUP>
---------------------------------------------------------------------------
\27\ A New FCC for the 21st Century (Federal Communications
Commission, August 1999)
---------------------------------------------------------------------------
The third major change--and the one that makes reform of
telecommunications taxes so crucially important--is that the
telecommunications sector has become the catalyst for overall
macroeconomic growth. Indeed, most economists now agree that the
information technology sector of the economy is responsible for a
disproportionate share of American economic growth in recent years.
Testifying before Congress in February 1998, for example, Federal
Reserve Board Chairman Alan Greenspan stated that:
[O]ur nation has been experiencing a higher growth rate of
productivity--output per hour worked--in recent years. The
dramatic improvements in computing power and communications and
information technology appear to have been a major force behind
this beneficial trend.<SUP>28</SUP>
---------------------------------------------------------------------------
\28\ Alan Greenspan, Monetary Policy Testimony and Report to
Congress, February 24, 1998.
---------------------------------------------------------------------------
More recently, the U.S. Department of Commerce has reported that the
information technology sector of the economy (which includes
telecommunications)--though making up less than 10 percent of total
output and employment--is responsible for over 40 percent of growth in
Gross Domestic Product.<SUP>29</SUP>
---------------------------------------------------------------------------
\29\ See U.S. Department of Commerce, The Emerging Digital Economy
II (June 1999).
---------------------------------------------------------------------------
These statistics highlight the importance of constructing a
sensible public policy framework that permits and encourages continued
growth in the telecommunications sector. Obviously, tax policy is an
important part of any such framework. As discussed in the body of this
paper, our current policies are a long way from meeting this standard.
Mr. Tauzin. And just for a couple of minutes to highlight
some of his findings, extraordinary findings. First of all, the
combination of State, Federal, and local taxes since 1986 on
telecommunications services has risen from 10.7 percent now to
17.6 percent. The taxes in many jurisdictions of State,
Federal, and local on telephone talking in America, free speech
society are now higher than the taxes on such so-called sin
products as alcohol and tobacco.
It points out that there are approximately 37 different
types of taxes levied on telecommunications services by State
and local governments alone and that for some cities, for
example, Richmond, Virginia, the rate of local taxation and
city taxation, State taxation, now 35.7 percent of the
telecommunications services. 35.7 percent State and local only,
then you add all of these Federal taxes on top of it.
In short, the study indicates that if there is one thing
that makes it harder for us to provide telecommunications
services to the poorest of Americans, it is because the
government takes out of those services from the get-go in the
form of taxation. And I think it strongly supports the effort
that we are jointly making to reduce taxes on
telecommunications services and at the same time use some of
those taxes, one-third of the 1913, 3 percent telephone tax, to
continue and to hopefully make better a program out of Internet
connection for our children.
So, gentlemen, I want to thank you for your contributions
and I know the leg work that you are doing to try to encourage
other members to pay attention to this one because it is not
only a constitutional problem, Mr. Weller, as you point out,
for the Ways and Means Committee and the Congress, but it is as
many of our witnesses will later tell us, an administration
problem, a policy question. Do we let the FCC run this
education program? Or do we let the educators with the guidance
and advice of our National Telecommunications Agency here in
Washington that tends to follow all the new technologies and
probably can recommend a wireless technology, perhaps over a
wire technology, that may have a better utility for the kids in
the future.
In Baton Rouge on October 11 I will be having a major high-
tech conference. We will introduce there technology that will
put kids on the Internet for $5 a month on television. Analog
television. Not digital. Today, $5 a month. And we will
probably be announcing some pilot programs to make it available
free to eighth graders in several school districts as a pilot
program in their homes just to test it out and see the power of
connecting kids to the Internet without the necessity of many
of the expenditures this program entails.
And so, again I want to thank you and ask if any of our
colleagues have any questions or comments they would like to
make while you are here and to engage you in any kind of
colloquy. Mr. Markey? Any one of you?
Mr. Markey. I thank you so much. This is a very complex
policy area because obviously a huge decision was made back in
the 1930's to create a universal service structure, so that
people from Boston would subsidize people in rural America.
Mr. Tauzin. And we appreciate it.
Mr. Markey. I appreciate that. But the question I would
have to our witnesses is whether or not they would support a
line item that would explain to each ratepayer how much higher
their phone bill is in Boston because they are subsidizing
rural America. And would they also put a line item on--support
a line item for rural America so they would understand how much
lower their bill is that it would be a doubling or tripling or
quadrupling of their phone bill if we pull out those taxes--
using the terminology that the majority is using. They consider
this taxes--that goes in urban America to help out rural
America. Would you support having that as a line item as well?
Mr. Weller. Mr. Markey, I find I represent South Side of
Chicago and the suburbs. I have the neighboring district to my
friend Mr. Rush as well as a lot of rural areas and I think
that the rural areas feel they are subsidizing the folks in the
cities on various issues and so forth.
Mr. Markey. But I just mean in this area of universal
service where there is a phone bill which is used here to
subsidize ensuring that the schools of the poorest communities
especially but all schools qualify, but the poor schools get
this additional funding to hook up, we do the same thing for
farmers. My father was a milkman for the Hood Milk Company and
his phone bill subsidizes wealthy farmers. And should he know
that in--should every American know that the poor city--not the
poor, but the working class city dwellers are subsidizing rural
America and it is right on their phone bill and each year they
are paying all of this extra money so the rural farmer can have
a lower phone bill? Should that be on each, as a line item on
each phone bill?
Mr. Weller. It sounds like it could be a subject of a
potential future hearing but the challenge before us today is
really what type of tax do we use to fund a program which has
bipartisan support and that is providing Internet access
through our local schools and libraries? And I certainly
believe as a member of the Ways and Means Committee that under
our Constitution it is Congress' job to levy a tax. And of
course the issue before us is the case where the FCC levied a
tax without the approval of Congress.
And while we all support Internet access through our local
libraries and schools and that is a goal we all share, the
question is how best can we fund it? And we believe that with
our legislation, the Schools and Libraries Internet Access Act,
the most appropriate thing to do is to earmark an existing tax
that has been in place since 1913, one penny on the dollar will
provide--one-third of that existing tax will provide $1.7
billion, which is actually more than the existing FCC tax. And
perhaps it should be labeled ``the FCC tax on the phone bill''
so that people identify who gave it to them and why it is
unconstitutional.
Mr. Markey. I guess the only point I am trying to make here
is that it would be honest for these subsidies to be on your
bill so that there is just a line saying you are subsidizing
schools and libraries, you are subsidizing rural Americans and
then everyone would know it. It would cause a huge furor, of
course, in urban America if we ever put that on as a line item.
Phone bills are three or four times lower in rural America than
they should be just because of some policy was made of
universal service but just truth in billing and the honesty of
ensuring that people understand the level of subsidies that do
flow through this universal service fund not just to poor
children but also to wealthy farmers, I think would help to
have a good honest debate on this.
Mr. Tancredo. I couldn't disagree with you. I think it
would be fine. I recognize fully well the interesting political
ramifications that may develop out of such honesty on a phone
bill and on a tax policy. But that is exactly why we are here.
And I am suggesting that what we are doing today is dishonest.
I am suggesting that we should be much more forthcoming with
the gentleman from my district and everybody else who receives
a phone bill and is trying to figure out exactly what all of
these taxes are paying for. And I would be more than willing to
explain that directly.
And you know, the fact is that there is a great degree of
cynicism, and we all know that, on the part of the general
public. Tax policies such as the ones that we are here today to
try to address I think only tend to exacerbate that cynicism
that exists on the part of the American public. And a degree of
candor that you suggest might go a long way toward reducing
that. So I have no qualms about that.
Mr. Markey. Can you go along with that, Jerry? To list on--
--
Mrs. Wilson. Will the gentleman yield? Does he have a list
of those wealthy farmers because I am not sure I have met any.
Mr. Markey. I am listening to my father speak. That was his
view of it.
Mrs. Wilson. That is a certain downtown Boston prejudice.
Mr. Weller. In quick response, Mr. Markey and Mr. Chairman,
as Chairman Tauzin pointed out, roughly 35 percent of the cost
of telecommunications today is consumed by taxes imposed at the
local and State level. And then, of course this is an
additional tax imposed at the Federal level. And, of course,
then the 3 percent excise tax that was imposed beginning 1913.
I think it is very helpful that the American people have an
understanding of the high level of tax burden that has been
placed on them. When 40 percent of the average Illinois
family's income is going to government today, that tax burden
is too high, when 21 percent of our gross domestic product is
consumed by the Federal Government. In 1993 it was only about
18 percent. So that tax burden is so high and I think it is
useful that we share with the American people every opportunity
that we identify how high that tax burden is.
Mr. Markey. So you would support this as a line item,
Jerry?
Mr. Weller. It is something that you and I could talk about
some more.
Mr. Markey. Let's have some principles here, Jerry.
Principles.
Mr. Weller. It is a useful discussion.
Mr. Tauzin. I think we need to get your dad in on that
meeting. We have to break for a vote and come back and hear the
next panel. We thank both of you. It has been a very exciting
and useful discussion. Come back after the vote.
[Brief recess.]
Mr. Tauzin. The committee will please come back to order
and our guests will take seats. We are pleased to welcome our
second panel, composed of Mr. Christopher Wright, General
Counsel of the FCC; Mrs. Kelly Levy, Acting Associate
Administrator, Office of Policy Analysis and Development for
the National Telecommunications and Information Administration;
Dr. Lois Gerber, Chairman of the board of National Independent
Private Schools Association; Cheryl Parrino, CEO of the
Universal Service Administrative Company; and Mr. Kent Lassman,
Deputy Director of Technology and Communications for the
Citizens for Sound Economy.
Ladies and gentlemen, thank you for your attendance today.
We welcome your testimony. We have a 5-minute rule. And we have
this incredible marvelous modern technology that we use to time
you, along with eggs, which we cook in the back room. So when
the bell goes off, your 5 minutes is up. We would like you to
know that your written statement is part of the record. You
don't have to read them to us. Please don't. Give us the
highlights in the 5 minutes that you have so that we can get
into a Q and A with you as rapidly as possible.
We will start with Mr. Christopher Wright of the FCC.
STATEMENTS OF CHRISTOPHER J. WRIGHT, GENERAL COUNSEL, FEDERAL
COMMUNICATIONS COMMISSION; KELLY KLEGAR LEVY, ACTING ASSOCIATE
ADMINISTRATOR, OFFICE OF POLICY ANALYSIS AND DEVELOPMENT,
NATIONAL TELECOMMUNICATIONS AND INFORMATION ADMINISTRATION,
U.S. DEPARTMENT OF COMMERCE; LOIS M. GERBER, CHAIRMAN OF THE
BOARD, NATIONAL INDEPENDENT PRIVATE SCHOOLS ASSOCIATION; CHERYL
PARRINO, CEO, UNIVERSAL SERVICE ADMINISTRATIVE COMPANY; AND
KENT LASSMAN, DEPUTY DIRECTOR, TECHNOLOGY AND COMMUNICATIONS,
CITIZENS FOR A SOUND ECONOMY
Mr. Wright. Thank you, Chairman Tauzin. Last December 1 I
had the wonderful opportunity to visit New Orleans for only the
second time in my life and argue the case in the Fifth Circuit,
and there were 10 attacks on the schools and libraries program
and we won nine.
Mr. Tauzin. Which one did you lose?
Mr. Wright. The jurisdictional argument. Cincinnati Bell
claimed that the way that we assessed the amounts was
incorrect, that we should only assess based on interstate
rather than intrastate revenues. It is a decision that is
troubling to us, but has nothing to do with--it has to do with
the relative amounts the different telephone companies pay
rather than anything that is of interest to this committee.
The nine issues on which we prevailed were divided into two
groups. There were four constitutional attacks, all made by
Celpage, and there were five statutory attacks, all made by
GTE. And we won all of the four constitutional attacks in short
order. It was a great range of attacks. The telecom industry is
extraordinarily resourceful and litigious. They claimed the
program violated the origination clause, the taxing clause, the
equal protection clause, and the takings clause. And in light
of your admonition that our testimony is in the record, I will
not go through each one of those except to say that we won each
and every one of those.
GTE's five statutory arguments were, first, that it was
erroneous under the statute to fund internal connections and
Internet access, an issue that the Court gave the most
attention to and certainly found merit in GTE's position,
although it ultimately held that the statute was ambiguous and
the Commission's reading of it was proper and affirmed.
Mr. Tauzin. In fact he did more. He called it sometimes
mysterious section.
Mr. Wright. That is what the Fifth Circuit said, not us.
But I take it that there is really no dispute anymore that
internal connections and Internet access ought to be funded. As
I understand it, your bill would do that in a different way.
The next issue that we won on that the Fifth Circuit gave
some attention to was GTE's argument that only telephone
companies like itself should get money out of the system. That
if a school district wanted to obtain Internet access from a
lower priced provider like AOL they couldn't choose them. The
Fifth Circuit rejected that claim. GTE also argued that we
funded too many telecommunications services. The Fifth Circuit
rejected that claim. And rejected two other GTE claims that I
don't really think warrant attention here.
So it took 3\1/2\ years to get where we are. We completed
our rulemaking on Congress' schedule 15 months after the act
was passed. It took the Court of Appeals more than 2 years
after that to reject these 9 out of 10 challenges. No one
sought rehearing on any of these nine issues. And it is
possible that someone could still raise some in the Supreme
Court. But that would surprise me.
Mr. Tauzin. If I could interrupt you, has there been an
appeal or will there be an appeal to this ruling?
Mr. Wright. Petitions for certiorari in the Supreme Court
are not due until December. The parties haven't shared with me
their plans but it took us 3\1/2\ years to get there. We view
it as now being essentially settled, these key elements. The
danger of disrupting the program that is in place is that the
bill that is proposed would require the Department of Commerce
to hold a rulemaking and I fear that would have the potential
of setting up another round of litigation.
My former colleague and friend, Andy Pincus, who is General
Counsel of the Department of Commerce, would, I guess, then
take over on that. But if that litigation proceeds on the same
schedule we would be in the year 2003 before we get the clarity
we now have.
