SPEAKERS CONTENTS INSERTS Tables
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59–920
2000
ADMINISTRATIVE TAXATION: THE FCC'S UNIVERSAL SERVICE TAX
HEARING
BEFORE THE
SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
SECOND SESSION
FEBRUARY 26, 1998
Serial No. 130
Printed for the use of the Committee on the Judiciary
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For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
COMMITTEE ON THE JUDICIARY
HENRY J. HYDE, Illinois, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
BILL McCOLLUM, Florida
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR S. SMITH, Texas
STEVEN SCHIFF, New Mexico
ELTON GALLEGLY, California
CHARLES T. CANADY, Florida
BOB INGLIS, South Carolina
BOB GOODLATTE, Virginia
STEPHEN E. BUYER, Indiana
ED BRYANT, Tennessee
STEVE CHABOT, Ohio
BOB BARR, Georgia
WILLIAM L. JENKINS, Tennessee
ASA HUTCHINSON, Arkansas
EDWARD A. PEASE, Indiana
CHRIS CANNON, Utah
JAMES E. ROGAN, California
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JOHN CONYERS, Jr., Michigan
BARNEY FRANK, Massachusetts
CHARLES E. SCHUMER, New York
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
STEVEN R. ROTHMAN, New Jersey
THOMAS E. MOONEY, SR., General Counsel-Chief of Staff
JULIAN EPSTEIN, Minority Chief Counsel and Staff Director
Subcommittee on Commercial and Administrative Law
GEORGE W. GEKAS, Pennsylvania, Chairman
LAMAR SMITH, Texas
BOB INGLIS, South Carolina
ED BRYANT, Tennessee
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STEVE CHABOT, Ohio
JERROLD NADLER, New York
SHEILA JACKSON LEE, Texas
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
RAYMOND V. SMIETANKA, Chief Counsel
SUSAN JENSEN-CONKLIN, Counsel
JAMES W. HARPER, Counsel
C O N T E N T S
HEARING DATE
February 26, 1998
OPENING STATEMENT
Gekas, Hon. George W., a Representative in Congress from the State of Pennsylvania, and chairman, Subcommittee on Commercial and Administrative Law
WITNESSES
Berthoud, John E., Ph.D., President, National Taxpayers Union, Alexandria, VA
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Glassman, James K., DeWitt Wallace Readers' Digest Fellow in Communications, American Enterprise Institute, Washington, DC
Johnson, Julia, Esq., Chairman, Florida Public Service Commission, Tallahassee, FL
McLean, Christopher A., Deputy Administrator, Rural Utilities Service, Department of Agriculture, Washington, DC
Miller, James C., III, Counselor, Citizens for a Sound Economy, Washington, DC
Norquist, Grover G., President, Americans for Tax Reform, Washington, DC
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Berthoud, John E., Ph.D., President, National Taxpayers Union, Alexandria, VA: Prepared statement
Gekas, Hon. George W., a Representative in Congress from the State of Pennsylvania, and chairman, Subcommittee on Commercial and Administrative Law: Prepared statement
Glassman, James K., DeWitt Wallace Readers' Digest Fellow in Communications, American Enterprise Institute, Washington, DC: Prepared statement
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Inglis, Hon. Bob, a Representative in Congress from the State of South Carolina: Prepared statement
Jackson Lee, Hon. Sheila, a Representative in Congress from the State of Texas: Prepared statement
McLean, Christopher A., Deputy Administrator, Rural Utilities Service, Department of Agriculture, Washington, DC: Prepared statement
Miller, James C., III, Counselor, Citizens for a Sound Economy, Washington, DC: Prepared statement
Norquist, Grover G., President, Americans for Tax Reform, Washington, DC: Prepared statement
APPENDIX
Material submitted for the record
ADMINISTRATIVE TAXATION: THE FCC'S UNIVERSAL SERVICE TAX
THURSDAY, FEBRUARY 26, 1998
House of Representatives,
Subcommittee on Commercial
and Administrative Law,
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Committee on the Judiciary,
Washington, DC.
The subcommittee met, pursuant to notice, in Room 2237, Rayburn House Office Building, Honorable George W. Gekas [chairman of the subcommittee] presiding.
Present: Representatives George W. Gekas, Bob Inglis, Ed Bryant, Steve Chabot, Jerrold Nadler, and Sheila Jackson Lee.
Staff present: James W. Harper, Subcommittee Counsel; Audray Clement, Subcommittee Staff Assistant, and Stephanie Goodman, Minority Counsel, Committee on the Judiciary.
OPENING STATEMENT OF CHAIRMAN GEKAS
Mr. GEKAS [presiding]. The hour of 10 o'clock having arrived, the subcommittee will be in order. The rules of the House maintain that a hearing of this type cannot be conducted by any committee without the presence of a hearing quorum, which requires at least two members. Although I consider myself all powerful, I'm only one member. So I must await the attendance of a second member of the subcommittee. Pending that, we will recess, and this way I have maintained my pattern of opening the meetings on time, even though we now must rest. We're in recess.
[Recess.]
Mr. GEKAS. The hearing will come back to order.
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[The prepared statement of Mr. Gekas follows:]
PREPARED STATEMENT OF HON. GEORGE W. GEKAS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF PENNSYLVANIA, AND CHAIRMAN, SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW
This morning we examine administrative taxation—the raising of taxes by federal agencies. And we ask some very important questions: Can federal agencies constitutionally raise taxes? If they can, should Congress allow unelected federal bureaucrats to raise taxes? Finally, if Congress allows agencies to raise taxes, what administrative procedures should be in place to protect taxpayer dollars?
Let me preview my own opinions on this matter: Administrative taxation is Taxation Without Representation. One way or another, we will protect taxpayer dollars. In the face of wide agreement in Congress and the Administration on tax and IRS reform, I will not stand by silently, allowing the American people to be hit with new, hidden administrative taxes. How we limit, box in, circumscribe, and expunge administrative taxes is the question to which I will seek an answer today.
Our foil, if you will, for this discussion, is the Federal Communications Commission's Universal Service tax, a new tax on telecommunications that the Clinton Administration projects to be $3.3 BILLION in this year alone, $7 BILLION in fiscal 1999, $10 BILLION in fiscal 2000, and more in each succeeding year.
Congress passed the Telecommunications Act in 1996 intending to bring the benefits of open markets and competition to communications. Lower costs and better service are the payoff that so many of us sought for our constituents when we voted for the bill. We still believe the full payoff from the Telecommunications Act will come, but the down-payment has been stolen. The FCC has instituted a huge, unanticipated tax on long-distance service.
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In its first year—even before it is up and running!—the tax and the programs it funds are out of control. So, instead of deregulation, we've got taxation and—quite literally—consumers are paying the bill with every long-distance call.
Now, let me be clear about the scope of the problem. My Subcommittee's research has not turned up a large number of administrative taxes that are currently in existence. This suggests that we can and should act to prevent them before they become common.
I do not consider federal user fees or other charges to be administrative taxes. User fees are collected from the people who use federal property or receive the benefits of regulation, and they should generally reflect the cost of providing those services. As such, they are an economic way of imposing the costs of government services on those who get their benefits.
What we are talking about is real taxes, because they are imposed on every American and used to fund government programs and federal bureaucracy.
Let me also be clear about the Universal Service tax. By holding this hearing, I do not intend to express opposition to providing outlying areas with telephone service, nor with providing schools and hospitals telecommunications services. But, at $40 BILLION DOLLARS over 4 or 5 years, I have to wonder if the rural residents, schools, and hospitals are on this planet, or are we stringing wires to Pluto?
Is the Universal Service tax really dedicated to achieving results, or has it been converted—right out of the gate—to a do-nothing, tax-and-spend liberal social program?
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Whatever my colleagues think of universal service is fine with me. I think that, as members of Congress, we should have the opportunity—and the duty—to vote on tax increases. Anyone who opposes me on that should say so and be subject to a vote in a different forum.
Let me also be clear that I am not asserting any single solution to the current Universal Service tax problem. The committees of jurisdiction and their Chairmen are working in good conscience to solve the problem of a good intention gone bad. I encourage them, and will join them in fixing the problem with a solution that truly protects taxpayer dollars.
Today, we are looking at an essential issue for the United States government and our people: Will Congress control the power to tax, or will it permit, encourage, and condone Taxation Without Representation?
Mr. GEKAS. The Chair recognizes the gentleman from New York, Mr. Nadler, the ranking minority member of the subcommittee.
Panel No. 1. James Glassman holds the DeWitt Wallace Readers' Digest Chair in Communications at the American Enterprise Institute. He writes two columns a week for The Washington Post, and is the host of Techno-Politics on PBS. He is also former editor and part owner of Roll Call. We'll especially take note of that.
Julia Johnson is an attorney and chair of the Florida Public Service Commission. She served on the Federal-State Joint Board that the Federal Communications Commission convened to advise it on the universal service tax.
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With that, we will proceed with the testimony in the order in which we announced the witnesses. We have a standing plan of providing 5 minutes for the oral testimony. In advance, we will tell you that the written statement will be made a part of the record. So you can proceed under that. We will not hold you to exactly the 5 minutes, but please try.
Mr. NADLER. Opening statements?
Mr. GEKAS. You may have an opening statement. We yield to the gentleman from New York.