Thank you.
[The prepared statement of Christopher J. Wright follows:]
Prepared Statement of Christopher J. Wright, General Counsel, Federal
Communications Commission
Mr. Chairman and Members of the Subcommittee: I am pleased to be
here today representing the Federal Communications Commission to
discuss H.R. 1746, the ``Schools and Libraries Internet Access Act.''
The bill would repeal Section 254(h) of the Communications Act, which
authorizes the Commission to provide support to schools and libraries
for the purpose of purchasing telecommunications services, internal
connections, and internet access. The bill would replace Section 254(h)
with a new provision that directs the Secretary of Commerce to
``prescribe such regulations as may be necessary'' to govern the
distribution of funds to schools and libraries to purchase
``telecommunications and related services'' and the ``installation of
equipment . . . essential to permit such school or library to have
access to advanced technologies.'' H.R. 1746, Sec. 5 (adding Section
106(a)(5) to the National Telecommunications and Information
Administration Organization Act).
As general counsel for the Commission, I think it would be most
helpful for me to focus on the relevant provisions of the universal
service decision that the Fifth Circuit issued this past July. See
Texas Office of Public Utility Counsel v. FCC, 183 F.3d 393 (5th Cir.
1999). That decision affirmed the key elements of the Commission's
implementation of Section 254(h), and thus puts to rest many of the
legal questions that have been raised concerning the Commission's
schools and libraries program. The replacement of Section 254 with a
similar provision could lead to delay and uncertainty because the
Commerce Department would first have to issue rules implementing the
new provision and then defend its interpretation in court. Although the
Commission issued its order implementing Section 254(h) exactly 15
months after its enactment, as Congress directed, it took the court of
appeals more than two years to resolve the legal challenges to the
program raised by Celpage, GTE, and Cincinnati Bell. If H.R. 1746 were
adopted tomorrow and a rulemaking and litigation followed on the same
course, it would be 2003 before a court of appeals issued a ruling
resolving the challenges that would almost inevitably follow.
The Fifth Circuit Decision
In most--but not all--respects, the Fifth Circuit upheld the
Commission's May 8, 1997, order implementing the universal service
provisions of the Communications Act.
As relevant here, the court first rejected Celpage's various
arguments that the Commission's schools and libraries program is an
``unconstitutional tax'' or is otherwise unconstitutional. By and
large, the court dispatched these claims summarily. Celpage's principal
argument was that Section 254(h) is a ``Bill for raising Revenue''
within the meaning of the Origination Clause, U.S. Const., art. I,
Sec. 7, cl. 1, and hence unconstitutional because it originated in the
Senate rather than the House of Representatives. The court held that
Celpage's ``Origination Clause claim cannot survive United States v.
Munoz-Flores, 495 U.S. 385, 398 (1990), . . . because `a statute that
creates a particular government program and that raises revenue to
support that program . . . is not a ``Bil[l] for raising Revenue''
within the meaning of the Origination Clause.'' 183 F.3d at 427. The
court dismissed Celpage's claim based on the Taxing Clause, U.S. Const.
art. I, Sec. 8, cl. 1, in a footnote. The court explained that, in
light of the clear nexus between the payments made by
telecommunications carriers under Section 254(d) and the program
supported by Section 254(h), ``the universal service contribution
qualifies as a fee.'' Id. at n. 52.
The court next dismissed Celpage's Equal Protection claim in a
single paragraph, concluding that ``Celpage does not come close'' to
establishing that there is no reasonable relationship between the
contributions telecommunications providers make to the universal
service program and the benefits provided by the program. Id. at 428.
It similarly disposed of Celpage's ``unconvincing takings claim,''
explaining that Celpage had failed to establish any basis for the
claim. Id. As this treatment indicates, the court of appeals was
convinced that the four constitutional challenges to the schools and
libraries program were totally lacking in merit.
The court found more merit to GTE's argument that the Commission
should not have provided support for internet access and internal
connections, but ultimately rejected that argument too. GTE first
argued that Section 254 permitted the Commission to authorize payments
to support telecommunications services only. Thus, in GTE's view, the
program could support ordinary telephone service but not payments for
internet access or the internal connections necessary to obtain
internet access. The court found considerable support for GTE's
contentions, but also found that other evidence supported the
Commission's interpretation of Section 254(h). In particular, the court
noted that Section 254(h)(2) directs the Commission to ``enhance . . .
access to advanced telecommunications and information services,'' which
plainly is something more than ``plain old telephone service.'' In
addition, the court added, ``some of the legislative history implies
that Congress intended for subsection (h) to support internet access.''
Id. at 442. The Fifth Circuit ultimately held that the Act is ambiguous
with respect to this issue. Like the Supreme Court in AT&T v. Iowa
Utilities Board, 119 S. Ct. 721 (1999), it concluded that ``Congress
realizes that many of these ambiguities will be resolved by the FCC
during its implementation of the statue, and we, like the Court,
generally defer to the agency's interpretation.'' Accordingly, the
court ``affirm[ed] those aspects of the Order providing internet
services and internal connections to schools and libraries.'' 183 F.3d
at 443.
The court next rejected in summary fashion GTE's fallback argument
that only telephone companies like itself--and not others, even if they
provided superior service at lower prices--could receive support for
providing internet access and internal connections. The court concluded
that the Commission properly took ``modest steps to ensure that
Congress's instructions on expanding universal service in the form of
internet access and internal connections will not be frustrated by
local monopolies.'' Id. at 444. The court summarily rejected the
argument that the Commission erred by conditioning its support for
funding for intrastate services on the states' establishing discounts
equal to those authorized by the Commission for interstate services.
Id. Similarly, the court found no merit at all to the contention that
the Commission erred by authorizing discounts to schools and libraries
for all commercially available telecommunications services; in GTE's
view, the Commission should have supported only a subset of
telecommunications services. Id. at 445. And the court dismissed in a
footnote the contention that support for internal connections may not
be provided because they are ``goods'' rather than ``services.'' Id. at
441 n.88.
However, the court accepted Cincinnati Bell's argument that the
Commission erred by calculating assessments to the schools and
libraries program on a carriers' intrastate revenues as well as its
interstate revenues. The court acknowledged that the Commission had
given a reasonable reading to Section 254, but gave substantial weight
to Section 152(b), which generally preserves authority over intrastate
telecommunications issues not addressed by federal law to the state
regulatory commissions, and concluded that carriers' assessments should
be based on their interstate revenues only. We filed a petition asking
the en banc court to rehear that issue because the panel's decision
conflicts with the Supreme Court's decision in the Iowa Utilities Board
case, rendered earlier this year. The Court in that case addressed the
``local competition'' provisions of the Communications Act, which are
Sections 251 through 261 of the Act and hence include Section 254. In
our view, the court of appeals failed to heed Justice Scalia's
interpretation of Section 152(b), provided on behalf of the Supreme
Court in that case. Justice Scalia explained that ``the question is not
whether the Federal Government has taken the regulation of local
telecommunications competition away from the States. With regard to the
matters address by the 1996 Act, it unquestionably has.'' 119 S. Ct. at
n. 6. He added that ``[a]fter the 1996 Act, Sec. 152(b) may have less
practical effect. But that is because Congress, by extending the
Communications Act into local competition, has removed a significant
area from the States' exclusive control.'' Id. at n. 8. Other parties
sought rehearing as well--but none on issues relating to the schools
and libraries program. The court of appeals recently denied all of the
petitions for rehearing. There is little doubt that the Supreme Court
will be asked to review some aspects of this decision.
Future Commission Action
The Commission continues to work with the state members of the
Joint Board and other parties to improve its rules regarding universal
service so that the administration is as effective and efficient as
possible, and so that support is set at the right levels and targeted
to the appropriate schools and libraries. For example, the Commission
will review by November 1999 its decision to name Universal Service
Administrative Company (USAC) the permanent Administrator, to ensure
that the support mechanisms are being administered ``in an efficient,
effective, and competitively neutral manner.'' 47 C.F.R.
Sec. 54.701(a). The Commission also has committed to convening the
Joint Board to review the definition of universal service on or before
January 1, 2001. As Congress noted, universal service is an
``evolving'' level of services, and the Commission recognizes that
there is always room for improvement to achieve all of the goals
Congress set forth in section 254.
H.R. 1746: Schools and Libraries Internet Access Act
The Commission was charged by Congress with implementing Section
254, including the provisions that require universal service support
for carriers that provide discounted services to schools and libraries.
It has not been an easy task, and it certainly has not been without
controversy. The Commission is pleased that the Fifth Circuit upheld
most of the agency's decisions regarding the schools and libraries
support mechanism, and that at least the legal challenges to those
decisions have apparently been laid to rest. It took a long time to get
this far--three and a half years after Congress enacted Section 254 and
more than two years since the Commission issued its initial Report and
Order on universal service. But today, the schools and libraries
support mechanism is up and running, and providing benefits to schools
and libraries in every state.
The proposed legislation, H.R. 1746, appears to be consistent with
many of the goals of the schools and libraries and rural health care
support mechanisms set forth in section 254. It seems clear that the
substantive goal--making sure that schools, libraries, and health care
providers have affordable access to telephone and other communications
services--is not being questioned, and that the real debate is how,
administratively, to achieve that goal. However, the proposed bill is
not without ambiguity, and the Commerce Department would need to
resolve that ambiguity in implementing the bill and then in defending
its interpretation in the face of the judicial challenges that are
likely to follow. For example, although it seems reasonably clear that
the provision is designed to provide support for internet access and
internal connections, like the existing program, the bill does not use
those words, but instead speaks of ``telecommunications and related
services.'' Accordingly, opponents of connecting schools to the
internet may raise some of the same objections that they raised to the
Commission's implementation of Section 254(h). Similarly, the bill
speaks of equipment ``essential to permit . . . access to advanced
technologies.'' It is not clear whether the use of the word
``essential'' is meant to require the use of a stricter standard than
is currently employed in reviewing requests by schools and libraries
for internal connections and, if so, what that standard is. Unless
matters such as these are clarified, another round of litigation and
uncertainty may follow.
In light of the Fifth Circuit's decision rejecting the challenges
to the Commission's rules regarding the schools and libraries program,
there is no legal need to modify the current method of administration
in order to provide support to schools and libraries seeking assistance
in obtaining internet connections. Thus, the question before Congress
is a policy decision. Congress must determine whether the benefits of a
different method of administration will outweigh the difficulties that
starting afresh might create. Whatever decision Congress makes with
respect to the administration of universal service, the Commission, of
course, will continue to work diligently to satisfy its
responsibilities.
I would be happy to answer any questions that you and any other
members of the Subcommittee may have.
Mr. Tauzin. Thank you very much, Mr. Wright. And next will
be Kelly Levy, Acting Associate Administrator of the Office of
Policy Analysis, NTIA, of the Department of Commerce. Ms. Levy.
STATEMENT OF KELLY KLEGAR LEVY
Ms. Levy. Thank you, Mr. Chairman. Good morning. On behalf
of the administration, I want to thank you and the other
members of the subcommittee for having me up here today. It is
an honor. Thank you for letting us testify on H.R. 1746, the
Schools and Libraries Internet Access Act.
Mr. Chairman and members of the subcommittee, the
administration shares your goal of providing advanced
telecommunications services to schools and libraries. Both
President Clinton and Vice President Gore have made connecting
schools and libraries to the Nation's information
infrastructure one of their highest priorities. As the
President stated, until every child has a computer in the
classroom and the skills to use it, until every student can tap
the enormous resources of the Internet, until every high-tech
company can find the skilled workers to fill high-wage jobs,
America will miss the full promise of the Information Age.
The administration strongly supported section 254(h) of the
Telecommunications Act of 1996, which established the E-Rate
program as part of the overall universal service fund. And the
administration has supported full funding of that program.
Today, the E-Rate program is helping to connect schools and
libraries at a very rapid pace. For instance in the first year
of the program, over 640,000 classrooms were connected to the
Internet. Importantly, the E-Rate program gives priority
funding to poor and rural schools and libraries. Mr. Chairman,
NTIA shares your concern that the schools and libraries program
be administered expertly, efficiently and impartially. However,
we see no need for new legislation to change the E-Rate program
in order to bring the full promise of the Information Age to
our children.
Congressional oversight, including input from the House
Commerce Committee, and a two-tiered auditing process have
helped to ensure that the Universal Service Administrative
Company, USAC, is running the E-Rate program efficiently and
that schools and libraries are using E-Rate money to fund only
eligible services.
H.R. 1746, the Schools and Libraries Internet Access Act,
would establish NTIA as the administrator of the universal
service program for schools and libraries as well as health
care providers. NTIA believes that it is premature to consider
such a drastic measure. First, we believe that the third-party
nongovernmental entities have a commendable performance record
in this regard. While the USAC may have experienced some
startup difficulties, we believe that it has taken the
appropriate corrective actions.
Second, in the competitive environment, many believe that
the fund administrator must not advocate telecommunications
policy positions, a role that would be incongruous with NTIA's
existing statutory mandate.
Third, as fund administrator, NTIA would incur large
startup costs, costs that have already been incurred by the
USAC. In its current operating mode, NTIA does not possess the
resources or the infrastructure to run the proposed E-Rate
program. In addition, last year the administration, through a
letter from the Office Management and Budget to Chairman Tauzin
as well as to Senator Burns, also raised significant budget
issues on similar legislation that was before this subcommittee
last year.
Finally, our greatest concern is that any fundamental
change in the administration of the E-Rate program will delay
and even forfeit opportunities for our children.
In conclusion, as Secretary of Commerce William Daley has
stated: Tomorrow's economy will demand technological literacy.
The E-Rate program is an important step to ensure that our
economy grows strongly and that in the future no one is left
behind.
Thank you again for the opportunity to testify and I am
pleased to answer any questions you may have.