Mr. NADLER. Thank you, Mr. Chairman.
Mr. Chairman, I am pleased to be here to discuss the universal service fund, which has been in place for almost 64 years. The universal service fund was first established by Congress under the original Communications Act of 1934 to ensure affordable rates for all consumers, including those in high-cost areas, with the goal of making telephone service universal. As a result, phone service is available in more than 93 percent of homes across America. The program has been enormously successful, and has contributed to the growth of one of the world's finest telecommunications systems.
We ought to recognize the fact that our phone system has been designed with implicit subsidies in place all along, for the last 64 years, in order to make affordable universal service possible. The universal service fund makes it possible for rural customers and for elderly customers to have basic phone service that they would likely otherwise lack.
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Our system is based on the premise that some callers subsidize others. To make those subsidies explicit for the first time by referring to them as taxes is a very questionable idea. The service fund is a discount system funded by carrier contributions, not an entitlement program funded by cash outlays from federally-collected revenues.
Legally, in Rural Telephone Coalition v. FCC in 1988, the District of Colombia Circuit Court upheld the FCC's universal service rules and concluded that universal service contributions do not constitute a tax. These funds are not used for general revenue purposes, and they are not taxes. It is not as if phone fees are being used to build roads and bridges. In fact, all the fees are used to further benefit the telecommunications industry.
So the universal service fund is not a tax. It has never been considered a tax. It has been found by the court, at least one court, not to be a tax, and it should not be misrepresented as a tax here today.
In 1996, the Congress acted in a broad bipartisan manner to expand the universal service fund to make it affordable for schools and libraries to connect to the newest telecommunications medium, the Internet. This was an extremely popular idea that was incorporated into the 1996 telecommunications bill, and I know of virtually no opposition at the time.
Congress recognized the value of the Internet as an educational tool and sought to make it universally accessible, at least to schools and libraries. The great value of the Internet which makes it possible to obtain information from all over the world quickly and easily must not be reserved for the few. The Internet must be available to all our citizens, and not just those who can afford thousand dollar computers in their homes or who send their children to schools in wealthy neighborhoods.
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Our efforts to improve our schools and to enlighten our children must be maintained and, frankly, expanded. I firmly believe that our schools and libraries ought to be able to access the Internet at the discounted e-rate promised to them in the 1996 telecommunications bill, which phone companies fought so hard to enact. That bill deregulated much of the industry and will result in enormous profits for these companies, which already reported annual revenues of $223 billion in 1996. These companies promised Congress in writing to support a $2.25 billion program to wire schools and not to add a new line item on consumers' bills. This costs about 2 percent of their revenues, and remember, they will be reimbursed for this discount from the universal service fund. So this is not a bad deal for the phone companies, and it is wrong to single out one portion of the telecommunications bill for special action, since it was negotiated as part of a package deal, with every cost being offset with benefits.
So the universal service fund was properly expanded to include discounts for schools and libraries, and this new program is now tremendously popular and enjoys wide bipartisan support for Members of Congress and the American people. Already the School and Libraries Corporation has received 18,000 applications just since January from schools and libraries throughout the country who want to participate, and the number is growing every day.
As of yesterday, the SLC had received 972 applications from schools and libraries in New York State alone, and I understand there have been more than 600 applications from the State of Pennsylvania, for example. If these applications are approved, the program will benefit millions of people all over the country.
I know well, I know full well, that some of the groups that are represented here today are involved in what I feel is a blatant attempt to undermine support for this program. That is unfortunate. They are crying, ''tax,'' when no tax in fact is in place, in an attempt to undermine a program that benefits most of the country. It is wrong. Unfortunately, this tactic is becoming increasingly popular these days.
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Finally, let me just say that if these groups are successful, and the new discounted rates for schools and libraries are not realized, then you will see a real tax increase, because local residents who pay taxes that fund public schools and libraries would then have to pay much higher rates to access the Internet. That will lead to higher local taxes or perhaps no access to the Internet for millions of Americans who otherwise would benefit. We should not allow that to happen.
So let me conclude by saying, again, that the universal service fund has never been considered a tax. It should not be considered one now, and it is entirely proper for it to be expanded—not only proper, but wise, useful, and appropriate—for it to be expanded to help schools and libraries gain access to the Internet, and I hope we never reduce or tamper with what could be a blessing to this country, as was the universal service charge started in 1934. I hope this hearing is not designed for, and does not go in the direction of starting to undo one of the good things, one of the few good things, in my view, that this Congress has done in the last few years.
Thank you very much.
Mr. GEKAS. We thank the gentleman.
Indeed, the question is folded into the remarks made by the gentleman from New York, and the purpose of this hearing is to inquire as to whether or not this does amount to a tax. He already has stated what he believes is the case, and he, the ranking member, applauds the purpose of the surcharge, tax, increased rate, whatever is the extra money that is to be spent and gathered in these projects for a purpose that is separate and apart from the original purpose of the Telecommunications Act.
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He says that this is not the bill—that we would be horrified if this bill were to use the revenues newly generated for highways and other programs, but says that to use it on the Internet highway is perfectly proper. That begs the question, and that must be determined by this subcommittee and by the Congress eventually.
The other point that has to be made is that there is nothing in the purpose of this hearing to delve into the good purposes of connecting up schools on the Internet. That isn't the question. The question is: How, if that's to be the public policy of the country, how is that to be funded? Maybe the answer is to have the local authorities do the taxation that is required to implement their school districts with this kind of project. Maybe isn't that the fairest way, rather than have ratepayers across the board subsidizing local tax districts. That's a question; we've got to resolve that.
This is not a question of what the goal is, but how to arrive at that goal. It is very worrisome that even a perception of delegation of tax authority from the Congress to any of the agencies is there for all the world to see, and we must question it, and we do. Hence, these hearings.
Mr. Glassman may begin.
Mr. CHABOT. Mr. Chairman?
Mr. GEKAS. Oh, Mr. Chabot?
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Mr. CHABOT. Thank you, Mr. Chairman, for holding this important hearing. I have a brief opening statement, very brief.
As we approach the dawn of the 21st century, I'm very concerned that American families now face the highest tax burden in peacetime history. Government demands income taxes, sales taxes, property taxes, taxes for stadium tickets, and hotels and restaurants, gasoline, the Internet, and the list goes on and on.
Recently, we've been able to make some progress enacting child and education tax credits, capital gains tax cuts, and a reduction in the death tax. However, I think we must do much more and we must enact broad-based tax cuts and reform the IRS.
But, as always, those of us who are fighting for lower taxes are engaged in an uphill battle against the Washington establishment with an insatiable appetite for the hard-earned dollars of America's families.
The FCC is now on a crusade for high taxes and bigger government. These unelected bureaucrats seek to pick the pockets of virtually every American by imposing higher taxes on telephone service. Our Constitution clearly confers to Congress the power to tax, a power that, I might add, is already used far too often. Allowing unelected Federal bureaucrats to impose new taxes on American citizens violates the deeply-rooted principles of our democracy.
I'm also concerned that these new taxes will limit the ability of Americans to use the Internet. This tax will make phone and Internet service more expensive, making it more difficult for families with children to bring the benefits of new technology to their home.
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Mr. Chairman, improving access to technology in our schools is clearly a noble goal. However, permitting a Federal agency to enact new taxes to fund this program is wrong. Government is already too big. It spends far too much money. Let's reduce the size of the Washington bureaucracy, block grant the funds to our schools, and allow parents and teachers and local school boards to determine the best way to improve education.
I yield back the balance of my time.
Mr. GEKAS. We thank the gentleman, and we want to make sure the record indicates that the gentleman from Ohio, Mr. Chabot, is present, in attendance, has rendered his opening statement.
With that, we'll turn to Mr. Glassman.
STATEMENT OF JAMES K. GLASSMAN, DeWITT WALLACE READERS' DIGEST FELLOW IN COMMUNICATIONS, AMERICAN ENTERPRISE INSTITUTE, WASHINGTON, DC
Mr. GLASSMAN. Good morning, Mr. Chairman, members of the committee. My complete statement has been submitted. I just want to make a few points.
The new system of charges for universal service amounts to a tax. Anyone who has any doubts should just read the excerpt from the transcript of my interview with Reed Hundt last year. That's included in my complete statement.
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This is bad tax policy. It circumvents the system that was enshrined in the Constitution, and it gives discretion to persons who are unelected and unaccountable to the electorate, some of whom, Mr. Chairman, receive salaries higher than you.
Second, in this setup, the General Accounting Office says the FCC, quote, ''exceeded its authority when it directed the National Exchange Carriers Association, Incorporated, to create the Schools and Libraries Corporation and the Rural Health Care Corporation.'' That's from a February 10th letter to Senator Stevens.
Third, the system is extremely complicated—extremely complicated. It's very difficult for anyone who has not engaged in this in a professional way to understand it or even explain it to a layperson.
Fourth, it is inefficient. Professor Jerry Hausman of MIT, in a paper for the National Bureau of Economic Research, says that the system of collecting taxes in this way adds an additional cost of $1.05 to $1.25 for every dollar collected. He estimates that's an efficiency loss of $60,000 per household in the United States when this system is finished.