[The prepared statement of Kelly Klegar Levy follows:]
Prepared Statement of Kelly Klegar Levy, Acting Associate
Administrator, Office of Policy Analysis and Development, National
Telecommunications and Information Administration, U.S. Department of
Commerce
Mr. Chairman and Members of the Subcommittee: Thank you for this
opportunity to testify this morning, setting forth the views of the
National Telecommunications and Information Administration (NTIA) with
respect to H.R. 1746, the Schools and Libraries Internet Access Act.
NTIA serves as a principal adviser to the President, Vice President,
and Secretary of Commerce on domestic and international
telecommunications and information policy issues and has been an active
participant in the schools and libraries support process.
The Administration shares your goal of providing advanced
telecommunications services to schools and libraries. Both President
Clinton and Vice President Gore have made connecting schools and
libraries to the nation's information infrastructure one of their
highest priorities. The importance of enabling schools, including
classrooms, and libraries to access the Internet, in conjunction with
an integrated, well-developed curriculum, cannot be overstated. As the
President stated: ``Until every child has a computer in the classroom
and the skills to use it . . . until every student can tap the enormous
resources of the Internet . . . until every high-tech company can find
skilled workers to fill its high-wage jobs . . . America will miss the
full promise of the Information Age.'' Once viewed with curiosity, the
information revolution has brought fundamental changes to the fabric of
society and to the foundations of the emerging global economy.
In June 1999, the Department of Commerce released The Emerging
Digital Economy II, a report that demonstrated the increasingly pivotal
role that information technologies play in our economy and the dramatic
growth of electronic commerce. In July 1999, the Department of Commerce
released Falling Through the Net: Defining the Digital Divide, a report
examining which American households have access to key information
tools--telephones, computers, and the Internet--and which do not.
Overall, we found that more Americans than ever before own computers
and are online. At the end of 1998, over 40 percent of American
households owned computers, and almost one-quarter of all households
had Internet access.
Yet, Falling Through the Net also documented that there remains a
significant digital divide separating American information ``haves''
and ``have nots.'' Indeed, in many instances, the digital divide has
widened in the last year. Certain minorities, low-income persons, the
less educated, and children of single-parent households, particularly
when they reside in rural areas or central cities, are among the groups
that lack access to information resources. Because access to computers
and the Internet is increasingly critical to successful participation
in our digital economy, we need to ensure that everyone has access to
these technologies.
One of the interesting findings of Falling Through the Net is that
community access centers--such as schools, libraries, and other public
access points--are particularly well used by those groups that lack
access at home or at work. For example, Hispanics and American Indians/
Eskimos/Aleuts are especially likely to use schools for access if they
live in rural areas. Households with incomes less than $25,000, those
with less than a high-school education, those in female-headed
households, and American Indian/Eskimos, Aleuts, Blacks, and Hispanics
who have low Internet access rates at home are relying with a great
deal of frequency on public libraries for access to the Internet.
Thus, the Falling Through the Net data underscore the importance of
efforts by Congress, as well as the Administration, to ensure that all
schools and libraries have affordable access to the Internet on
sustained basis. The Administration strongly supported Section 254(h)
of the Telecommunications Act of 1996, which established the E-rate
program as part of the overall Universal Service Fund. And the
Administration has supported full funding of that program. Under the E-
rate program, telecommunications carriers are providing eligible
schools and libraries with a discounted rate for telecommunications
services, internal connections among classrooms, and Internet access.
As a result, the E-rate program is helping to connect schools and
libraries at a very rapid pace. In the first year of the program,
640,000 classrooms were connected to the Internet. This year, $2.25
billion is available to connect an expected 528,000 additional
classrooms. Eighty percent of public schools and fifty percent of
public libraries participate in the E-rate program. Importantly, the E-
rate program gives priority for funding to poor and rural schools and
libraries.
Moreover, the E-rate monies are proving to be a catalyst for other
efforts to connect schools and libraries to online resources. Many
states and communities are combining the Federal E-rate funds with
state and/or private sector money to address access problems. In
Louisiana, for example, $500,000 in E-rate funding received by the
State Library of Louisiana combined with $2 million in state funding
and $7 million from the Gates Library Foundation will enable the state
library to provide Internet access and computers for every library in
the state. While just three years ago many parts of Louisiana were
entirely cut off from the Internet, now every library in the state has
computers and Internet access, which are available for free to all 4.3
million residents.
The American public joins us in strongly supporting the E-rate
program. As information technology becomes increasingly important in
our global economy, Americans have come to overwhelmingly support the
need for computers in our nation's classrooms and libraries. A non-
partisan poll commissioned by EdLiNC found that 87 percent of
respondents support the mission of the E-rate program. The public's
support of the E-rate program is echoed by parent and teacher groups,
library organizations, high-tech companies, many telecommunications
providers, and civil rights groups.
On July 30, 1999, the Fifth Circuit Court upheld the structure of
the E-rate program, including coverage for Internet access and
connections to the classroom as well as telecommunications services,
and upheld the Federal Communications Commission's authority to target
discount levels to the schools and libraries with greatest needs. Now
with the court case behind us, we hope that this program can achieve
its full potential.
Mr. Chairman, NTIA shares your concern that the schools and
libraries program be administered expertly, efficiently, and
impartially. However, we see no need for new legislation to change the
E-rate program in order to bring the full promise of the Information
Age to our children. Congressional oversight, including input from the
House Commerce Committee, and a two-tiered auditing process have helped
to ensure that the Universal Service Administrative Company (USAC) is
running the E-rate program efficiently, and that schools and libraries
are using E-rate money to fund only eligible services. Moreover, the E-
rate program is part of Universal Service--a program that, for the vast
majority of Americans, has worked well for over 60 years.
H.R. 1746, the Schools and Libraries Internet Access Act, would
establish NTIA as the administrator of the universal service program
for schools and libraries as well as rural health care providers. NTIA
believes that it is premature to consider such a drastic measure.
First, we believe that third-party, non-governmental entities have a
commendable performance record in this regard. While the USAC may have
experienced some start-up difficulties, we believe that they have taken
the appropriate corrective actions. More time is needed to allow the
system to work. Second, in the new competitive environment, many
believe that the fund administrator must not advocate
telecommunications policy positions, a role that would be totally
antithetical to, and incongruous with, NTIA's existing statutory
mandate. Third, as fund administrator, NTIA would incur large start-up
costs--costs that have already been incurred by the USAC. In its
current operating mode, NTIA does not possess the resources or
infrastructure to run the proposed E-rate grant program. While we feel
confident that we could administer the fund on an impartial basis and
do so in an accountable manner, these factors would not offset the
above disadvantages. In addition, the Administration, through a letter
from the Office of Management and Budget to Chairman Tauzin, as well as
to Senator Burns, also raised significant budget issues on similar
legislation before this subcommittee last year.
Aside from these issues, our greatest concern is that any
fundamental change in the administration of the E-rate program will
delay and forfeit opportunities for our children. Delay denies students
and teachers access to information and telecommunications technologies
and their benefits. Research shows that technology can enhance learning
opportunity and achievement, increase student motivation to learn, help
students acquire essential workplace skills, improve professional
development for teachers, and enable students to access high-quality
education regardless of time or place. As Vice President Gore has
noted, ``[f]or the very first time in our history, it is now possible
for a child in the most isolated inner-city neighborhood or rural
community to have access to the same world of knowledge at the same
instant as the child in the most affluent suburb.''
Another recent Commerce Department report, The Digital Work Force:
Building Infotech Skills at the Speed of Innovation, stresses the
importance of expeditiously meeting the burgeoning demand for a highly-
skilled labor force. In testimony before the Congressional Joint
Economic Committee, such notables as Federal Reserve Board Chairman
Alan Greenspan, Bill Gates, and many other leaders from the technology
industry have testified not only that technology has played a leading
role in building and strengthening our economy but also that the
foundation for this growth is a quality education for every student. If
students--and others--cannot obtain the high-tech skills and ready
access to information that is critical for success in the emerging
digital economy, then our nation's ability to compete and prosper will
be put at risk. Particularly hard hit would be students at the
disadvantaged schools and libraries--those in low-income, rural, or
inner-city areas who likely would have to do without Internet access
unless universal service support is made available.
As Secretary of Commerce William Daley has noted, ``[t]omorrow's
economy will demand technological literacy--the E-rate is an important
step to ensure that our economy grows strongly and that in the future
no one is left behind.'' During its evolution, the E-rate program has
already demonstrated its value, and the Administration continues its
strong support for the existing program and its goals. Thank you again
for the opportunity to testify.
Mr. Tauzin. Thank you very much. Next will be Dr. Lois
Gerber, Chairman of the Board of the National Independent
Private Schools Association.
STATEMENT OF LOIS M. GERBER
Ms. Gerber. Thank you, Mr. Chairman. You know it is a real
challenge for an educator to have 5 minutes but I will do the
best I can.
The organization that I represent is fast becoming a
minority in this group, and you, yourself, have said that you
wish not to establish or leave out or make another minority.
But, unfortunately, Schools and Libraries Internet Access Act
is using as definition what the Elementary and Secondary Act of
1965 described as ``school.''
Now, many of you perhaps were not as old as I am and you
don't remember that act but that act was developed on child
benefit and we have talked this morning and we have heard about
child benefit. I have heard all children, every school.
Unfortunately, there are a group of children, 50,000 which
I represent and probably 100,000 more out there, that are being
eliminated because you are using the Child Benefit Act
description of schools that the regulators then took that act
and described what a school was. A school according to the
Department of Education in America is a public school, a
nonprofit school or a parochial school.
In 1965, there were very few taxpaying schools in this
country. Most of them were vocational. However, since then we
all know life in the world has changed and so has the world of
education. We now have a viable organization that I represent
that are all taxpaying academic schools.
Most of us are family owned businesses but we have
multischools and corporations also. Most of us are nonselective
in the type of children that we put into our schools. 30
percent of us have learning disabled children, physically
challenged children. Our school particularly, the one that my
husband and I own, have mentally challenged children. And we
take children--we give millions of dollars a year in
scholarships to disadvantaged children because the only thing
that our schools offer is education. We do not have any reason
for a parent to come to our school except for the product of
education.
It is our job to keep that level of product at a point that
they can afford. Everything we do in our schools are tuition
driven. And yet on the other end we have chosen to take this
financial risk to prove that education can work, that we can
serve the children that wish to come, and yet we pay millions
of dollars in property taxes, sales taxes and corporate taxes
and get nothing in return.
Now, this is an interesting position for me to be in
because usually when I come up on the Hill and Members of
Congress ask me what we want I keep saying we really don't want
anything, please don't bother us. But in this case we do. We
want the definition of what a school in America is to change.
We want you to realize that if you keep that definition in the
Schools and Libraries Internet Access Act, you are literally
disenfranchising our children. What we are asking for is for
them to have it. We are not asking for a business advantage but
we are asking help to provide for our children those services
that all other children in all schools are being provided.
You see by keeping that definition, it infers all nonprofit
schools are good and anything else is not good. And yet the
Immigration and Naturalization Service has said that they
accept accredited schools as schools able to not have to go
through a curriculum review in order to give student visas. Our
accreditation has been accepted and approved and scrutinized by
the National Council for Private School Accreditation. We are
working in a partnership with all the regional organizations to
form the International Academy of School Accreditors.
My point is this, that accreditation and viable
accreditation is a much better way to say whether a school is
viable than to lump them into nonprofit or for-profit schools.
Secretary Riley said this, he said it in 1996 when he said the
administration's goal was for all children to have access.
Well, all we would like to say is that there are no nonprofit
and for-profit children in this country to educate. We all
educate children and our children do not want to become the
next educational minority of this country. Thank you and I
would love to answer any questions.
[The prepared statement of Lois M. Gerber follows:]
Prepared Statement of Lois M. Gerber, Chairman of the Board, National
Independent Private Schools Association
Thank you Mr. Chairman and Members of the Committee. As Chairman of
the Board of the National Independent Private Schools Association.
Commonly known as NIPSA and Co-owner and Co Director of Bradenton
Academy in Bradenton Florida. It is my pleasure to be here today to
discuss with you an inequity in the proposed legislation. That is the
inclusion of schools, but only those as defined in the Elementary and
Secondary Appropriation bill.
The time has come in America that we begin to look at our
definition of schools public and private. Although public schools have
become the primary source of education in the United States, it was not
always that way. In fact, the first schools in the United States were
privately owned. Our founding Fathers relied on free enterprise to
educate the youth of their new nation. Almost 200 years later, The
National Independent Private Schools Association (NIPSA) was founded to
represent the virtues of educational choice and high academic
standards. All NIPSA members are private, tax-paying, academic, non-
religiously affiliated independent institutions located in both urban
and suburban areas throughout the country. These elementary and
secondary schools are run by proprietors who believe strongly that
education can be made better and they are willing to assume all the
financial and operating risks associated with running a private school.
These dedicated educators have met this challenge while maintaining the
highest education standards. In the process of doing this, NIPSA
members have also kept the doors open to all children. Many of our
members have made significant contributions to public education at
earlier stages in their careers, ie. Some have been superintendent of
schools and administrators.
Mr. Chairman and Members of this distinguished Committee, I
respectfully ask that you review today: Section 106.6A DEFINITION--For
purposes of this section: (A) ELEMENTARY AND SECONDARY SCHOOLS--The
terms `elementary and `secondary school' have the same meanings given
those terms in paragraphs (14) and (25), respectively, of section 14101
of the Elementary and Secondary Education Act of 1965.
The Elementary and Secondary Education Act of 1965 was funded on
the basis of ``child benefit''. It was when the regulators wrote the
rules that we began this stipulation of funding only public and non-
profit schools. If you continue on the premise that you are funding
education on ``Child Benefit'' but by definition of the regulators, you
have excluded 50,00 children in NIPSA and probably another 100,000 that
are in unaffiliated schools. This is an unintentional oversight but an
oversight just as well.
Let me explain the logic of why NIPSA children should be included
in this Act cited as ``Schools and Libraries Internet Access Act''.