Fifth, we are talking about staggering amounts of money—staggering amounts of money—$20 million over the next 10 years, $2.65 billion for schools and libraries and health care alone. I'm not sure anyone, and certainly not many Members of Congress who originally voted for this in the telecommunications bill, understood how much money was involved here.
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Sixth, there is a serious lack of transparency. Most Americans don't know that these costs are being passed onto them. Many telecommunications companies would like to tell them about this through line items on their bills. According to The New York Times and other sources, they were pressured not to do so. However, my understanding is that these line items will start showing up on bills, and I think we will hear from the American people.
And, finally, it's hard to believe that the current architecture and high charges were originally envisioned by Congress when it passed the telecommunications bill of 1996. That's why I believe it's so important that you're examining these issues today, and I hope that I can contribute to some of the understanding of the current situation.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Glassman follows:]
PREPARED STATEMENT OF JAMES K. GLASSMAN, DEWITT WALLACE READERS' DIGEST FELLOW IN COMMUNICATIONS, AMERICAN ENTERPRISE INSTITUTE, WASHINGTON, DC
Good morning, Mr. Chairman.
My name is James K. Glassman. I am the DeWitt Wallace-Reader's Digest Fellow in Communications at the American Enterprise Institute here in Washington. I write two columns a week for the Washington Post on financial, economic and political topics, including those involving taxation and telecommunications. I am also a columnist for U.S. News & World Report. I was formerly publisher of the New Republic magazine and president of the Atlantic Monthly magazine. Between 1988 and 1993, I was editor of Roll Call, the twice-weekly newspaper that covers Congress.
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Finally, for the past three years, I have been host of the weekly PBS television series, TechnoPolitics, which focuses on the interaction between technology and public policy, one of my major interests.
It was in that capacity last spring that I interviewed Reed Hundt, the outgoing—in both senses—chairman of the Federal Communications Commission. I asked him about the plan for providing subsidies from the Universal Service Fund to pay for Internet and other telecommunications services to classrooms throughout the United States.
It was my belief at the time that the financing of this program, estimated then at $10 billion, was little understood by most Americans. The following dialogue ensued:
Glassman: Who's going to pay the $10 billion? . . .
Hundt: It will be contributed by communications companies. Will they pass it on to somebody? Yes, they'll pass it on to somebody, but it'll be passed on to everyone in America in insignificant ways down to, you know, pennies per day. It will be a collective action by all of America.
Glassman: So since everybody uses the phone system——
Hundt: That's right.
Glassman: —and if it's passed on in an equal way, as you say, or spread out, why not just tax people? Why not raise general tax revenues?. . . . Why use the phone system as a means to generate revenues for what you consider to be public goods?
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Hundt: Probably the most equitable way that you could raise money for a national purpose would be through contributions by communications companies, because they cover the whole country.
Glassman: Really?
Hundt: Yes.
This conversation with Mr. Hundt eventually led to a column that was published on December 2, 1997, in the Washington Post under the headline, ''A New Tax for a New Year.'' What was remarkable—and what I did not understand back in the spring—was that the amount of this tax would be determined by the FCC itself, rather than by Congress, and that the tax would be imposed by, collected by, and administered by, not the federal government or even the FCC itself, but a new non-profit company. In addition, two new private Delaware corporations would be created to implement the new programs. One of these, with responsibility for Internet services involving schools and libraries, would be headed by an attorney with a salary considerably in excess of that earned by the members of this committee or by the commissioners of the FCC.
The amount of the schools-and-libraries tax—and I will call it that—which is being collected was originally estimated at $2.25 billion annually for the next four years. This amount has been scaled back, at least temporarily, to $625 million for the first six months of 1998. The collection began last January, and some of your constituents may be receiving bills with a line-item charge for ''universal service.'' Most of your constituents, however, do not know that they are paying a new tax because the telephone companies were pressured by various parties not to report the tax as a line item on the bills.
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It was reported at the time that the FCC ''decided to reduce the charges after the carriers said the fee could lead to higher rates and after AT&T and MCI threatened to specify the charge on the bills they send to customers.'' (''Fund to Aid Technology in Schools Facing Big FCC Cuts,'' New York Times, December 15, 1997, p. D–1) Apparently, ''the agency worried that if millions of Americans began seeing such fees on their bills, popular support for deregulating the telecommunications industry could begin to erode.'' (Ibid.) Commissioner Harold Furchtgott-Roth, the lone dissenter from the Commission's Order, concluded: ''I am reluctant to support any new fees or taxes on consumers; I will never support any new fees or taxes negotiated in secret, without public notice and comment.''
Meanwhile, at least one telecommunications company has filed suit in federal court challenging the entire legal edifice that has brought about these charges.
A February 10 letter from the General Accounting Office to Senator Ted Stevens concludes that ''the Commission exceeded its authority when it directed the National Exchange Carriers Association, Inc. (NECA) to create the Schools and Libraries Corporation and the Rural Health Care Corporation.'' These are the two Delaware corporations which are implementing the programs.
And, finally, a recent working paper, written for the National Bureau of Economic Research by Professor Jerry Hausman of the Department of Economics at the Massachusetts Institute of Technology, examines the schools and libraries program and concludes that ''the efficiency loss to the economy for every $1 raised to pay for the Internet access discounts is an additional $1.05 to $1.25 beyond the money raised for the Internet discounts. This cost to the economy is extraordinarily high compared to other taxes used by the Federal government to raise revenues.'' That works out to an efficiency loss of $60,000 per household per year when the tax is fully implemented, which is, as Professor Hausman puts it, enough to buy a house in many parts of the United States.
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Today, I will relate how this complicated, costly and perhaps illegal situation came about.
It begins with universal service. The Congressional Budget Office (CBO) defines the concept as ''the system of redistributing costs associated with local and residential telephone service to long-distance and business customers, with the intent of increasing the percentage of the population that has telephone service.''
According to Milton L. Mueller Jr., in his book, ''Universal Service'' (MIT Press/AEI Press, 1997), the ''contemporary construction of universal service . . . has prevailed from about 1975.''
There are two ways in which conventional universal service is now provided. First, the FCC and state regulators allow phone companies to set rates with hidden subsidies that flow to their high-cost customers—for example, in remote areas—through excess amounts paid by their low-cost customers. Also, subsidies flow to certain local phone companies from other local phone companies and long-distance carriers, for the same purpose. Second, a Universal Service Fund (USF) was established to collect revenues from telecommunications carriers and disburse them for specific services.
The Telecommunications Act of 1996 transformed many of the formerly implicit types of subsidies in the first category into explicit programs of the USF.
The USF has four main programs, in addition to the Internet-related programs that were also added in the Telecommunications Act of 1996. The largest—called the High-Cost Program—accounted for $800 million of the $1 billion in outlays for the USF in fiscal 1997. That program provides subsidies for rural areas.
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The other three programs are Lifeline and Linkup, begun in 1985 and 1987, which provide subsidies for low-income people to pay their monthly phone bills and to connect to the phone network, and a service for the hearing-impaired.
As new programs are put into place and the implicit subsidies are turned explicit, outlays by the Universal Service Fund will explode. From $1 billion in fiscal 1997, they will rise, according to the President's recently submitted budget, to $7 billion in fiscal 1999, and to more than $13 billion in 2003.
The two new programs will provide a wide array of telecommunications services, including Internet access, to: 1) schools and libraries, and 2) rural health providers. The services will be offered through a system of discounts to these institutions as they purchase them from private firms. The CBO estimates that the total cost to taxpayers—or phone users—of the schools and libraries program will be $19.4 billion between 1998 and 2008 and $1.3 billion for rural health care providers over that same period. The initial annual limits were $2.25 billion for schools and libraries and $400 million for rural health.
Eligible services include both external connections, such as access to the Internet, and internal connections, such as local area computer networks connecting individual classrooms. Also included: charges for satellite transmissions for distance learning.
Many of these services have already been adopted in the nation's schools without federal help. In fact, in 1996, two-thirds of public schools were using the Internet; that number today is probably far higher.
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There are also questions raised about the need for Internet access by schools. When I interviewed David Gelernter, professor of computer science at Yale (and coincidentally a victim of the Unabomber) for my December 2, 1997, column, he told me that he was more concerned about children not reading than about their not connecting through the Internet. ''Children need Internet access,'' he said, ''the way they need subsidized bus service to the nearest mall.''
All of the Universal Service programs are administered through a fiendishly complex system of boards and corporations. At the top is the National Exchange Carrier Association, Inc. (NECA), which was established at the direction of the FCC in 1983 as an association of local carriers to administer various tariffs. Then, on July 18, 1997, the FCC directed NECA to create an independent not-for-profit subsidiary called the Universal Service Administrative Company (USAC) that would administer the high-cost and low-income universal service programs as well as handle the billing and collection functions for all of the universal service programs.
Next, the FCC directed NECA to create two unaffiliated not-for-profit corporations, incorporated in Delaware and designated as the Schools and Libraries Corporation (SLC) and the Rural Health Care Corporation (RHCC), to implement the Internet-related and other programs. Specifically, according to the two organizations, this means ''administering the application process, creating and maintaining a Website to post service applications, and performing outreach and public education functions needed to administer the schools, libraries and rural health care programs.'' Thus, four separate entities have a piece of the Universal Service action.