There are four significant traits of all NIPSA Member Schools:
<bullet> Accreditation--All member schools undergo a stringent NIPSA
accreditation process which has been reviewed and accepted by
the National Council for Private School Accreditation;
<bullet> Accountability--Teachers and staff gladly understand that if
their school does not provide a quality education for students,
the school will be forced to close its doors. Parents simply
will not continue sending their children to NIPSA schools;
<bullet> Financial management expertise--In order to remain viable,
NIPSA schools have learned proper budgeting, inventory control,
regulation of administrative costs, and prudent purchasing
strategies;
<bullet> Emphasis on children--All NIPSA schools are singularly focused
on building students not administrative organizations-
administrative staff is kept to a minimum, classroom size is
kept small, decisions are made on-site.
NOIPSA schools are, in essence, true educational schools of choice,
with a sole funding source-parents. We receive no federal funds,
endowments, foundation funds or donations. Our schools are held to the
highest accountability standards because, in a free market, schools
that deliver a quality educational product at an affordable price
become successful schools while schools that deliver poor educational
results go out of business.
NIPSA schools provide before and after-school care, summer
programs, scholarships for disadvantaged children, and most importantly
many are dedicated to educating that segment of the school population
that has been termed as ``high-risk''. Thirty percent of our schools
enroll children with learning disabilities, one percent have physically
challenged youngsters, and ninety-five percent have programs for gifted
learners.
Perhaps one of the most important factors to consider is that NIPSA
schools are tax paying schools. We contribute to the tax base of this
country that is contributing these grants to schools that are public or
non-profit. Our schools pay property taxes, sales taxes and millions in
corporate income taxes. There should be some benefit for our students.
We are not asking for help in managing our business or in any area that
would give us a business advantage. It is difficult enough, to provide
quality education, professional staff and all of the necessary
materials plus housing for students when the income for all of this is
tuition driven. We are dedicated to continuing this however we wish to
provide our students with the library and internet access at a
reasonable educational fee, not a commercial rate.
Finally, let me quote Secretary of Education Richard Riley.
Speaking at a teleconference in San Diego in 1996 , he noted that
schools and libraries were already making big investments in
technology. He reminded Reed Hundt , the chairman of the FCC, that
under the administration proposal, ALL k-12 schools public and private
and parochial schools, as well as public libraries, would receive a
basic package of services for free. He closed by reminding the board
further that, ``The proposal advances the long-standing American
tradition of providing free education and free access to libraries to
EVERY AMERICAN CHILD''.
I respectfully submit to this distinguished Committee that America
does not have nonprofit children and for profit children. We have
children to educate. Thank you for your consideration.
Mr. Tauzin. Thank you very much. Next Ms. Cheryl Parrino,
the CEO of the USAC corporation. Ms. Parrino.
STATEMENT OF CHERYL PARRINO
Ms. Parrino. Good morning. It is a pleasure to be here with
you today representing the Universal Service Administrative
Company and to share with you a bit of information about the
administration and our work of administering the four funds
that were established by the FCC in response to the Telecom Act
of 1996.
As you recall, Congress authorized four universal service
programs, the High Cost Program, Low-Income, Rural Health Care,
and Schools and Libraries. USAC is charged with administering
all four of those programs.
The High Cost Program that was mentioned earlier today by
Congressman Markey provides support primarily to high cost
areas, rural areas of this country, and we fund those entities
to the tune of about $1.7 billion on an annual basis.
Attachment A to my testimony provides you information for
each of the parts of that program on a State-by-State basis,
how much money is distributed across the country under the High
Cost Program.
We also administer the Low-Income Program which provides
opportunities or subsidies for low-income customers to be able
to hook up to the telephone and help buy down their monthly
rates. About 5 million customers across the United States have
taken advantage of that program in 1998 and we have funded
those customers to the tune of about $500 million.
Attachment B, again State by State for each component of
the program, it gives you information on how much money has
been distributed in 1998 for the Low-Income Program.
The third program is the Rural Health Care Program, which
provides subsidies to buy down the difference between the rural
and urban rate so that rural health care providers can use
technology to provide health services to rural parts of this
country. To the extent that the High Cost Program has been very
successful in balancing or equalizing the rates between urban
and rural places in this country, that has minimized the impact
of that program. But in the first year we had an indication of
interest from about 2,800 rural health care providers. About
600 of those have filed complete applications and to date we
have funded about $1 million to 170 eligible rural health care
providers in 34 States. Attachment C provides you with the same
sort of information as the previous attachments for that
program.
Last but not least, the Schools and Library Program, which
is the primary subject of this hearing today, is also
administered by USAC. In the first year we received more than
30,000 applications. We supported 25,785 applicants
representing public and private schools and public libraries up
to the FCC cap of $1.9 billion for the first 18 months of the
program.
Again, attachment D provides you information for the
Schools and Libraries Program.
In year two we have received 32,000 applications and we
will fund up to the FCC cap of $2.25 billion.
As you well know, USAC's mandate is a very narrow one. We
have been charged with administering the four universal service
programs I have described. USAC charter from the FCC strictly
limits our role. USAC cannot and does not establish policy or
advocate any position before the FCC or Congress. Over the past
2 years we have hired independent auditors Price Waterhouse
Coopers and Deloitte Touche to assist us in designing efficient
operating procedures for the new programs. Each of these firms
have attested that our procedures are efficient and suitable,
designed to prevent or detect any material departures from
program objectives.
We have also been given a clean bill of health by Arthur
Andersen in our 1998 financial and operational audits. At
direction of Senator McCain, the General Accounting Office
reviewed the procedures of the Schools and Libraries Division
and observed in their July 16 testimony that the Schools and
Libraries Division has made substantial progress in
establishing an operational framework for the program that is
consistent with the relevant FCC orders.
I thank you. Again I would like to highlight that I am not
able to, given my narrow charge, I am not able to comment on
your bill, but I would be happy to answer any questions you may
have about the program.
[The prepared statement of Cheryl Parrino follows:]
Prepared Statement of Cheryl Parrino, Chief Executive Officer,
Universal Service Administrative Company
Good morning, Mr. Chairman and Members of the Committee. It is my
privilege to be here today to speak to you about the Universal Service
Administrative Company (referred to as USAC) and our administration of
the universal service programs as established by the FCC as a result of
the Telecommunications Act of 1996.
As you will recall, Congress authorized four universal service
programs: the High Cost Program, the Low Income Program, the Schools
and Libraries Program, and the Rural Health Care Program. I would like
to very briefly describe the programs as they exist today and provide
you with information concerning the benefits that are being provided.
The High Cost Program provides support to Eligible
Telecommunications Carriers (companies) who deliver basic ``core''
telephone service to customers in areas of the country that are more
costly to serve. There are three parts of the High Cost program which
help companies deliver telephone service to all Americans. The High
Cost Loop portion covers the cost of the last mile to the customer if
it is 115% greater than the national average, the Local Switching
Support portion of the fund covers switching costs for small companies
that serve less than 50,000 customers, and the Long Term Support
portion helps offset access charge rates charged by small and
predominately rural companies. In 1998, USAC provided approximately
$1.7 billion in High Cost support. Attachment A provides detail for
each state, each portion of the program and the total high cost funding
for 1998.
The Low Income Program helps make telephone service more affordable
for low-income consumers through two national programs, Lifeline and
Link-Up. Approximately 5 million customers have taken advantage of this
program. The Lifeline program helps to offset the monthly bill and the
Link-Up program helps to offset the one-time hookup or connection
charge. The program will also pay for the cost of toll blocking which
helps the customer control the phone bill. In 1998, USAC provided
approximately $465 million in Low Income Universal Service support to
Eligible Telecommunications Carriers to offset charges on low-income
consumers' bills. Attachment B provides detail for each state, each
portion of the program and the total low income funding for 1998.
The Rural Health Care Program provides support to rural health care
providers to ensure that they pay no more than their urban counterparts
for telecommunications services. Support applies to monthly
telecommunications service charges, installation charges, and long
distance charges for access to the Internet. During the first year of
the program, 2835 rural health care providers indicated an interest in
the program and 616 submitted applications for support. To date almost
$1 million has been committed to 170 eligible rural health care
providers in 34 states. The Rural Health Care Division continues to
process Year 1 applications. Attachment C provides a summary of the
funds committed thus far for Year 1.
Finally, the Schools and Libraries Program (commonly referred to as
the E-Rate) helps provide affordable access to telecommunications
services for all eligible schools and libraries, particularly those in
rural and economically disadvantaged areas. The program provides
discounts of 20% to 90% on telecommunications services, Internet access
and internal connections. The level of discounts that schools and
libraries are eligible to receive depends on economic need and
location, rural or urban. More than 30,000 applications were received
during the first year of the program. Support was provided to 25,785
applicants representing public and private schools and public libraries
up to the FCC cap of $1.9 billion for the first 18 months of the
program. For your reference, Attachment D provides a summary of the
funding commitments that were made for Year 1. In Year 2 we have
received 32,000 applications. USAC will fund eligible requests up to
the $2.25 billion cap established by the FCC.
USAC's mandate is a narrow one. We have been charged with
administering the four universal service programs I have briefly
described. The USAC charter from the FCC strictly limits our role. USAC
cannot and does not establish policy or advocate any position before
the FCC or Congress. Since its creation in September of 1997, USAC has
worked hard to increase its efficiency and effectiveness. On January 1,
1999, as ordered by the FCC, the Rural Health Care Corporation and the
Schools and Libraries Corporation merged into USAC. The merger has
resulted in an initial savings of 10%. We continue to look for
efficiencies and additional opportunities for streamlining.
In summary, USAC has worked diligently to ensure that the programs
are administered in accordance with the rules promulgated by the
Federal Communications Commission. As the administrator of these
programs, USAC has no authority to advocate policy and therefore I
cannot take a position on HR 1746. I would however be pleased to
respond to any questions you may have about the programs or USAC.
Attachment A
Universal Service Administrative Company High Cost Program
Total Projected Support Payments for 1998 by State
----------------------------------------------------------------------------------------------------------------
Universal Long Term Local Switching
State or Jurisdiction Service Fund Support Support Total Support
----------------------------------------------------------------------------------------------------------------
ALABAMA................................. $21,947,616 $6,812,558 $10,153,266 $38,913,440
ALASKA.................................. $31,963,777 $16,287,535 $14,909,157 $63,160,470
ARIZONA................................. $19,492,163 $2,996,004 $7,785,833 $30,274,001
ARKANSAS................................ $46,089,633 $14,974,038 $9,584,889 $70,648,560
CALIFORNIA.............................. $28,886,748 $15,252,293 $8,255,564 $52,394,605
COLORADO................................ $29,084,089 $12,480,408 $4,354,619 $45,919,116
CONNECTICUT............................. $0 $173,885 $1,229,387 $1,403,271
DELAWARE................................ $0 $0 $0 $0
DISTRICT OF COLUMBIA.................... $0 $0 $0 $0
FLORIDA................................. $11,300,827 $6,216,006 $4,622,852 $22,139,686
GEORGIA................................. $41,660,333 $17,469,442 $12,673,651 $71,803,426
GUAM.................................... $0 $1,036,397 $0 $1,036,397
HAWAII.................................. $0 $253,710 $645,216 $898,926
IDAHO................................... $19,505,787 $2,651,783 $6,406,782 $28,564,351
ILLINOIS................................ $5,717,032 $5,260,687 $11,745,592 $22,723,310
INDIANA................................. $2,922,762 $5,051,789 $8,062,461 $16,037,012
IOWA.................................... $5,682,281 $7,444,862 $16,926,049 $29,053,192
KANSAS.................................. $36,263,126 $9,228,572 $12,687,975 $58,179,674
KENTUCKY................................ $14,146,447 $5,274,410 $5,764,233 $25,185,091
LOUISIANA............................... $41,626,484 $17,112,419 $8,025,003 $66,763,905
MAINE................................... $5,142,391 $5,566,003 $6,145,029 $16,853,424
MARYLAND................................ $0 $93,174 $497,916 $591,089
MASSACHUSETTS........................... $6,686 $89,836 $270,257 $366,779
MICHIGAN................................ $13,982,051 $8,628,866 $10,042,616 $32,653,533
MINNESOTA............................... $8,924,455 $11,401,747 $18,068,447 $38,394,648
MISSISSIPPI............................. $18,338,576 $4,903,515 $4,226,669 $27,468,760
MISSOURI................................ $29,578,017 $10,545,430 $9,463,755 $49,587,202
MONTANA................................. $23,467,678 $9,989,579 $9,693,921 $43,151,178
NEBRASKA................................ $6,281,317 $3,723,244 $10,408,820 $20,413,381
NEVADA.................................. $3,252,723 $1,029,177 $4,789,246 $9,071,146
NEW HAMPSHIRE........................... $2,473,619 $1,583,426 $4,873,081 $8,930,126
NEW JERSEY.............................. $2,012,385 $0 $1,097,875 $3,110,260
NEW MEXICO.............................. $19,260,613 $5,929,144 $9,278,954 $34,468,711
NEW YORK................................ $10,664,865 $7,008,888 $18,238,267 $35,912,019
NORTH CAROLINA.......................... $21,836,970 $13,015,756 $6,240,669 $41,093,395
NORTH DAKOTA............................ $5,074,893 $5,440,606 $11,023,045 $21,538,543
NORTHERN MARIANA ISLANDS................ $3,601,484 $0 $1,332,414 $4,933,899
OHIO.................................... $4,476,642 $5,189,569 $5,023,827 $14,690,038
OKLAHOMA................................ $27,353,330 $15,826,197 $15,833,411 $69,012,937
OREGON.................................. $18,563,458 $10,471,338 $7,584,140 $36,618,937
PENNSYLVANIA............................ $1,383,836 $14,037,268 $8,771,332 $24,192,436
PUERTO RICO............................. $48,786,061 $93,890,023 $0 $142,676,084
RHODE ISLNND............................ $0 $0 $0 $0
SOUTH CAROLINA.......................... $23,680,509 $9,971,023 $12,919,526 $46,571,058
SOUTH DAKOTA............................ $3,160,201 $4,331,610 $10,412,199 $17,904,010
TENNESSEE............................... $8,152,076 $9,452,075 $10,515,599 $28,119,750
TEXAS................................... $75,837,949 $29,658,890 $19,282,803 $124,799,642
UTAH.................................... $2,981,619 $1,268,015 $4,761,353 $9,010,987
VERMONT................................. $4,144,186 $3,291,398 $4,766,929 $12,202,512
VIRGIN ISLANDS.......................... $11,315,559 $4,935,577 $0 $16,251,136
VIRGINIA................................ $4,780,376 $3,348,990 $5,225,657 $13,355,023
WASHNGTON............................... $23,442,891 $12,470,927 $6,955,915 $42,869,733
WEST VIRGINIA........................... $17,173,230 $1,069,241 $3,064,611 $21,307,082
WISCONSIN............................... $13,108,671 $13,716,424 $24,465,366 $51,290,461
WYOMING................................. $22,501,742 $4,082,462 $4,528,568 $21,112,772
INDUSTRY................................ $831,030,165 $471,936,214 $412,634,743 $1,715,601,122