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One concern about SLC and RHCC is that, as private corporations, they are exempt from the procedural safeguards, including making public disclosure of information and following contracting guidelines, that are required by the Federal Advisory Committee Act. That, at any rate, is the judgment of the General Accounting Office.
More important, however, in its letter to Senator Stevens, the GAO states that the FCC exceeded its authority in setting up the SLC and the RHCC in the first place. ''In our view,'' says the letter, ''the Control Act [i.e., the Government Corporation Control Act] prohibits an agency from creating or causing creation of a corporation to carry out government programs without explicit statutory authorization.''
This, then, is the outline of the complicated system by which the FCC has decided to implement the Telecommunications Act of 1996 as it regards Universal Service.
It is important to understand that the act did not specify the amounts that would be collected and used by schools, libraries and rural health units for their high-technology telecommunicating. Indeed, many members of Congress are surprised—to use a mild word—at the high costs of the programs. Chairman Thomas Bliley of the House Commerce Committee wrote to FCC Chairman William E. Kennard on December 15, 1997:
''While I agree that the Commission, acting as the expert independent agency, has some discretion to implement section 254 [of the Telecommunications Act], I find it troubling that the agency would adopt an implementation strategy that results in increasing telephone rates for many Americans. Clearly this was not Congress's intent, nor mandate, when it passed the Telecommunications Act of 1996.''
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Similarly, Chairman Michael G. Oxley of the House Commerce Committee's Subcommittee on Finance and Hazardous Materials wrote to an FCC commissioner last year: ''I do not believe that most Members envisioned subsidies in the billions of dollars annually—at least not initially.''
That is exactly what they are getting.
Let me end with some editorial comments: I believe that payments for Internet connections should be made at the local level, education being primarily a state and local, rather than a national, function. Still, if it is the will of Americans to provide these services at federal direction, then they should be offered and paid for in the most transparent and above-board manner possible. That is clearly not the case here.
On February 20, a company called Celpage, Inc., filed suit against the FCC, arguing that ''the Universal Service regime implemented by the FCC is an unlawful tax.'' I am no lawyer, but it appears this case has merit. Collecting taxes through phone bills for use to promote the general welfare is, at best, misleading.
One of the joys of our system is that these obfuscations eventually become clear, and Americans tend to react to them sharply. A more appropriate way to handle the matter of Internet access would have been to ask Americans directly, through the appropriations and taxation process: ''Do you want to pay, through your federal taxes, $2.65 billion a year to schools, libraries and rural health care providers so that they can use the Internet and other high-tech communications services?''
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Also, a word on where this all began—with telephone access to Americans in remote areas. My own view is that this sort of universal service should never have been subsidized to start with. Why should inner-city dwellers foot the bills of people who choose to live in the glorious, wide-open spaces of Montana? But, today, with advances such as cellular phones, such subsidies make little sense. The latest FCC study finds that telephone penetration was 93.9 percent nationwide. Alaska, at 94.5 percent, has a higher penetration than New York, at 94.2 percent.
Finally, it should be of concern to all Americans that the new Universal Service system provides a pot of money that can be distributed at potential political gain, with little accountability.
It is this notion of taxation outside the tax code and the normal legislative process that is most bothersome—although, I suppose, it should not be too shocking. When William Gladstone was chancellor of the exchequer in Britain in the 19th century, he is said to have asked the famous inventor Michael Faraday about the usefulness of electricity.
''Why, sir,'' said Faraday, ''there is every probability that you will soon be able to tax it.''
Mr. GEKAS. Thank you.
Ms. Johnson may begin her testimony.
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We acknowledge the presence of the gentleman from Tennessee, Mr. Bryant; and the gentleman from South Carolina, Mr. Inglis. We may proceed.
STATEMENT OF JULIA JOHNSON, ESQ., CHAIRMAN, FLORIDA PUBLIC SERVICE COMMISSION, TALLAHASSEE, FL
Ms. JOHNSON. Thank you, Mr. Chairman and members of the committee. My name is Julia Johnson. I'm the Chair of the Florida Public Service Commission. As such, I have daily contact with consumers regarding telecommunications issues, as well as the other issues that we regulate. We're also involved in the implementation of the Federal Telecommunication Act as it impacts Florida and the State implementation. I also serve as the Chair of the Federal-State Joint Board, and I've been a member of that board since its inception.
I've been honored to serve on the Federal-State Joint Board. It's been a challenge, but it's been a very rewarding experience. I've had the opportunity to implement a historic new law that receives full bipartisan support, has been endorsed by the States, including the National Governors' Association, and interested parties from diverse disciplines.
In implementing the law, and in following your authority, I have looked directly to the text for direction. The law does not give regulators or unelected bureaucrats unlimited discretion. It narrowly defines our mission.
First, a clear codification, an affirmation of universal service, a simple, yet profound concept, providing all Americans with phone service at fair, just, and reasonable rates. Nothing in that principle is new. It's been around for over 60 years.
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High cost support is necessary to provide access to networks, so that someone who lives in Texas or Pennsylvania can call someone that lives in the innercity or the Everglades of Florida at an affordable rate, so that their rates aren't 200, 300, or 500 percent higher than the rates of someone in urban areas.
Low-income individuals have also been taken into consideration to ensure that they have access to the network. You have endorsed a concept of ubiquitous network, and by doing that, you've increased the value of the telecommunications network. Ubiquity enhances the value, not just for customers, but for the companies, too. You've embraced a concept of competition, but you've not abandoned universal service.
Universal service has allowed our Nation and our networks to grow and prosper. Now how have we achieved that? How have we achieved that as regulators? Certainly, it's been through a contribution mechanism. That contribution mechanism, even under the new schemes that are proposed, has not changed. Carrier-to-carrier assessments—the same assessment process conceptually and in fact that has existed for the last 60 or so years to support both high-cost areas, rural areas, low-income individuals. It is not new.
On the Federal side, we have used interexchange company revenues to, indeed, keep the local rates low. It is a process—it has been a quid pro quo, but the monies have been very targeted. They've been specific. They've not been laid out in such a way to give broad discretion or to bring back funds to allot to any resource necessary. They have been limited in their assessment to telecommunications services and access to telecommunications services.
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The assessments have been done through State and Federal processes, cost allocation, and separation principles, to maintain the balance. Again, directionally, this has not changed.
States have their own mechanism that we also use to support keeping our local rates low. It is the same process—carrier-to-carrier contributions focused on telecommunications. Certainly, you have seen the wisdom in expanding the program to include schools, libraries, and rural health care providers. You determined and recognized that the information age requires more than just access to plain old telephone service. Access must be provided not just to residential homes, but to our schools and our libraries, so that our children and our adults will have access to the information age and information technology.
Just as we could not afford to have high-cost small towns not on our network, you have concluded that we also have to give access to our children and to our older adults, who would otherwise be left off of our network. What we did in terms of the Joint Board in making our recommendation to the FCC was to follow closely your direction. We used the principles set forth to keep low rates, competitive neutrality, maintaining but changing subsidies from implicit to explicit.
Some suggested that when we were developing the schools and libraries program that we have a free rate. We determined, based on your direction and your direct authority, that we could not, indeed, have a free rate, but that what we would have is a discount program. Monies don't go to schools directly. They receive discounts off their telecommunications services. The monies go to the providers in such a way to provide for a comprehensive setup that will allow carrier-to-carrier contributions, but discount rates for our schools and libraries.
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Often, it had been articulated that we should limit the services that the schools and libraries would have access to. We determined that that certainly is not the role of the individual States, but is the local role to determine what services need support and how they will be used.
We also capped the fund to make sure that impact on rates would be lessened. We also included language that stated that you pay as you go, to ensure that we will not overcollect.
And our role is not complete. It is a continuing, ongoing role. As a regulator, I am extra-sensitive to the issue of ratepayers and making sure that rates are not increased. I'm committed to ensuring and seeing that we do have universal service and that rates are affordable for all of our citizenry. I believe that that is one of the reasons we established a State-Federal Joint Board, so we could work in union and ask counsel from citizens' groups, from consumer groups, from schools and libraries, to ensure that we would have services that were, again, affordable to all.
I do not believe that the program is a tax. It is a discount program, and in general, it is a contribution program that has existed for over 60 years.
Thank you.
Mr. GEKAS. We thank the lady. And now, if you're willing, we'll pose some questions.
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For Ms. Johnson: Before the advent of the Telecommunications Act was there any, in the industry, any action or movement in the industry to help schools and libraries?
Ms. JOHNSON. I think that there was some initiative and there continues to be initiatives to help schools and libraries. Generally, on the issue of their rates that they paid for their service, they were still paying some of the highest rates in the Nation, and in our State, some of the highest rates, much higher than the commercial customers and others of equal size.
Certainly, there has been some effort, but, as stated by one of the honorable Members, obviously, there's a need. There have been over 18,000 applications filed to receive the benefits of these programs. To me, that demonstrates that there is a need to make sure that there is access to the information network for our schools and libraries, in addition to the help that's being received by corporations and private citizens.
Mr. GEKAS. That help to the local schools and the libraries could be obtained through other funding, though, could it not? That is, it isn't only the possibility that telephone rates would go up that would bring enough funding to meet the demands of the local communities for expansion of library or school communications equipment or other projects; is that correct?
Ms. JOHNSON. Yes, sir, I believe that there are other avenues, and that those need to be used, too. Schools and libraries have enormous demand, and I think that it will take the collaborative effort, and more than just one funding source, in order to ensure that they are a part of our information age. I believe that that is the reason why the language was crafted in just the way that it was, that we could ensure that we have access not just for residential customers, but we provide access to our schools and to our libraries.
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Mr. GEKAS. But if you were servicing the libraries and schools before, as you mentioned, in other programs, before the Telecommunications Act, what structure did you use, what authority did you use for that?
Ms. JOHNSON. I'm sorry. State regulators——
Mr. GEKAS. You stated—when I asked you, even before the Telecommunications Act was there any aid from your enterprises to schools and libraries, you answered in the affirmative.
Ms. JOHNSON. Let me clarify that——
Mr. GEKAS. Yes.
Ms. JOHNSON [continuing]. And I apologize. I thought you meant whether or not there were any volunteer efforts or efforts by private corporations, and I was addressing that. I wasn't addressing the issue of the Florida Public Service Commission and what we have been able to achieve.
What we have been able to achieve in terms of passing the discounts, the 20 to 90 percent discounts, were a direct result of your legislation, and it was a direct result of the FCC order that allowed the 20 to 90 percent discounts. The other programs that I mentioned were, I think, private enterprise being also involved, and those programs are, in fact, complementary, but insufficient.
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Mr. GEKAS. Mr. Glassman, in your printed colloquy with Mr. Hundt—was it?
Mr. GLASSMAN. Yes.
Mr. GEKAS [continuing]. He seemed to indicate that all of this is going to be passed onto somebody, and of course that can only mean the telephone user community; isn't that correct?
Mr. GLASSMAN. Correct.
Mr. GEKAS. And in doing so, then we have, do we not, we have a select set of payors for services beyond their original intent for being subscribers; is that correct?
Mr. GLASSMAN. Correct.
Mr. GEKAS. Do you believe that the local governments and the local communities would not try to serve their libraries or schools in their own fundraising, revenue-raising capacities, and that the Congress has felt that we've got to help those local governments or relief their burden by doing this? Because I did not have that notion when I voted for the bill, I have to admit.
Mr. GLASSMAN. Well, it seems to me to stand to reason that if access to the Internet and other high-technology telecommunications systems is an important part of education, that no one knows that better than a local school board. In fact, the latest statistics—well, the statistics through 1996 show that two-thirds of American schools have at least some Internet access right now, and not every single classroom does, but two-thirds do. It seems to me that this is the ultimate local decision.
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Mr. GEKAS. So you would not be sitting here, would you, Mr. Glassman, if new rates were imposed on all telephone subscribers for new capital projects or maintenance projects, or even new telecommunications equipment for the subscribers? That wouldn't even merit your approaching the witness table; is that correct?
Mr. GLASSMAN. Correct, Mr. Chairman.
Mr. GEKAS. But, rather, it is the notion that this amounts to a tax because it isn't circumscribed for the telephone subscribers for telephone purposes?
Mr. GLASSMAN. Correct. If this is a grand—if there is a grand national purpose in connecting every classroom to the Internet, then I think it should have been debated as such, and it should have been taxed as such. But, to my understanding, that's not what happened here.
Mr. GEKAS. So general revenues could more efficiently and more responsibly be used by way of policy mandates to take care of the problem that this seems to try to protect?
Mr. GLASSMAN. Absolutely, and one wonders why it wasn't done that way. Maybe it's easier to conceal if it's done this way, or it appears to be free.
Mr. GEKAS. The time of the Chair has expired. The gentleman from New York is recognized for 5 minutes.
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Mr. NADLER. Thank you, Mr. Chairman.
Mr. Glassman, in your testimony you state that, quote, ''My own view is that this sort of universal service''—meaning since 1934—''should never have been subsidized to start with.'' Do you think that the universal service since 1934 that you disapprove of has been a tax all this time or did this only become a tax in 1996 with the Telecom Act adding to the Internet?
Mr. GLASSMAN. I would draw a very sharp distinction between the kind of universal service that was in place until today and the new universal service that's associated with the schools and libraries and health care. I think that the former was clearly associated with phone service, with telecommunications, with phone service. This is not. This is part of a grander national purpose.
Mr. NADLER. That may be, but was that a tax?
Mr. GLASSMAN. I don't think so
Mr. NADLER. Why not?
Mr. GLASSMAN. Because it as a series of charges that were made and subsidies that were internal, and more important, had to do with phone service itself. I consider it a tax for general purposes because Internet connection is something that's completely different, I think, from normal phone service.
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Mr. NADLER. So all the people that we have had parading to witness stands for the last seven or 8 years in innumerable hearings before innumerable committees, leading up to the Telecom Act, who told us that all of these things are coming together, that we're not going to be able to tell the difference between a telephone and a computer and the television set and the cable and the phone service, and all of this is coming into one technology and one home communications thing, they were all wrong?
Mr. GLASSMAN. I would draw a very clear distinction between connecting everybody up with the Internet for some kind of grand national purpose and subsidizing rural phone service, which I don't like, either, by the way.
Mr. NADLER. Well, you said you didn't like it. I asked you if you thought it was a tax.
Mr. GLASSMAN. No.
Mr. NADLER. Okay. I don't see the distinction, but let's get onto another question. The point of a tax, of course, is that you're paying something you wouldn't otherwise pay.
Mr. GLASSMAN. Right.
Mr. NADLER. You would concede that?
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Mr. GLASSMAN. Right.
Mr. NADLER. Okay. Until 1996-7, whenever the Telecom Act provisions go into effect, telephone companies were a monopoly. They were people permitted, the only institutions permitted to offer phone service in a given locality. You had to pay whatever they charged if you wanted service, and they were regulated, and their fees were approved and set by a public utilities commission or some other board. And if an extra charge, an extra cost, was added to them, they passed it right along to the consumer, and they got the PUC or the PSC permission to do that.
Under this bright new world of deregulation, however, we've deregulated. Phone companies are no longer going to be monopolies. You're going to have the phone company, the long distance company coming into the local market, the cable TV company, et cetera, and nobody's setting fees. It's all deregulated, and the free market sets the rates they can charge.
Since the free market will set the rate, and nobody else, then the company is going to charge whatever the market will bear. No. 1, they don't have total—they don't have freedom to pass a cost onto the consumer; they have to eat the cost if they're already charging what the market will bear. And, presumably, in a good old capitalist society, with or without this charge, they will charge what the market will bear.
The conclusion, therefore—and tell me why I'm wrong in my theory of free markets and deregulation and competition—my conclusion, therefore, is that this charge is simply a cost of doing business which will be absorbed by the company because—and result in perhaps lower profits, but it's not going to be, quote, ''passed onto the consumer,'' because the company is going to charge what it's going to charge, whether they have this cost or not. They'll charge whatever the market will bear, and they're not going to be charitable and charge less than they can, period.
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Mr. GLASSMAN. Well, I think that's certainly a debatable point. Let me quote Mr. Hundt on that question. I asked him about, who's going to pay, what I thought at the time was, $10 billion—now it appears to be $20 billion. He said, it will be contributed by communications companies. Will they pass it onto somebody? Yes, they'll pass it onto somebody, but it will be passed onto everyone in America in insignificant ways down to, you know, pennies a day, and so forth. And I think that's true.
Mr. NADLER. Yes, I've read the quote, but Mr. Hundt apparently is not a believer in the free market. You are—at least every column I read of yours has.
Mr. GLASSMAN. I think Mr. Hundt's a believer in the free market.
Mr. NADLER. I don't know, but he's not here, so I can't comment on that. But why is what I said incorrect? In other words, in a deregulated environment, in a free market, where nobody tells them what they can charge, where they will charge whatever the competition will permit them to charge, whatever the competitive market will permit them to charge, then they're not going to charge less because we don't have this charge, and they're not going to charge more. They'll charge what the market will bear. Why is that an incorrect conclusion?
Mr. GLASSMAN. I understand your point, but it seems to me that if every company has imposed on it extra costs, the same extra costs, they're all going to pass it on. Now maybe if one or two companies had extra costs passed on, because of the competitive situation, they might not pass it on. I think it's quite clear they're going to pass it on.
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Mr. GEKAS. The time of the gentleman has expired.
We acknowledge the presence of the lady from Texas, Ms. Jackson Lee.
We recognize the gentleman from Ohio, Mr. Chabot, for any questions that he might wish to pose, and yield 5 minutes for that purpose.
Mr. CHABOT. Thank you, Mr. Chairman. I just have a couple of questions.
Mr. Glassman, could you elaborate a little bit on your comment that there was pressure from the administration or somebody on the phone companies to keep this tax—it is a tax, in my opinion—keep this tax off the bills as a separate item, so that the public really wouldn't be aware of what was going on here? Could you elaborate a little on that?
Mr. GLASSMAN. Let me quote from a story that was in The New York Times on December 15, 1997, page D-1. The FCC, quote, ''decided to reduce the charges after the carriers said the fee could lead to higher rates and after AT&T and MCI threatened to specify the charge on the bill that they send to customers.'' Apparently, quote, ''the agency worried that if millions of Americans began seeing such fees on their bills, popular support for deregulating the telecommunications industry could begin to erode.''