----------------------------------------------------------------------------------------------------------------
Attachment B
Universal Service Administrative Company Schedule of Low Income Program Dollars
January-December 1998
--------------------------------------------------------------------------------------------------------------------------------------------------------
State or Jurisdiction Lifeline Linkup TLS PICC Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
ALABAMA............................................................ $1,416,925 $37,716 $2,119 $16,305 1,473,065
ALASKA............................................................. 188,578 17,367 14,584 60 220,589
AMERICAN SOMOA..................................................... 8,167 3,660 0 0 11,827
ARIZONA............................................................ 1,100,289 12,446 13,621 1,035 1,127,391
ARKANSAS........................................................... 579,799 141,989 2,837 4,832 729,457
CALIFORNIA......................................................... 243,424,958 28,644,537 1,938,526 1,259,338 275,267,359
COLORADO........................................................... 1,830,137 44,217 18,578 8,345 1,901,277
CONNECTICUT........................................................ 3,611,946 201,089 27,447 21,318 3,861,800
DELAWARE........................................................... 23,198 2,376 0 0 25,574
DISTRICT OF COLUMBIA............................................... 0 0 0 0 0
FLORIDA............................................................ 10,035,286 196,450 9,789 70,479 10,312,004
GEORGIA............................................................ 6,129,291 204,596 8,052 49,896 6,391,835
GUAM............................................................... 18,061 3,521 0 0 21,582
HAWAII............................................................. 551,000 34,784 0 150 585,934
IDAHO.............................................................. 567,496 11,509 3,877 1,000 583,882
ILLINOIS........................................................... 1,832,182 317,772 995 17,291 2,168,240
INDIANA............................................................ 782,948 103,698 1,527 9,888 898,061
IOWA............................................................... 146,995 28,639 10,959 1,815 188,408
KANSAS............................................................. 336,607 26,737 993 1,822 366,159
KENTUCKY........................................................... 304,340 143,819 4,200 5,307 457,666
LOUISIANA.......................................................... 366,692 73,810 1,433 10,857 452,792
MANE............................................................... 5,284,914 476,938 19,660 19,402 5,800,914
MARYLAND........................................................... 319,809 0 0 0 319,809
MASSACHUSETTS...................................................... 13,572,243 108,720 0 55,882 13,736,845
MICHIGAN........................................................... 9,676,719 384,007 8,773 73,502 10,143,001
MINNESOTA.......................................................... 3,505,814 15,793 3,233 932 3,525,772
MISSISSIPPI........................................................ 876,569 38,181 1,234 9,295 925,279
MISSOURI........................................................... 545,922 83,766 2,683 2,062 634,433
MONTANA............................................................ 665,191 20,099 10,524 1,945 697,759
NEBRASKA........................................................... 585,475 8,380 12,640 3,411 609,906
NEVADA............................................................. 214,009 1,875 410 13 216,307
NEW HAMPSHIRE...................................................... 161,458 26,155 0 873 188,486
NEW JERSEY......................................................... 317,378 22,502 149 0 340,029
NEW MEXICO......................................................... 2,494,090 116,219 70,603 31,716 2,712,628
NEW YORK........................................................... 53,778,248 5,479,060 19 969,876 60,227,203
NORTH CAROLINA..................................................... 2,412,287 38,516 1,971 13,365 2,466,139
NORTH DAKOTA....................................................... 853,729 23,136 10,603 4,525 891,993
NORTHERN MARIANA ISLANDS........................................... 10,659 5,887 0 0 16,546
OHIO............................................................... 5,231,163 319,261 20,325 99,255 5,670,004
OKLAHOMA........................................................... 104,641 47,836 883 928 154,288
OREGON............................................................. 2,328,845 44,007 19,739 10,280 2,402,871
PENNSYLVANIA....................................................... 1,689,112 898,486 90 800 2,588,488
PUERTO RICO........................................................ 587,156 68,116 0 0 655,272
RHODE ISLAND....................................................... 3,753,152 29,878 0 23,846 3,806,876
SOUTH CAROLINA..................................................... 1,794,933 42,388 6,278 21,106 1,864,705
SOUTH DAKOTA....................................................... 647,158 29,448 15,138 3,267 695,011
TENNESSEE.......................................................... 1,862,505 78,042 1,364 10,248 1,952,159
TEXAS.............................................................. 17,075,909 2,243,803 173,804 161,996 19,655,512
UTAH............................................................... 1,665,225 36,078 24,856 9,191 1,735,350
VERMONT............................................................ 2,207,827 24,157 487 2,958 2,235,429
VIRGIN ISLANDS..................................................... 49,229 2,005 0 0 51,234
VIRGNIA............................................................ 1,772,255 27,350 474 627 1,800,706
WASHINGTON......................................................... 4,029,780 409,930 89,905 33,236 4,562,851
WEST VIRGINIA...................................................... 367,781 1,280 0 23 369,084
WISCONSIN.......................................................... 2,715,202 376,880 3,037 48,748 3,143,867
WYOMING............................................................ 92,637 424 456 127 93,644
TOTALS............................................................. $416,503,919 $41,779,335 $2,558,875 $3,093,173 $463,935,302
--------------------------------------------------------------------------------------------------------------------------------------------------------
SOURCE: Universal Service Administrative Company.
NOTE: These dollars represent submitted claims to USAC for the time period January through December 1998 only, including true-ups reported to date
(April 1999). District of Columbia has reported data to USAC for the entire period in question, but has not as of yet been compensated due to the fact
that eligible telecommunications carrier (ETC) status has not been granted retroactive to January 1998.
Attachment C
Universal Service Administrative Company Schedule of Rural Health Care
Program
Dollars Committed Year 1
------------------------------------------------------------------------
Dollars
State Committed
------------------------------------------------------------------------
Alaska.................................................. $34,053.57
Alabama................................................. $9,198.81
Arkansas................................................ $9,216.67
Arizona................................................. $36,626.71
California.............................................. $9,525.23
Colorado................................................ $52,057.81
Hawaii.................................................. $91,612.44
Idaho................................................... $5,277.50
Illinois................................................ $13,712.28
Kansas.................................................. $33,316.73
Maine................................................... $1,344.16
Michigan................................................ $12,630.84
Minnesota............................................... $28,004.39
Missouri................................................ $24,451.71
Mississippi............................................. $38,183.72
Montana................................................. $106,726.75
North Carolina.......................................... $21,005.41
North Dakota............................................ $83,777.85
Nebraska................................................ $11,688.33
New Hampshire........................................... $10,443.97
New Mexico.............................................. $38,614.30
Nevada.................................................. $21,584.88
New York................................................ $124,386.36
Ohio.................................................... $28,865.94
Oklahoma................................................ $20,537.43
Oregon.................................................. $6,346.38
Tennessee............................................... $9,990.61
Texas................................................... $12,278.68
Utah.................................................... $29,534.58
Virginia................................................ $28,768.26
Vermont................................................. $3,789.52
Washington.............................................. $12,256.55
West Virginia........................................... $1,219.80
Wyoming................................................. $1,022.52
$972,049.69
------------------------------------------------------------------------
\1\ Includes Funding Commitment Letters expected to be mailed week of 9/
27/99
Attachment D
Universal Service Administrative Company Schedule of Schools and
Libraries Program
Dollars Committed Year 1
------------------------------------------------------------------------
State $ Amount
------------------------------------------------------------------------
AK.................................................. $11,932,992.58
AL.................................................. $45,769,470.99
AR.................................................. $13,154,643.52
AS.................................................. $3,557,348.10
AZ.................................................. $35,610,282.85
CA.................................................. $206,391,757.29
CO.................................................. $13,945,827.03
CT.................................................. $23,788,196.36
DC.................................................. $4,866,571.30
DE.................................................. $1,006,045.70
FL.................................................. $48,003,718.99
GA.................................................. $77,786,315.87
HI.................................................. $4,974,590.09
IA.................................................. $7,266,755.15
ID.................................................. $4,542,270.99
IL.................................................. $78,887,519.99
IN.................................................. $18,304,745.93
KS.................................................. $10,181,488.23
KY.................................................. $50,167,390.09
LA.................................................. $39,005,354.98
MA.................................................. $29,001,101.46
MD.................................................. $11,486,773.49
ME.................................................. $2,923,471.63
MI.................................................. $56,927,837.75
MN.................................................. $24,551,883.83
MO.................................................. $23,641,930.13
MS.................................................. $24,691,838.83
MT.................................................. $3,622,895.02
NC.................................................. $25,504,323.54
ND.................................................. $2,408,800.40
NE.................................................. $4,865,343.20
NH.................................................. $1,583,922.28
NJ.................................................. $61,387,902.07
NM.................................................. $18,865,472.13
NV.................................................. $5,213,870.49
NY.................................................. $164,546,935.89
OH.................................................. $57,272,501.29
OK.................................................. $32,648,986.93
OR.................................................. $9,377,406.30
PA.................................................. $49,659,748.96
PR.................................................. $47,646,855.08
RI.................................................. $6,009,681.71
SC.................................................. $25,041,848.84
SD.................................................. $2,799,130.09
TN.................................................. $27,098,296.97
TX.................................................. $128,767,624.83
UT.................................................. $6,154,438.20
VA.................................................. $24,997,720.78
VI.................................................. $2,153,443.53
VT.................................................. $2,027,333.55
WA.................................................. $29,903,483.48
WI.................................................. $37,455,756.57
WV.................................................. $9,319,829.21
WY.................................................. $1,218,192.24
Total............................................... $1,660,008,866.73
------------------------------------------------------------------------
Schools and Libraries Division, USAC, March 1, 1999
Mr. Tauzin. I understand. Thank you very much. And finally
Mr. Kent Lassman, Deputy Director of Technology and
Communications for the Citizens for Sound Economy. Kent, your 5
minutes are started.
STATEMENT OF KENT LASSMAN
Mr. Lassman. ``For every old blackboard there are hundreds
of new electronic computers.'' That is what Dwight Eisenhower
said on January 17, 1961 in his televised farewell address. Of
course this speech is more famous for Eisenhower's warning to
guard against the acquisition of unwarranted influence, whether
sought or unsought, by The military industrial complex. But
with the spirit of President Eisenhower's remark about
computers firmly in mind today, we would do well to guard
against the acquisition of unwarranted influence over the
technology in our lives by regulation, albeit well intended.
Mr. Chairman and members of the committee, thank you for
the opportunity to share my views on the E-Rate and public
mechanisms to subsidize telecommunications services. I present
these views on behalf of the members of Citizens for a Sound
Economy Foundation.
Mr. Chairman, the problem contemplated by H.R. 1746 is
real. However, the solution presented by the proposed
legislation can be improved. Too often policymakers take action
on the following premise: If not for government action an
essential public need will not be met. This premise doesn't
apply to the infusion of technology in telecommunications into
American education programs.
As Mr. Shimkus pointed out, it did not apply at the turn of
the century, it did not apply in 1961, and it certainly does
not apply today.
The problem with the E-Rate subsidy is that it does not
address a critical and one might argue the most critical aspect
of education reform. If the promise of America's future is in
her children and their preparedness for the social economy and
social challenges of tomorrow, then we would do well to provide
the tools that they will need. Unfortunately, the E-Rate
subsidizes the tools that are easy to provide, not necessarily
the tools that are most needed.
As much emphasis as we place on what is new and novel we
should also focus on the tried and true.
The very fundamentals of education. Can our children read?
Do young people have sufficient writing and logical thinking
skills? Are our schools teaching children how to learn how to
learn? And most important to the discussion before us today,
are the Federal subsidy for telecommunication services the best
use of our resources?
I suggest to you that a computer is a poor substitute for
concerned parents. A computer is a poor substitute for well
trained and caring teachers. An Internet connection with high
speed web access is of little good to a child who cannot read
at grade level. Think about your own child. Would you provide
her with a computer or an inspiring teacher? Is it more
important to master today's technologies or to learn the skills
that permit learning the technologies of tomorrow?
Nonetheless, today's hearing is on the E-Rate. You may know
that elsewhere I have recommended the elimination of the E-
Rate. However, it is altogether different to ask about how to
best administer the program. My written statement offers five
principles that should guide any reform.
First, the program must be constitutional. The 1996
Telecommunications Act did not give the FCC the power to
establish or increase taxes. In fact, had the act attempted to
delegate such a power it would have been unconstitutional.
The E-Rate should also be limited. The difference between
the law and the implementation of the E-Rate is stark. For
example, the law says that subsidies may be granted for, quote,
an evolving level of telecommunications services that the
Commission shall establish periodically. But nothing about
desktop computers servers, network administration, software or
teacher training.
The E-Rate should be targeted. The E-Rate should be
transparent, as Mr. Markey has correctly suggested, the costs
as well as the benefits of the program must be made clear to
consumers. One need look no further than the FCC's so-called
truth in billing proposals to see how these subsidies are
hidden from consumers today by the FCC.