I know from my own experience in doing research for a piece that I did prior to this reduction, which may be temporary, that sources to whom I spoke said that such pressure was applied. And I talked to people in the FCC who said they were very unhappy with the idea that this charge would appear on bills. And I talked to people, staff people, in Congress who said that they were also very unhappy about it.
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Mr. CHABOT. Thank you. Could you comment on what you believe to be the level of public awareness right now out there on this issue, the fact that this tax even exists? And I guess this hearing, of course, is part of educating the public and making them aware of it, but could you comment on what you think the level of awareness is out there now?
Mr. GLASSMAN. Yes . I think the level of awareness is just a little bit above zero. I did a column on this, I think it was December 2, which appeared in The Washington Post and got out to a lot of other newspapers, and I received calls from around the country, and I appeared on some radio programs. The general impression was: Where did this come from? We never knew anything about this.
Now I think there is—my sense is that there is more awareness of it now, but not a great deal, but when it starts showing up on the bills, and when hearings like this are being held, I think more Americans will know about it, and that seems to me to be very good thing. There's no need to keep this under a rock.
Mr. CHABOT. And then, finally, could you also comment on the Government's tactic in general to basically hide taxes, whether it's our income tax, the Federal income tax, where it's taken out every week—in other words, Government has the ability and intention, I think, to hide its taxation as much as possible, so that people don't really realize how hard it hits us and that's how we've gotten up to 40 percent of the average American family paying their money to the Government in taxes. Could you comment?
Mr. GLASSMAN. I agree with you, Congressman. I mean, the best kind of tax, at least from the point of view of the tax collector and the tax user, is a tax that people don't see. I must say that in this case that if it were put to a vote to the American people, that they're going to be spending $2.25, $2.5 billion a year on wiring schools and libraries and health care facilities, and they're going to have to pay for it, if they would agree to that in a very transparent way, and there was a tax or it was part of general revenues, I certainly wouldn't have any objection. Unfortunately, too many taxes don't work that way, and this is a very good example of one—probably the most blatant example of one.
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Mr. CHABOT. Okay, thank you very much. I yield back the balance of my time, Mr. Chairman.
Mr. GEKAS. And we thank the gentleman. We yield 5 minutes to the lady from Texas, Ms. Jackson Lee.
Ms. JACKSON LEE. I thank the chairman very much. Let me, if I might, ask the chairman unanimous consent to submit a statement that I have for the record.
Mr. GEKAS. Without objection.
[The prepared statement of Ms. Jackson Lee follows:]
PREPARED STATEMENT OF HON. SHEILA JACKSON LEE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
I am truly delighted that the Chairman has decided to entertain this important practical as well as Constitutional issue of universal service. On the practical side, it is important that we find a way to ensure universal access to the Internet and other advanced telecommunications networks. As a member of the House Committee on Science, the Telecommunications Reform Act Conference Committee in 1996 and recent Sponsor of HR 38, which recognized the outstanding accomplishments of NetDay Projects around the nation, I am committed to seeing universal access to the Internet and other advanced telecommunications network become a reality.
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Unfortunately, like most issues that we face in the Congress, this matter is not entirely that simple. For example, the provisions of the Telecommunications Reform Act of 1996, dealing with competition, were challenged in a lawsuit brought by the Iowa Utilities Board against the FCC in the 8th Circuit Court of Appeals. I know for a fact that it was not the intent of the Telecommunications Reform Act Conference Committee to create a patchwork system of competition, which did not delve deeply, and cut decisively across the whole spectrum of telecommunications and information service industry providers. Consequently, I believe that it would be unfair to require that the American consumer shoulder the entire financial burden of the Internet/ Telecommunications industry's emerging markets.
Even though the Internet is a new segment of the telecommunications market, I still believe that the FCC should continue to charge subsidies to ensure universal service access. The need to provide low cost service for local Internet access is of vital importance to the emerging electronic commerce industry, newly connected schools, and other groups developing cyber-information services. My primary concern is whether the American public, vis-à-vis an increase in rates by long-distance providers, are carrying too much of the necessary costs of universal service access? A charge for universal access is not fundamentally unfair as long as its cost is negotiable for the average consumer.
Finally, I am aware of the fact that as a Constitutional issue, it is still unclear whether an administrative agency has the power to levy a tax. For the record, however, the Supreme Court has never limited or even squarely challenged the congressional power to delegate its authority whenever necessary. The bottom line is that this program to facilitate advanced rural health care, computer literacy in our schools, and universal access to emerging technologies is a subsidy, and not a tax. This program of systematic cost adjustments has been in action for well over six decades. Honestly, we can better spend our time in this sub-committee on how well this plan is working, rather than hypothetical Constitutional issues. The most important remaining question before the members of this Subcommittee panel today is simply whether those parties who are rightfully financially responsible for universal service access subsidies are upholding their part of the bargain. If not, they should be held accountable according to the letter of the Telecommunications Act of 1996, which was crafted for the purpose of bringing us closer to genuine universal service access for all consumers.
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In closing, I know that in my district, the 18th Congressional District of Texas, located in the heart of the City of Houston, universal access has made a difference. I have personally witnessed what can happen when people come together with a goal of providing access to computer technology for our children or the socio-economically disadvantaged; it is a miracle. The Congress passed the Telecommunications Act of 1996 by a ratio of well over 25 to 1; universal access to new technologies in every part of our country is the mandate for the future. Hopefully, we can continue this significant mandate by maintaining our cost-effective bargain with the taxpayer for universal service access. Thank you.
Ms. JACKSON LEE. Let me initially say, out of fairness, Mr. Glassman, that I have an absolute philosophical difference with your perspective. I would argue that if you posed to the American people that you could save them $2 billion in prison cost and people roaming the streets with illnesses who didn't have access to medical care, and possibly a massive onslaught on their house with burglaries and stolen cars, they might opt to say that the Federal Government has a high moral ground to make sure that there is equality in access to technology and computerization.
I say that because I've just come this morning from a conference being held here In Washington with over 500 to 600 grassroots activists seeking to create an opportunity for those who do not have an opportunity, to have access to the Internet, to computerization. I assume that this is in the Judiciary Committee because of the relevance of Article I, Section 8, of the Constitution about the question of taxation. However, the Supreme Court has upheld the imposition of user and license fees by administrative agencies, and the President, against challenges that they were unconstitutional delegations of Congress.
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I would also simply say that I am certainly aghast that, though we certainly have the privilege of implementing or sponsoring any legislation that we would want, but I am certainly aghast that two very astute politicians would be so extreme to propose legislation that would eliminate the opportunity, if you will, for schools and libraries to be able to have access to the Internet and computerization. It is so outrageous that I'm almost unable to contain myself and to pose questions of common sense and judgment.
Likewise, to bring down the amount of money for rural health care facilities. Coming from Texas, one of the things that I have heard extensively is the large numbers of hospitals being closed in our rural areas and the inability of people to access hospitals facilities, and people driving 50 and 60 and 100 miles to deliver a baby, or because they've had a heart attack, they've died on the way.
With that being said, let me say that it is my belief that the Constitution clearly allows this—to make our country more computer-literate. My question to Ms. Johnson, then—and I thank you for your presence—is: Because you know about these networks and loops, what would happen to the poor and rural areas without universal service?
And let me ask this other one. I understand you serve on the Joint Board with the FCC to make universal service work. What has that process been like, and in your opinion as an administrator, have you been foolish? Have you been frivolous? Have you been wasting of the dollars? Or have you had some success and need to be able to continue to have more success?
Ms. JOHNSON. I think that the process as a whole has been a very successful process. It's been a very open process. As a member of the Federal-State Joint Board, we held public hearings, heard from schools, heard from hospitals, heard from industry groups, heard from consumer advocates, invited everyone to the table to provide input as to how this program, indeed, should be implemented.
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As to the issue discussed with Mr. Glassman with respect to the knowledge and whether or not people are aware of this program, I can assure you that in my State, and in most States around the Union, people are not only aware; they're very excited about this program. They understand, as the question that you posed, to the extent that we did not have universal service—and I'm looking at universal service in terms of providing support for rural areas and providing support for schools and libraries—that to the extent we didn't have that support in the rural areas, people would be off the network.
The same is true for not having support for schools and libraries. Given the fact that we're in an information age, it's even more vital that we have access not just for those rural communities, but also for our schools and libraries.
And, again, on the taxing issue, this is not a tax. It is a methodology. It is a process that has been in place for more than 60 years, carrier-to-carrier contribution.
With respect to the schools and libraries, they don't receive dollars. They receive discounts off telecommunications services.
The Internet service is a very important service, but that's just one of the telecommunications services that they will receive discounts toward. That, again, is to ensure access, not just for the children, but also for the adults who would otherwise not have that ability.
Ms. JACKSON LEE. It is my understanding that the Declaration of Independence did charge us with creating opportunities, inalienable rights of life and liberty and the pursuit of happiness. Would you say simply that this elimination of universal service would make a country of unequals?
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Ms. JOHNSON. Absolutely. Absolutely.
Ms. JACKSON LEE. Thank you. I yield back, Mr. Chairman. Thank you.
Mr. GEKAS. The time of the lady has expired. We turn to the gentleman from South Carolina, Mr. Inglis, for 5 minutes.