Finally, the E-Rate should be performance based. Funding
for the subsidies should be directly linked to the performance
of the E-Rate program. Constitutional, limited, targeted,
transparent and performance-based. These are the watch words
for reform. H.R. 1746 is a step toward a better subsidy system
but it can be strengthened. For example, while the sunset
provision is an asset, it can be improved by a small
modification to repeal the remainder of the excise tax on
telecommunication services when the trust fund expires.
I see that my time has expired and I look forward to any
questions from the committee.
[The prepared statement of Kent Lassman follows:]
Prepared Statement of Kent Lassman, Citizens for a Sound Economy
Foundation
Introduction
``For every old blackboard there are now hundreds of new electronic
computers.'' So said President Dwight Eisenhower in his televised
farewell address on January 17, 1961. Of course, this speech is more
famous for Eisenhower's warning to ``guard against the acquisition of
unwarranted influence, whether sought or unsought, by the military-
industrial complex.''
His early recognition of the growing role that technology might
play in education seems even more relevant 38 years later, and informs
the on-going policy debate about the E-Rate. And to paraphrase
President Eisenhower's earlier warning about government power, today we
would do well to guard against the acquisition of unwarranted influence
over the technology in our lives by misguided--albeit well intended--
regulatory policy.
Mr. Chairman, and members of the Committee, thank you for the
opportunity to share my views on the E-Rate and public mechanisms to
subsidize telecommunications services. I present these views on behalf
of Citizens fora Sound Economy (CSE) Foundation's members. At CSE
Foundation, I am the deputy director for technology and communications
policy.<SUP>1</SUP>
---------------------------------------------------------------------------
\1\ CSE Foundation does not receive any funds from the U.S.
Government.
---------------------------------------------------------------------------
More than a quarter of a million strong, CSE Foundation's members
are in every corner and congressional district of America. Our members
distinguish themselves as policy activists. They constantly remind us
that decisions made in Washington, D.C. are felt in places far away
from here. And that is where CSE Foundation can be found. We fight at
the grassroots level for lower taxes and less economic regulation. CSE
Foundation members are also consumers. They understand from their own
personal experiences how markets and competition--not government
regulations--enable individuals to make better decisions about the
products and services they want and need, including telecommunications
services. Public policies we are here to discuss today should seek to
increase, and not limit the choices, control, and information available
to consumers.
The E-Rate, and the taxes collected from consumers to support it,
have long been interests for CSE Foundation. At the most basic level,
the E-Rate is a part of a complex wealth transfer system where the
units of value are telecommunications services. The E-Rate is based
upon a policy that takes from one consumer in order to give to another
consumer; the effect is to distort the marketplace and to be inherently
unfair.
The legislation before you today, H.R. 1746, correctly identifies a
problem but presents a solution that would be--at best--a marginal
improvement over the current situation. More likely, it would result in
an unfunded entitlement that might actually limit opportunities for
America's children to learn from, and by, using technology.
The Problem
Too often policymakers take action based on the following premise:
If not for government action--a new program, a new law or subsidy--an
essential public need will not be met. This premise does not apply to
the infusion of technology and telecommunications into American
education programs.
One week ago, on the 23rd of September, the Associated Press ran a
story about a report featured in Education Week that detailed the
prevalence of technology in American schools. All told, there are 5.7
students per instructional computer. 71 percent of our schools use the
Internet in a classroom. It is simply incorrect to claim that computers
and Internet access are not available to our students.
Despite its overwhelming size and the speed by which the E-Rate has
grown, growth of technology in the classroom has not been the result of
this federal policy. Looking forward, it is more likely that local
administrators and teachers working with parents and the local
community will make the decisions for what will work in their schools.
This suggests that any subsidy program should have clear goals and
should be phased out upon their completion.
A second problem with the E-Rate subsidy is that it does not
address a critical--one might argue the most critical--aspect of
education reform. If the promise of America's future is in her children
and their preparedness for the social, economic, and international
challenges of tomorrow, then we would do well to provide the tools that
they will need. Unfortunately, the E-Rate subsidizes the tools that are
easy to provide--not necessarily the tools that would most add value to
our students, society, and economy.
Technology has wrought great change in America. An extensive review
of these changes would not surprise or necessarily inform the members
of this committee. Our jobs, workplaces, leisure, education, and social
networks have responded to the advances of information technology.
However, some things do not change. As much emphasis as we place on
what is new and novel, we should also focus on education fundamentals.
Can all of our children read? Do young people have sufficient writing
and logical thinking skills? Are our schools teaching children to learn
how to learn? And most important to the discussion before us today, is
a federal subsidy for telecommunications services the best use of our
resources? Can a computer or an Internet connection teach a child the
habits of the mind to understand basic mathematics and science? Will
tomorrow's workers know how to communicate and think as a result of a
new technology subsidy system today?
I suggest to you that a computer is a poor substitute for concerned
parents; a computer is a poor substitute for well-trained and caring
teachers; an Internet connection with high-speed web access is of
little good to a child that cannot read at a basic level.
And if the recommendations that I present today are too
challenging, consider the following thought experiment to help guide
your decisions. Would it be better provide your own child with a
mastery of today's technologies without the skills that permit learning
the next set of technologies? Or, would it be better for your daughter,
or your son, to have the skills to maximize her own, or his own,
flexibility in the workforce and in society?
Obviously, it is the latter. Children must be taught how to think
critically, to learn on their own, and to communicate with others.
Technology can augment this process. It is not however, a stopgap or
substitute for something else entirely, namely a basic education. The
skills most attractive to employers are not centered on web-browsing.
For example, computer programming requires a solid foundation in
analytical skills--basic mathematics and science.
A federal subsidy program for telecommunications services is the
wrong way to address fundamental education reform.
Principles for Reform
All of universal service, and in particular the E-Rate program, is
in need of a comprehensive overhaul. Following are a handful of
principles to guide any such effort.
It should be Constitutional. The 1996 Telecommunications Act did
not give the Federal Communications Commission (FCC) the power to
establish or increase taxes. In fact, had the act attempted to delegate
that power, it would be clearly unconstitutional.
A power delegated in the Constitution cannot be re-delegated. This
is the starting point of a legal theory called the non-delegation
doctrine. The non-delegation doctrine is not a musty relic from
history. On May 14, 1999 the 10th Circuit struck down air quality
regulations promulgated by the Environmental Protection Agency (EPA) on
the basis that the agency was implementing regulations not expressly
approved by Congress. In American Trucking Association v. United States
Environmental Protection Agency <SUP>2</SUP> the court held that
without a clear standard from Congress, the EPA could not
constitutionally create and mandate rules and regulations. This need
for a clear statutory standard is consistent with Supreme Court
decisions such as Industrial Union Department v. American Petroleum
Institute <SUP>3</SUP> and J.W. Hampton v. United States.<SUP>4</SUP>
As in these cases, there is no clear statutory standard by which the
FCC can create or increase taxes to fund the E-Rate program. If
Congress does not administer the E-Rate, then it is imperative that a
clear statutory standard is established to provide guidance to, and
legal authority for, the its implementation and administration.
---------------------------------------------------------------------------
\2\ 1999 WL 300 618 (D.C. Cir. 1999).
\3\ 448 U.S. 607 (1981).
\4\ 276 U.S. 394 (1928).
---------------------------------------------------------------------------
While the Supreme Court has not ruled on the question of a clear
statutory standard for the E-Rate, a hint of the Court's opinion might
be gleaned from the opinion in AT&T Corp. v. Iowa Utilities
Board.<SUP>5</SUP> Justice Scalia, writing for the majority, declared
that ``It would be gross understatement to say that the
Telecommunications Act of 1996 is not a model of clarity. It is in many
important respects a model of ambiguity or indeed even self-
contradiction.''
---------------------------------------------------------------------------
\5\ 119 S.Ct. 721 (1999).
---------------------------------------------------------------------------
It should be limited. Federal support programs for
telecommunications services should be consolidated and limited. The
General Accounting Office has identified 40 subsidy programs to support
telecommunications services. In addition, section 254(h)(B) of the 1996
Telecommunications Act requires a discount to be provided to schools,
libraries and the like for the services of a telecommunications
provider. The current administration of the E-Rate is not limited to
telecommunications services as contemplated by the law. Finally, reform
of the E-Rate should include a sunset provision for the program.
Without such a measure, the E-Rate will become an entitlement that
hides and distorts budget decisions in local school districts.
It should be targeted. A subsidy for the needy--students, rural
health facilities, or local libraries--should be targeted to those in
the most need. Pressure to better target the federal largesse of the E-
Rate will grow as limits to the size, scope, and duration of the E-Rate
are implemented.
It should be transparent. Section 254(b)(5) of the 1996
Telecommunications Act requires that universal service programs adhere
to a principle of specific and predictable support mechanisms. Section
254 (e) of the 1996 Telecommunications Act requires all subsidies to be
explicit. As a result, any reform to universal service--including the
E-Rate--must rely upon a predicable source of revenue that is collected
in an open manner from consumers. The current mechanisms to fund
universal service do not meet this minimal standard. An improvement to
this standard would be to require that in addition to making the costs
associated with universal service explicit, the benefits (and
beneficiaries) of universal service subsidies should also be made clear
to consumers.
It should be performance-based. Funding for the E-Rate should be
directly linked to the performance of the program. This simple
guideline would create an incentive to limit wasteful spending. If
students were to learn more through additional appropriations for the
E-Rate, then the program would likely thrive. If, however, students did
not fare better despite extravagant expenditures for E-Rate funding,
then America would be best served by spending those precious dollars on
a more effective education program. In addition, this principle creates
a means through which the merits of the program--if they exist--will be
justified by an honest taxpayer assessment.
A significant problem with funding a government program through an
excise tax--either alone or funneled through a trust fund--is that it
divorces the results of a program from the source of the revenue.
Consider that as consumers spend more money on telecommunications
services the amount of funding for the E-Rate will continue to climb
regardless of need or efficacy of additional revenues.
An assessment by taxpayers--most often through the Congressional
oversight process--requires objective measures of success. Currently,
we measure the amount of money that goes into the E-Rate program.
However, it would be more helpful to know how much of the multi-billion
dollar E-Rate program makes it into the classroom versus being spent on
administrative costs. Is web access as good of a teaching tool as a
local area network run by teachers trained in HTML? Does this question
produce different answers at different grade levels? These questions,
and not numbers about the quantity of applications for federal aid,
would do more to help understand the merit and performance of this
federal subsidy. In turn, better information about the performance of
federally funded program can translate into a better use of scarce
resources.
Reforming Reform: H.R. 1746
Common wisdom suggests that unless Congress, or the FCC, steps into
the marketplace with a tax and regulatory system then our schools,
libraries, and rural health care providers will not have adequate
telecommunications services. If that were true, and if a federal
subsidy were introduced, then we would certainly attempt to design the
most efficient system to administer that subsidy. H.R. 1746 is a step
toward a better subsidy system that the current E-Rate program.
However, this proposed legislation can be significantly improved.
The principles outlined above should guide any effort--including
the development and refinement of H.R. 1746--to reform the E-Rate
program. Following are only a few examples of where this legislation
can be improved.
<bullet> People use the Internet. Students, library patrons, and rural
health care professionals are not the direct beneficiaries of
the E-Rate. H.R. 1746 would make resources available to states,
not to schools and certainly not to students. The closer a
subsidy is moved to the ultimate beneficiary, the better and
more accountable the subsidy system.
<bullet> The sunset provision in H.R. 1746 is very important. It,
however, could be improved by repealing the remainder of the
federal excise tax on telecommunications at the same time that
the proposed trust fund expires. This excise tax was introduced
to fund the Spanish-American War. The war lasted approximately
three months and ended more than 100 years ago. It is time to
get rid of this tax.
<bullet> By definition, a program funded by an excise tax is poorly
structured. The excise tax--a tax on talking--should be
repealed and the E-Rate should be funded out of general
revenues. This structural change to H.R. 1746 would strengthen
the proposal to reform the E-Rate.
<bullet> A criterion such as ``living in a sparsely populated area'' is
not the same as an area in need of a subsidy. For example, some
rural areas may be served by wireless telecommunications
services at a lower cost--and therefore lower need for
subsidy--than traditional landline services. A change of
perspective from rural to high-cost would better target the
resources made available by the E-Rate program.
<bullet> H.R. 1746 sends unexpended balances in the trust fund to the
general treasury. At the same time, consumers are led to
believe that the telecommunications taxes that they pay are
putting computers in a classroom. Taking money for one purpose,
putting it in a trust fund, and then spending it on another
purpose is not good public policy. It is dishonest. Instead,
any subsidy program should be funded out of general revenues,
where it would have to compete with other priorities. If this
change is not made, at the very least, unexpected balances
should be returned to taxpayers, and not shifted into an
already-bloated federal budget.
Conclusion
This impetus behind H.R. 1746 is well-intentioned. The current E-
Rate is a case study in government waste, fraud, and abuse. However,
the proposed reforms contained in this legislation should not go
forward without substantial improvement based on the principles
outlined above..
As we move forward, I trust that we will heed the warning of
President Eisenhower to ``guard against the acquisition of unwarranted
influence, whether sought or unsought.''
Thank you.
Mr. Tauzin. Thank you very much. The Chair recognizes
himself quickly. The GAO study that looked at the beginnings of
this program was highly critical of it and criticized the
corporations that were created to carry the program out, even
indicated to all of us that there were 27 existing programs
that could provide funding for the purchase of technology for
schools and libraries and questioned the need for corporations
that were not subject to ordinary congressional oversight
review and appropriation.
What became of that study and what was done? Perhaps Mr.
Wright you want to get into that? What was done to respond to
that GAO study?
Ms. Parrino. There were a number of GAO studies. GAO came
in to look at our operating procedures. They made a number of
recommendations for improvement. As an example, they suggested
or highly recommended that our internal auditors complete--or
that our independent auditors completely review before we issue
any commitments to schools and libraries. And we adopted that
recommendation and implemented it so we completed our audit----
Mr. Tauzin. They called these corporations illegal at one
point, didn't they?
Ms. Parrino. In a response, I believe to Senator Stevens
and Senator McCain, they identified or raised concerns and
issues. As of this point in time, both of those corporations
have been merged into USAC and I am not aware that that opinion
addressed the legality of USAC. But I would defer to Mr.