Mr. INGLIS. Thank you, Mr. Chairman. And, Mr. Chairman, I ask unanimous consent to insert a statement in the record.
Mr. GEKAS. Without objection.
Mr. INGLIS. Thank you, sir.
[The prepared statement of Mr. Inglis follows:]
PREPARED STATEMENT OF HON. BOB INGLIS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF SOUTH CAROLINA
Mr. Chairman, thank you for the opportunity to have this hearing. I think it is important for Congress to keep a watchful eye on the actions of administrative agencies. The free enterprise system is under assault from too much taxation, regulation and litigation.
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We have the opportunity before us today to examine what amounts to an enormous new tax burden. A tax increase of this size is troubling in itself, but what concerns me the most is that this tax was not imposed by Congress, but by unelected bureaucrats at the FCC. I am deeply troubled, Mr. Chairman, that the 61nton Administration has seen fit to turn Americans' phone bills into tax bills.
Mr. Chairman, I began hearing from my constituents about this matter when notices and phone bills began showing up in mailboxes across South Carolina that included a new line item charge for Universal Service Fund fees. Citizens like Frances Sargent who, along with her husband Paul, live on a fixed income in Taylors, South Carolina, are now forced pay charges on their long-distance service and for the cellular phone they have for roadside emergencies. Again, this new tax burden they must bear was not something that was passed by Congress, but by a body that is not directly accountable to the taxpayers.
This tax is also affecting small businesses. Phone bills of businesses like Zettler Sales Corporation in Simpsonville, South Carolina, Bruce Tool Company and Software Services both in Greenville, included a new five (5) percent tax for the Federal Universal Service Fee. According to an article that appeared in the February 17 edition of USA Today entitled ''Small, Midsize Businesses Bear Brunt of New Long-Distance Fees,'' some phone companies will start charging small businesses thirteen (13) to thirty (30) percent of their monthly long distance bill for Universal Service Fees. This new fee is in addition to already existing federal taxes, state taxes, local taxes, franchise charges, and interstate access charges.
The situation gets worse, too, when you consider that the five percent charge showing up now on phone bills reflect the FCC's mandate to collect $2.25 billion in 1998. However, under the FCC's plan as I understand it, consumers would be facing a staggering $13 billion tax bill within five years. This is not acceptable. Americans are tired of having the federal government reach into their back pockets and take more of their hard-earned money every time they turn around.
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Mr. Chairman, we have a responsibility here in Congress to oversee the execution of the laws we pass. I voted for the Telecom Act in 1996 because I thought that the act, while not perfect, would invigorate the telecommunications industry with competition in a way that would benefit consumers with more choices and lower prices. I think the actions taken by the FCC follow neither the letter of the law nor the intent of Congress and have denied the American people the benefits of this legislation. Indeed, we in Congress have the responsibility to see to it that raw exercise of power by an administrative agency like this must not go unchecked.
I look forward to hearing from the witnesses and thank you again for holding this hearing.
Mr. INGLIS. Mr. Glassman, Ms. Johnson has just indicated that she believes it's not a tax, as I understand.
Ms. JOHNSON. Yes, sir.
Mr. INGLIS. Is that your view? Is this a tax or——
Mr. GLASSMAN. My view is that it is a tax. A tax is a, quote, ''taking of money from the taxpayer for public purposes,'' and I think that that's what this clearly is. This is a public purpose.
Mr. INGLIS. How about the argument that Ms. Johnson was just making that this has been in the bills before; it just hasn't been broken out separately? Do you find that convincing, or you don't agree with that?
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Mr. GLASSMAN. That was in the Telecommunications Act?
Mr. INGLIS. Built into the price of telephones before, but now it's only separately stated, I mean, is that——
Mr. GLASSMAN. Well, part of universal service was built into the bills that people have been receiving for many years, but this is a whole new genre of universal service which, to my mind, has very little to do with the original universal service. If we want to provide schools and libraries with access to the Internet, it seems to me that that's on a par with providing them with books. Nobody asks ratepayers from around the country to pay for somebody else's books in some other State. It seems to me it's a perfect example of a function for State and local governments.
Mr. INGLIS. It's interesting you bring that up because I understand in South Carolina, which of course is not the wealthiest State in the Nation, that by July we will have hooked up all schools and libraries in South Carolina, wired them all, through efforts by the State and through some philanthropy by Bell South, and by some other organizations.
Mr. NADLER. Would the gentleman yield for a moment?
Mr. INGLIS. I'd be happy to.
Mr. NADLER. I just want to point out—and you might amend your question—hooking up a school or a library to the Internet is one thing; paying for continued access is another.
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Mr. INGLIS. Yes.
Mr. NADLER. And we're talking about both.
Mr. INGLIS. Yes. And it would be interesting to know, and maybe you know in your research—I don't know the relative cost between the two. I mean, as I understand it, we would get some benefit out of this in South Carolina by virtue of the access charges, but I've got to assume that the wiring is a significant cost. So we've done that on our own. Do you have any comment about that?
Mr. GLASSMAN. Well, I can't tell you the exact cost, but I think most of the people—many of the people here probably have Internet access themselves, and it's quite a competitive area. I know it's not exactly the same thing as with institutions, but those costs are certainly coming down, and I think they'll continue to come down.
The program that you're talking about in South Carolina is also in place in California and in many other States. I mean, as I said earlier, as of 1996—and I'm sure the figure is much higher today—two-thirds of the Nation's schools had some access and were using the Internet in some way, not every classroom, and I think there may be those who debate, who would question whether every classroom ought to be using the Internet on a regular basis.
Mr. INGLIS. Is it a case where—normally he who hesitates is lost, but in this case maybe if you hesitate, the wealthy Uncle Sam will come along later, and maybe you should just sit around and wait, rather than being innovative. Is that a lesson maybe for States?
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Mr. GLASSMAN. That, unfortunately, could be the lesson for many States: Let the Federal Government take care of it.
I would also say that, if I were running a State education department, that I would want to have more control over these things myself anyway. I think that there is some role for the Federal Government in education, but at this level it seems to me that these decisions ought to be made at the local level.
Mr. INGLIS. Ms. Johnson, do you have any comment about that, about the observation that some States that went ahead and have taken an active role——
Ms. JOHNSON. Yes, sir. I think you should be very proud of the work that has occurred in your particular State, but this program is even more important for your State, because now they actually have the network and the infrastructure in place. Their telecommunications services, their monthly bills—they will be able to have assistance with respect to those endeavors. And I don't underestimate—I really respect—the States and the local governments, and they want better; they want more for their children. This will not be a disincentive. This will be an incentive for additional investment, and this program is not a handout; it's only helping them facilitate the process and grow the network. That will help our Nation and our children and our older Americans.
Mr. INGLIS. Thank you, Mr. Chairman.
Mr. GEKAS. The time of the gentleman has expired. The gentleman from Tennessee is recognized, Mr. Bryant.
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Mr. BRYANT. Thank you, Mr. Chairman. I'd like to move fairly quickly, if I could. I have two questions, one for each member of this distinguished panel.
Mr. Glassman, I'll ask you the first question, and if you could keep your answer within a couple minutes, so I could have time for Ms. Johnson to answer a question, I would appreciate that.
In dealing with this situation, I've learned a lot in preparing for the hearing. One of the things I was not completely aware of was that the FCC, in implementing this part of the Telecommunications Act, in essence, set up three not-for-profit corporations: the Universal Service Administration Corporation, the Schools and Libraries Corporation, and the Rural Health Care Corporation. Now since that time, the GAO has determined that this act of setting up three corporations violated the Government Corporation Control Act, which requires agencies to have specific authorization to establish or acquire a corporation, and obviously, they did not have that specific authorization.
These particular not-for-profit corporations that the FCC established, are not obligated to follow the Administrative Procedure Act, the Freedom of Information Act, the Government in Sunshine Act, the Paper Reduction Act, and the Competition in Contracting Act.
Mr. Glassman, who are these people and how are they paid and to whom are they accountable?
Mr. GLASSMAN. Well, that's a very good question, and you really do have to ask yourself why this amazingly complicated structure was set up with three nonprofit corporations. You already have the National Exchange Carriers Association that was already set up. Then you have USAC, and now you have the Schools and Libraries Corporation, the Rural Health Care Corporation. According to the budget that I saw, these three will be spending $25 million for administrative costs.
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I'm at a loss to explain why such a complicated structure was set up. It is true that as private, nonprofit, Delaware corporations, they are not subject to the same disclosure rules as any other agency, and I don't know whether that's why they were set up or not, but that certainly is an advantage to being set up in that fashion. Although, according to the GAO's letter, they were apparently set up illegally to start with, so maybe that's a moot point.
Mr. BRYANT. Well, apparently, it hasn't slowed the FCC down yet. But who picked these people? I would think these would be very attractive jobs, well-paid jobs. Are these political people that are being put in these positions?
Mr. GLASSMAN. Well, at least Mr. Fishman, who is the head of the Schools and Libraries Corporation, may not be political, but he certainly has close ties to people in the administration. He worked in the White House. I know that he told me he's making $200,000 a year. He as very upfront about that. I've seen clips that show that he was involved in raising funds for now Vice President Al Gore during his race for the presidency, I think it was several years ago. I don't know. I think that certainly is worth looking into.