Wright.
Mr. Tauzin. So we can understand it, USAC is a corporation
organized under what law?
Ms. Parrino. USAC is a not-for-profit corporation organized
and incorporated in the State of Delaware.
Mr. Tauzin. And who created it?
Ms. Parrino. The National Exchange Carriers Association
suggested to the Commission that they should create an
independent entity that was neutral primarily for--at that
point in time for the administration of the High Cost Fund.
Mr. Tauzin. So the Commission asked for its creation or
created it?
Ms. Parrino. The National Exchange Carriers Association
suggested or recommended to the Commission that they--that NECA
create an independent corporation.
Mr. Tauzin. So the association created this corporation?
Ms. Parrino. That is correct.
Mr. Tauzin. And this corporation now administers these
funds. Who collects these funds? Where do they come and where
do they go?
Ms. Parrino. The Universal Service Administrative Company
collects the funds, the FCC establishes the rate on a quarterly
basis and based on that order we collect the funds that the FCC
designates.
Mr. Tauzin. An agency of government decides how much
telephone users are going to pay, and then instructs a private
corporation organized under the State of Delaware to collect
the money and distribute it? Is that an accurate description?
Mr. Wright?
Ms. Parrino. I will defer to Mr. Wright.
Mr. Tauzin. I want to know how the legal is set up. We have
another corporation called ICANN we have been looking at in the
Internet services area, a private corporation, and the way
these private corporations function in connection with
associations and government agencies always intrigues me. In
this case, you decide how much is going to be collected from
each telephone user's bill; is that correct, Mr. Wright?
Mr. Wright. No, Mr. Chairman.
Mr. Tauzin. How do you do that, then?
Mr. Wright. The money is collected from telephone
companies, not from users.
Mr. Tauzin. Telephone companies collect it from their
users.
Mr. Wright. They can.
Mr. Tauzin. Where do they get it? Out of the sky?
Mr. Wright. They have three choices. Like anybody else when
they have a fee imposed on them, they can pass it on to their
users.
Mr. Tauzin. Or they could assess their stockholders.
Mr. Wright. Lower their profits or decrease their rates.
Mr. Tauzin. Wait, wait, stop, they can't take it out of
profits without taking the same money out of their consumer.
The money comes from consumers, doesn't it? Let's not beat
around the bush.
Mr. Wright. Absolutely.
Mr. Tauzin. So the dollars you assess the corporation are
going to be assessed to their consumers, us, telephone
consumers.
Mr. Wright. That is what usually happens.
Mr. Tauzin. So without playing games, when you tell a
corporation you want so much money from it you are telling it
to go out and collect it from its consumers and obviously it is
going to show up on my bill and your bill.
Mr. Wright. We are certainly aware that that has happened.
We have been deregulatory in our approach.
Mr. Tauzin. Do you think it is a mystery that it happens?
Mr. Wright. No, Mr. Chairman.
Mr. Tauzin. Normally, when taxes or fees are assessed
against corporations, don't they pass those on to their
consumers as part of the cost of business? That is normal, so
you know in advance when you assess a charge against the
corporation for these universal service functions that they are
going to pass them on to consumers and they will show up on our
phone bills; right?
Mr. Wright. Most likely.
Mr. Tauzin. So you assess these charges against them.
Companies pay the money in. Where do they pay it in?
Mr. Wright. To USAC.
Mr. Tauzin. So it never goes to the Treasury?
Mr. Wright. No, Mr. Chairman.
Mr. Tauzin. The United States Treasury never sees this
money?
Mr. Wright. That is right.
Mr. Tauzin. The money goes to a private corporation set up
under the laws of the State of Delaware. What relationship do
you have with this private corporation?
Mr. Wright. They are our agent, Mr. Chairman. As Ms.
Parrino said, they are the successor to NECA, which has been in
existence for years and was largely praised as an example of
outsourcing by us, rather than doing it in-house.
Mr. Tauzin. I am not heaping scorn or praise. I am just
trying to understand. So this corporation is your agent? It is
an agent of a government agency.
Mr. Wright. For decades in the high cost area NECA and now
USAC have collected money from telephone companies to support
the High Cost Fund.
Mr. Tauzin. And now this corporation acting as your agent
disburses money. Does any committee of Congress, the
appropriators who oversee the collection and expenditure of
Federal dollars ever audit, account for, appropriate and
oversight collection and spending of this money?
Mr. Wright. Well, this Congress of course enacted section
254(d), which requires us to assess telephone companies.
Mr. Tauzin. Does any appropriator oversee the collection
and expenditure of this money? Do you go to any Appropriations
Committee with this business?
Mr. Wright. I don't know the answer to that.
Mr. Tauzin. Ms. Parrino, do you? Do you appear before an
Appropriations Committee to talk about how this money is
collected and spent?
Ms. Parrino. No, I do not. I administer the rules and the
orders as directed by the Federal Communications Commission.
Mr. Tauzin. So you just follow their direction, but nobody
in Congress ever oversees the collection and expenditure of
that money?
Ms. Parrino. We do not appear before the Appropriations
Committee. But USAC has been subject to audits from the General
Accounting Office.
Mr. Tauzin. Is the money that is collected out of this
system part of the budget of the United States, Mr. Wright?
Mr. Wright. I don't believe--it doesn't go into the Federal
Treasury. I am not sure what the question is. I do know there
has been no shortage of oversight of the Schools and Libraries
Program. Congress can't be faulted for that.
Mr. Tauzin. You are saying, though, that it never goes to
the Treasury? It is not counted in the budget?
Mr. Wright. I know that----
Mr. Tauzin. If it disappeared tomorrow, would there be an
offset required under our budget laws? Do you know?
Mr. Wright. I don't know the answer.
Mr. Tauzin. Mr. Lassman, do you know the answer?
Mr. Lassman. Mr. Tauzin, it is on the budget. It has been
since 1997.
Mr. Tauzin. So it never goes to the Treasury but it is in
our budget and the appropriators never appropriate it or manage
it in any respect? Do I have it accurate now? In that regard,
Ms. Parrino, who is on this--who serves on this corporation?
Who selects the members of it? Where do they come from?
Ms. Parrino. You are referring to the board of directors,
Mr. Chairman?
Mr. Tauzin. Whoever runs the corporation. Is it run by a
board?
Ms. Parrino. There is a board of directors of the
corporation. The board represents various constituencies that
either benefit or pay into the various programs. It is a 19-
member board. The industry representation is spelled out in an
FCC order.
Mr. Tauzin. So it is all done by FCC order. Do you make
decisions about who gets money or does the FCC tell you who
should get money?
Ms. Parrino. We make the decisions on who gets money on
each of those programs consistent with FCC rules.
Mr. Tauzin. They make general rules and then you make
specific allocations?
Ms. Parrino. That is accurate.
Mr. Tauzin. One final thing. I was looking at one of your
programs, the Health Care Program, where you administered
almost $1 billion of money. There are lots of States that
didn't get any money. Why is that?
Ms. Parrino. Which program is that?
Mr. Tauzin. Your Rural Health Care Program. I am looking
for my own State. My own State, I don't even see it on the
list. Some States were just left out.
Ms. Parrino. It depends upon the rates that are established
in your State. To the extent that your urban rates are very
comparable to your rural sites, again to the extent the High
Cost Program provides significant subsidies in Louisiana, there
would be no subsidy in rural health because that particular
program says to the extent rural rates are higher than urban
rates----
Mr. Tauzin. I think it would be very good if we got just a
one-page explanation of the rules by which all of these moneys
are distributed.
Ms. Parrino. I would be happy to do that.
[The following was received for the record:]
The Rural Health Care Division (RHCD) of the Universal Service
Administrative Company (USAC) administers the support program that was
authorized by Congress and designed by the Federal Communications
Commission (FCC) to make telecommunications services--including the
more ``cutting-edge'' services--affordable for rural health care
providers (RHCPs). Discounts apply to monthly telecommunications
service charges and installation charges, but not to terminal equipment
costs.
What this means to RHCPs is that support is available for any
telecommunications service, including T-1, fractional T-1, and ISDN.
Support is also available for limited long distance charges to an
Internet Service Provider (ISP). Level of support is determined by the
location of the RHCP and the type of service chosen by the recipient.
This will be calculated individually for each RHCP. Additionally, if an
RHCP is already receiving services, they can opt to save on that
service, or upgrade to another. Prior to committing to anything, RHCPs
have an opportunity to know their level of support.
In order to receive a discount, the primary concern for the RHCP is
to make sure that they are eligible. They should be a rural health care
provider, or, regardless of location, have no other means of reaching
an ISP than by making a long distance phone call. They must also be a
public, not-for-profit entity.
After determining eligibility, it is important for RHCPs to have a
clear understanding of how they will use the telecommunications
services. For example, will they need to download information from the
Internet? Will they need to transmit data, images, or interactive
video? How fast will they need to send or receive data? With whom do
they plan to communicate most? At this point the eligible RHCP
identifies their telecommunications needs and submits Form 465 to the
RHCD. The RHCD will then post Form 465 on their web site for 28 days so
that telecommunications companies can contact them with service
offerings. RHCPs may also approach service providers directly to
encourage bids. The RHCP then chooses the service provider and the
services they want, and notifies the RHCD by submitting Form 466, in
addition to Form 468 which is completed by the service provider and is
used by the RHCD to verify the services and calculate the discounted
rate. Once the RHCP begins receiving services, they notify the RHCD by
submitting Form 467. The RHCP is then billed by the service provider at
the discounted rate. The service provider recovers the difference from
the Universal Service Fund (administered by the RHCD). This process
must be completed annually in order for RHCPs to continue to receive
discounts on services.
Mr. Tauzin. Apparently there are some formulas that might
be very interesting to members if you kindly submit that to the
record.
The Chair is pleased to recognize the gentleman from
Illinois, Mr. Rush.
Mr. Rush. Thank you, Mr. Chairman. Let me go back to Ms.
Parrino. Ms. Levy of the NTIA testified earlier that a large
startup cost would be required if the program were moved to
that agency. She indicated about--she testified about the large
startup costs. Do you know how much you save if the E-Rate
program went to the NTIA given that your organization would
continue to be required to administer various other universal
service programs such as the high cost and low-income subsidy
programs?
Ms. Parrino. If the NTIA were responsible for the Schools
and Libraries Corporation Program, USAC would no longer incur
any expenses associated with that program. We do have separate
budgets for each of the other three programs which would still
be in place. The Schools and Libraries Program is the largest
chunk of the USAC consolidated budget. I don't have a
percentage for you. I do have specific dollars that would be
left or costs that would be left to administer the other
programs. I don't have a percentage for you. I could certainly
provide that.
Mr. Rush. Would you, please?
Ms. Parrino. Yes.
Mr. Rush. Wouldn't this bill that we are currently
considering, wouldn't that result in increased administrative
costs for your agency?
Ms. Parrino. For USAC?
Mr. Rush. Yes.
Ms. Parrino. I don't know what the overall impact would be.
Again as far as my expenses and my budget, my budget would
decrease because I would no longer have responsibility for that
function.
Mr. Rush. Maybe I should ask that question to Ms. Levy.
Would there be an increased cost to your agency if, in fact,
this bill were to pass?
Ms. Levy. There would be. We don't have--we have other
grant programs in place at NTIA but they are set up to function
differently than a program like this, which is more of a block
grant program. So we would have both staff and infrastructure
costs.
Mr. Rush. Staff and infrastructure. So there would be an
increase?
Ms. Levy. There would be.
Mr. Rush. Okay. And would that be taking money away from
the students that we are trying to service if, in fact, you had
additional costs at your agency?
Ms. Levy. It would take away money from the overall fund.
Mr. Rush. Mr. Wright, it seems that the people actually
affected by the Schools and Library Program, there are not many
complaints from those individuals, the beneficiaries of the
programs and even the companies. Do you agree with that?
Mr. Wright. As I understand it, they are quite pleased with
the way the program is going and hope it will continue.
Mr. Rush. You testified earlier about court decisions and
the Fifth Circuit decision that put to rest the legal challenge
that universal service is a tax. Don't you think it is kind of
inconsistent and disingenuous--you might not want to answer it
in the way that I ask, but please--for the Congress to be
pursuing and continue to be recalcitrant in its position that
this is a tax when the Court of Appeals, the Fifth Circuit, has
actually made a decision saying that it is not a tax?
Mr. Wright. Let me say this. I had the pleasure of
testifying before the House Ways and Means Committee last year
on this, and I said that, gee, if we lost in the Fifth Circuit
this would be a good fallback. But indeed we won in the Fifth
Circuit and perhaps I can tie it to your earlier question to me
that the Schools and Libraries filed a very nice amicus brief
on our behalf in the Fifth Circuit defending our position in
toto and that was helpful.
Mr. Rush. And are you aware of an earlier decision
yesterday by Senator McCain that he strongly endorsed the E-
Rate funding?
Mr. Wright. I did read about that in Communications Daily
yesterday. And, you know, just for the record this has always
been a bipartisan program. Senators Snowe and Rockefeller also
filed an amicus brief in the Fifth Circuit fully supporting how
the FCC had implemented the program.
Mr. Rush. I want to return to Ms. Levy. What types of
services does the E-Rate program support that would not be
supported by H.R. 1746? And then conversely, what type of
services not currently supported would be included under H.R.
1746? And the third part of that question is wouldn't they be
basically the same type of programs?
Ms. Levy. Yes, as I read the proposed legislation, I think
the program itself would be very similar. I think Mr. Wright
has identified some areas where the legislation is ambiguous
and it might go to litigation on that. I think the major
difference is in the administration of the program. It would be
taken away from the FCC and it would be given to NTIA to run as
more of a block grant program that received an appropriation.
Mr. Tauzin. The gentleman's time has expired. Let me try to
get one more round of questions before we have to break. Mr.
Cox.
Mr. Cox. Mr. Wright, I am wondering if you didn't just
misspeak in response to Mr. Rush when you said we won it on the
taxing issue in the Fifth Circuit. You didn't really win the
question of whether that was an unconstitutional tax.
Mr. Wright. The origination clause issue was the primary
issue raised by Celpage that said it was an unconstitutional
tax under the origination clause.
Mr. Cox. Oh, the origination clause is the issue of whether
the bill starts in the House or the Senate. The
unconstitutionality of the tax, that is whether you can levy it
or Congress can. You didn't win that issue, did you?
Mr. Wright. That was the taxing clause issue.
Mr. Cox. And you didn't win that, did you?
Mr. Wright. There was a footnote that says we win it on two
grounds. First, that they did not raise it and, second, that
there is no merit to it anyway.
Mr. Cox. Well, actually, I have the footnote and it is
right in the text, and I have it before me. It says that
Celpage raised it in their reply brief, therefore, we will not
consider it. And I mean if a Court doesn't consider the
question, then it doesn't decide it in your favor. Isn't that
right?
Mr. Wright. In footnote 52 the Court went on to say even if
Celpage's taxing clause issue were properly before us we find
no basis for reversal and went on in a few sentences to explain
why there was not merit to it.
Mr. Cox. The Court said it didn't consider the issue,
right?
Mr. Wright. And alternatively said in any event there is no
merit to it.
Mr. Cox. Did the Court consider and decide the question?
Mr. Wright. I would certainly say that the issue has been
waived at least. And the Court has said there is no merit to
it.
Mr. Cox. Actually, I disagree strongly with your
interpretation of the opinion because it says in plain English:
Therefore, we will not consider it. The Fifth Circuit did not
consider your issue. That issue. It didn't decide it in your
favor. It is not a decided issue. It is not stare decisis. It
is not binding on anybody. It is not the law of the land in the
Fifth Circuit or anything else.
Mr. Lassman, did you want to say something on this?
Mr. Tauzin. I think we have a minute left. We have a vote
on.
Mr. Cox. I can resume questioning when we get back.
Mr. Tauzin. Why don't we do that. We will resume
questioning when we get back.
[Brief recess.]
Mr. Tauzin. Thank you for your patience, ladies and
gentlemen. Several of the members are coming, and I am going to
have to leave you to attend a technology summit right now. But
Chris Cox from California will assume the Chair and continue
his round of questions and recognize members in order. And
again I appreciate your consideration for interruptions like
this.
Mr. Chris Cox from California.
Mr. Cox [presiding]. Thank you, and if the interruption on
the floor results in our members not returning, then what I
would like to do is ask all the members of the panel if they
would be willing, and it may be an easy promise to make, to
respond to additional questions in writing that we would submit
that members might have.
Ms. Levy, the FCC has recently increased the amount of the
E-Rate tax. It was on an annual basis a billion, and now it has
been increased to $2.25 billion.
Ms. Levy. I think it went from $1.3 to $2.25.
Mr. Cox. And so right now there is an exaction without
prejudicing the argument about whether and how this acts as a
tax. There is an exaction from the economy, to put it broadly,
because we had this exchange with Chairman Tauzin about how it
functions and what the FCC expects will happen when it makes
these actions, but we do have an exaction of $2.25 billion that
we are now going to levy on the economy, the U.S. economy. Is
that essentially the case?
Ms. Levy. Well, I believe that 2.25 is the full funding of
the program as originally envisioned by both Congress and the
FCC. It was brought down because of problems they were having
during the first year.
We would respectfully disagree with calling it a tax.
Mr. Cox. That is why I said it is an exaction. To use
really simple Anglo-Saxon words, we are going to get $2.25
billion out of the economy under the aegis of this exaction. Is
that not the case?
Ms. Levy. And we will put it back into the economy.
Mr. Cox. I understand.
Ms. Levy. I think that is right. We are asking for $2.25
billion from companies that are participating in the program,
which I think it is consistent with how the statutory language
was put in in terms of talking about this as part of the
universal service fund, talking about this as an evolving
definition of universal service.
Mr. Cox. There is a levy of $2.25 billion and just to do
some big number math off the cuff here--we won't need a
calculator, we will do it rough justice--but if there is about
a quarter of a billion people in America, and you have got
$2.25 billion then something just shy of $10 a head is this
exaction for every man, woman, child and infant in America. Is
that not right?
Ms. Levy. I don't think it is that much. I think if you see
what people are paying on their phone bill.
Mr. Cox. No, no, I think it is that much because it is
pretty simple math. I will ask the question differently. If you
divide the exaction, which is $2.25 billion, by a quarter
billion, what is the answer?
Ms. Levy. I agree with where you are going.
Mr. Cox. There you go. We are talking about $9 and change,
round figures, $10 per head. So in my household where I have
three little kids, it is exaction on our family, unless we have
some way to get through a loophole that most Americans don't
have, net on average, the exaction on our family is $50 from
this exaction which we won't call a tax. We are taking it away.
My point is these are big numbers. And this is a program that
Congress has not expressly authorized. The Congress has had
nothing to do with these figures. Congress didn't come up with
the $50 per household number for my household. Congress didn't
come up with the $10 per capita amount of the tax. You guys
came up with that.
Ms. Levy. The FCC came up with that.
Mr. Cox. Right. Do you understand why Democrats and
Republicans in the Senate and in the House have written these
letters saying that we don't have King George any more and
Congress has this authority and the executive branch doesn't?
That is a big amount of money to do in the executive branch
without Congress being involved in any way. Don't you think?
Ms. Levy. I understand. Yes, if it is a taxation issue,
then it is for Congress to decide.
Mr. Cox. Even if one were willing to hang his or her hat on
some seemingly comforting language in a footnote that didn't
decide the question, as a matter of policy do you think that
billions of dollars ought to be taken away from the economy and
then put back in in more pleasing ways without Congress as a
policy matter being directly involved in that process on a
regular basis?
Ms. Levy. I think that when we are talking about taxation
issues, it is up for Congress to decide. I think Congress did
make a commitment and did make a conscious move in the 1996
Telecom Act to establish a universal service fund that had a
schools and libraries component that would do what the program
is doing. And that is provide E-Rate moneys to children in
schools and libraries throughout the country. I think the FCC
has simply implemented what it has deemed to be the
congressional mandate of the Telecom Act.
Mr. Cox. Mr. Lassman, you have been trying to interject.
Mr. Lassman. If I could make a clarification of what is
being discussed, Congress very clearly, and the President
signed a bill that told the Commission how to exact that amount
of resources, the amount of resource being defined as an
evolving series of definitions. They didn't say to what extent,
they did not say a number, they didn't say so much per year.
And that difference, that clarification of delegation is very
important because the Supreme Court has ruled extensively over
the last 100 years that ``to what extent'' is a standard that
must be met. The Congress has to tell a regulatory agency to
what extent may you regulate.
Mr. Cox. We have got 37--by the estimate provided to
members here on the committee, we have got 37 State and local
exactions, taxes, I think we can say State and local taxes on
telecommunications in the United States. This morning I just
had a news conference with Senator Wyden in the Senate radio
and TV gallery unveiling legislation that I think we are going
to work with Larry Summers on that puts U.S. policy on the side
of a global permanent moratorium on Internet taxes and tariffs
around the world. We have got the WTO meeting coming up in
Seattle in November, and we believe that it is in America's
best interest to take the temporary moratorium that we have and
make it permanent around the world. We want a 1-year standoff
at that WTO meeting.
And the reason that we are concerned about it is that
France, for example, has a 20.6 percent value added tax. And if
France decides that it wants to apply its VAT as the EC
recommended in 1998, not only to goods traded over the Internet
but also the information, to software, service going over the
Internet, and that is just one country, you can very quickly
see how these exactions accumulate and end up killing the goose
that is laying the golden eggs, which is in this case the
Internet and the possibility that it holds.
In the U.S. we have got 37 different taxes and we have also
got some 30,000 jurisdictions that could, if they chose to do
so, levy taxes.
My question to anybody that wishes to address it is whether
or not, as reasonable as it might be for each one of these tax
jurisdictions, and the FCC for its part to say, we are only
going to take our little corner here, ought we not be concerned
about the aggregation of all these charges inasmuch as the
Internet is a global medium and might we not by our bad example
defeat what we are trying to accomplish at the WTO and
elsewhere if we are adding new taxes even though they are not
authorized by Congress onto telecommunications?
And last, inasmuch as telecommunications itself is an
elusive thing that we are increasingly having difficulty
defining, should we be a little bit wary about taking existing
concepts, for example, of universal service, which we have
always felt comfortable applying to a telephone system to
subsidize local users with long lines, for example, and
applying it to whatever in the world telecommunications might
become because telecommunications might become something very
different and we might have trouble recognizing it in the
future.
What we did in the Internet Tax Freedom Act of course is
put a ban on taxes for Internet access. Any kind of
telecommunications service that includes Internet access
already runs smack in the middle of the Internet Tax Freedom
Act. And so I just wondered whether or not this approach
doesn't make more sense inasmuch as it gets you into general
appropriations for block grants for ultimately the purpose that
we are seeking to achieve here, which is schools and libraries,
without using an interfering mechanism of taxing
telecommunications and being the ``Nth'' tax on top of all of
these other exactions.
Does anybody want to deal with that?
Mr. Wright. If I could respond, I am sure there is no
dispute from anyone, and certainly not from the FCC, that
Congress could always specify the amounts in these bills. And
that is one of the few things that I don't think could even
lead to further litigation.
If I could just explain our perspective for a minute----
Mr. Cox. I will just interject on that point. If the
executive levies a tax on the country and the Congress by
bicameral action passes a bill repealing that unconstitutional
tax, and the President vetoes it, then you are still left with
the problem, aren't you?
Mr. Wright. I was suggesting that if Congress passed a law
saying X dollars shall be----
Mr. Cox. As long as the President went along with it. As
long as it is the same executive branch that came up with this
program against Congress' wishes went along with it, it is
fine. But I am not sure for Congress to have to reassert itself
and then to depend on the executive's approval is the right
policy question.
Mr. Wright. Imagine our perspective on the high cost issue.
There is no question--I am sure no one would disagree that we
have been instructed in section 254 to subsidize rural
residential customers, as Mr. Markey was noting before. The Act
does not tell us how much we are supposed to raise for that
purpose either, but no one has ever suggested that we would be
other than derelict in our duties if we didn't have a High Cost
Fund. And, of course, Congress has to work with the President
to come up with an amount, but, of course, that could be done.
But from our perspective we would be derelict in our duties
if we didn't do what Congress has told us, which is establish
mechanisms to support high cost and education and we have to do
that. Of course, if Congress tells us how much, that make its
easier for us, but we cannot not do it because the amount
hasn't been specified.
Mr. Cox. Do you want to take a stab at whether we are
better off with the Tauzin approach, which does not add an
incremental exaction on telecommunications?
Mr. Wright. Well, my thought on that was that it would
probably lead to another round of litigation. The bill seems to
me to say that it is supposed to fund internal connections and
Internet access, but it doesn't say that in so many words. And
I can imagine some Telco saying, going to court and saying,
well, Congress meant to fund something different and that is
why they passed a new law. And, therefore, the law also directs
the Department of Commerce to conduct a rulemaking to determine
what is to be funded, so they would have to do that. And the
litigation would follow, and the arguments would be made, well,
Congress meant something different or they would not have
passed a new law.
On the other hand, if Congress means to do just the same
thing, the aspect of Congressman Tauzin's bill that specifies
the amount, you know, we, of course, in the FCC and I am sure
at NTIA will do whatever Congress tells us to do. And that
specifying the amount just make its easier.
Mr. Cox. And I am not sure I understand whether you are
taking a position on whether we would be better off to use
general appropriations rather than a specific levy on
telecommunications?
Mr. Wright. I don't think the FCC has a position on that.
Our position is that we administer the Telecommunications Act.
Mr. Cox. From a policy standpoint, as I say, a lot of us
are very, very concerned about the multiplicity of different
kinds of taxes and so on.
Well, I think I have extended my own time for questioning
under our rules substantially but I did so for the purpose of
seeing whether other members would arrive, and they have begun
to arrive, and so I would recognize the gentlewoman from New
Mexico if she wishes to be recognized.
Mrs. Wilson. I may not help you out, Mr. Chairman. I am
beginning to understand some of the intricacies of this. I was
not here, as you know, when the 1996 Telecom Act was passed.
Although I have seen what it does in my local community, which
is to provide access to the Internet, particularly for
elementary, middle and high schools who did not have that
access.
And unlike Mr. Markey, New Mexico is a rural State and I do
believe that universal service is a laudable goal, just as the
electrification of America was a laudable goal in the 30's and
40's. The people who live in rural areas shouldn't be left out.
I happen to believe that it is probably more important for our
elementary schools to have great teachers and good books and
fine curricula than it is for them to have computer labs and
access to the Internet. But I am also forward-looking enough to
know that that may not be the case 10 or 20 years from now, and
that all children should have access to the information that
increasingly will be available on the World Wide Web when it is
not available in their local library.
As to the constitutional issues and how we decide who has
the power to tax and whether the 1996 Communication Act gives
the FCC the authorities that it has taken and how so if they
are limited, that is not my area of expertise. I am not a
lawyer, thank goodness, and I look at this with a fairly
practical eye of what is its effect? Is it being administered
properly? What would the change be for the constituents that I
represent if we change the way this is being administered? And
for that reason I am fairly pragmatic about all of this.
I don't have specific questions for members of the panel,
and I apologize for being kind of double scheduled and not
being here for your actual presentations, but I appreciate the
opportunity to read through your testimony.
Mr. Cox. Well, I thank you. I think as is our custom we
will leave the record open for 30 days and if any member,
either present or not here, wishes to submit questions I think
our panel would probably be willing to respond to those
questions in writing.
I won't make you swear to that under oath, but I am sure we
can call you back if need be.
I appreciate very much your spending time with us this
morning and your testimony has been very, very enlightening and
we look forward to continue working with you on solving these
problems. Thanks again.
The hearing is adjourned.
[Whereupon, at 12:47 p.m., the subcommittee was adjourned.]