Mr. BRYANT. Thank you.
Ms. Johnson, let me take another direction with you, in terms of using your State as an example. I have no knowledge of how this is working here, but I have a phone bill from one of my constituents who's complaining about this, and he's got a total deal of $129.40, and within that $129, $130, he has a national access fee of $24.39 and he's got a Federal universal service fee of $4.52, and that's about $30. It's roughly 25 percent of his phone bill, whatever these things are. He has concerns about those.
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My question to you is, in Florida, who is setting these rates? Are the different long distance companies and telephone companies setting their own rates here? When I say ''rates,'' I mean fees. Are they consistent? Does MCI charge the same thing as AT&T and Sprint and all these other companies?
Ms. JOHNSON. Yes, sir.
Mr. BRYANT. Or are they just sort of charging different things? And is there any regulation over them in terms of how they establish this fee?
Ms. JOHNSON. I think that's a very good question. And as it relates to the national access fee, that was an effort to make sure that, to the extent that there are subsidies, that those subsidies become more explicit. The FCC took the common carrier line charge and changed that into a more structured pixie charge. The companies, however, are implementing those in different ways. I am hope——
Mr. BRYANT. So they have different fees?
Ms. JOHNSON. Yes, sir, different fees. We've had a lot of questions also from our consumers as to how those fees were actually structured. Interestingly enough, when the customers call, they generally have a lot of questions. ''What's this access fee? We don't understand how it works.'' Once that's explained, they still have some concern with respect to it, how it relates to access, but I understand that the FCC is working very closely with the industry groups. They're trying to review their tariffs. I think what they intended to do was to open these markets up to competition and have less regulation and rules requiring carriers to act in a certain way, and let the market take care of their market conditions. We're hopeful that that will occur.
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As it relates to the universal service fee, most times when I'm asked what that is, once it's explained—and I do believe it's one of the obligations of a State regulatory body to explain the mechanisms of support for both high cost and schools and libraries. Once it's explained, they usually say, okay, we understand. And to the extent that there are other carriers out there with different rate structures, they try to investigate that and pick the best rates for themselves.
Mr. BRYANT. I might just ask one yes-or-no answer——
Mr. GEKAS. Without objection.
Mr. BRYANT. Is 20 to 25 percent of the bill being related to this, is that too high?
Ms. JOHNSON. In order to answer that, I must have a clarification of the antecedent, the ''this.'' What's the ''this'' that you're referring to?
Mr. BRYANT. This $130——
Ms. JOHNSON. The access charge?
Mr. BRYANT [continuing]. Phone bill, and he has a national access fee of $24.39 and a Federal universal service charge of $4.50. That's roughly 20 to 25 percent of his total bill. Is that too high—just yes or no—in your opinion, in Florida, for example?
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Ms. JOHNSON. In my opinion, to the extent that it is necessary to recover the costs, and we're in a competitive environment, if it's a necessary cost, it's a necessary cost. To the extent there's a small fraction of that that's for the universal service program—that's the 4.4 percent to 5 percent—whether I believe that that's too high, not for the benefits that are being incurred.
Mr. BRYANT. My constituents don't agree.
Mr. GEKAS. We thank the gentleman.
Mr. NADLER. Mr. Chairman?
Mr. GEKAS. The gentleman from New York.
Mr. NADLER. I ask unanimous consent to ask Ms. Johnson a clarifying question.
Mr. GEKAS. Without objection.
Mr. NADLER. Thank you.
Referring to Mr. Bryant's constituent's bill, that $24 access charge, as I understand it, referring to the $24 that Mr. Bryant was referring to, the $4.50 was the universal charge, but the $24 was the—what did you call it?——
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Ms. JOHNSON. The national access——
Mr. NADLER [continuing]. The national access charge. That is not the universal service charge. That is the fee that the local company pays to the long distance company for use of its lines, or vice versa, has nothing to do with the subject of what we were talking about—am I correct?
Ms. JOHNSON. Absolutely, and I wanted to clarify that point, but you're absolutely correct; the national access charge is not a part of the general universal service——
Mr. NADLER. So it has nothing to do with this subject that we were talking about. It's a payment by one phone company, the long distance company, to the local company, or vice versa, for accessing their facilities?
Mr. BRYANT. Well, if the gentleman would yield——
Mr. GEKAS. The gentleman from Tennessee.
Mr. BRYANT [continuing]. I have just had this explained to me, that this long distance carrier, in fact, does break the access down into two different categories. One is the rural access charge, and the other is the universal services for the schools. So that is, in fact, in the case of this carrier the entire package.
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Mr. NADLER. But aren't they in the $4, not in the $24?
Mr. BRYANT. This is what this carrier does. This is the way they break it down in their bill.
Mr. NADLER. The $24, when you referred to the—I think it's important we clarify this because of the magnitude here involved. My understanding is that the $4 is the universal service charge, including the Internet, whatever we call this new Internet thing, and the $24 there as a national access, or whatever they call that, is a fee one company pays the other, but has nothing to do with either the older universal service charge or the new Internet; am I correct?
Ms. JOHNSON. Yes, they are separate charges.
Mr. BRYANT. My understanding is, from this carrier, whose bill this is, this is how they break it down. Now I don't know. Each carrier handles it different ways; is that not true?
Mr. GEKAS. The time of both gentlemen has expired. What I suggest, for my own purposes, if your constituent doesn't mind, if you would reprint that billing and get it to the members of the subcommittee, maybe we can analyze it on our own and then——
Mr. NADLER. Call the companies.
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Mr. GEKAS. We thank the witnesses who have opened this very important hearing.
Ms. JACKSON LEE. Mr. Chairman? May I just ask a question and get it in writing, please, because I know you're moving on to the next panel? May I just ask a question and get them to send it to me in writing, the two speakers here? So they can send it to me in writing because I know you're getting ready to——
Mr. GEKAS. Fine. Without objection, so ordered.
Ms. JACKSON LEE. All right. Since we have sort of a difference of opinion, and interestingly enough, as you were speaking, Ms. Johnson, several of my students have come in in the Close-Up Program. I think you might be familiar with that. Students come in from our respective communities, and I want them to note that we are trying to make sure that they are computer-literate.
But there seems to be a sort of difference on universal access and the structure. Would you give me in writing your interpretation of the universal service, how it is set up under the 1996 Act? Mr. Glassman, would you likewise, your interpretation of how you believe it's set up, so that in your perception it is a taxation? I'd appreciate that in writing.
Thank you very much.
Mr. GEKAS. The time of the lady has expired.
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Again, with the gratitude of the subcommittee, we discharge these excellent witnesses. Thank you very much.
Ms. JOHNSON. Thank you.
Mr. GLASSMAN. Thank you, Mr. Chairman.
Mr. GEKAS. Panel No. 2 can begin to approach the witness table: Grover Norquist, president of Americans for Tax Reform, who serves on the National Commission on Restructuring the Internal Revenue Service, and he also writes a monthly column for American Spectator.
James Miller, who is well-known on Capitol Hill and who has been a friend of Presidents actually, is counselor at Citizens for a Sound Economy. He was director of the Office of Management and Budget in the Reagan administration and a member of the President's Cabinet by virtue of that. He has also served as vice chairman of the Administrative Conference of the United States.
John Berthoud is president of the National Taxpayers Union and the National Taxpayers Union Foundation in Alexandria, Virginia. He is also a widely publicized individual who lectures on budgetary politics at George Washington University.
Christopher McLean is Deputy Administrator of the Rural Utilities Service in the Department of Agriculture. He was legislative assistant and legal counsel to Senator Exxon until the Senator's retirement. There he helped write the universal service provisions of the act in question here, the Telecommunications Act.
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With that, we welcome the panel. We begin by asserting that their written statements will become a part of the record, without objection. We will attempt to restrict each witness to 5 minutes of oral testimony, and then ask them to submit to questions from the panel.
With that, we will begin in the order in which we have introduced the witnesses. Mr. Norquist will be first.
STATEMENT OF GROVER G. NORQUIST, PRESIDENT, AMERICANS FOR TAX REFORM, WASHINGTON, DC
Mr. NORQUIST. Thank you very much. Grover Norquist; I run Americans for Tax Reform, and we receive no Federal or State taxpayer funds.
I just came from a press conference where Speaker Gingrich and Joe Barton and Ralph Hall announced their support for the vote on April 22 for a Constitutional Amendment to require a two-thirds vote to raise taxes. We're very supportive of that effort, but of course it raises the question about whether Congress or the President can redefine something, the taking of money from citizens without their permission, and call it something other than the tax and get around such a constitutional prohibition.
We're very concerned both about tax visibility in this field and others—Americans should know exactly what they're paying in taxes; they should know what it's going for. One of the arguments for moving to a flat-rate, single-rate tax, either Mr. Armey's idea of a flat-rate income tax or Chairman Archer's idea of a single-rate retail sales tax is that so everybody knows exactly what they're paying and what everybody else is paying, and you have tax visibility.
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There's a real challenge with hidden taxes, not just the addition of these new taxes on telephones, but we do a study on tax visibility questions, and before these new taxes on phones, 50 percent of the cost of phone service in the United States is actually taxes, not the use of the phone itself, or whatever. It includes the taxes on labor, the taxes on capital, the property taxes that phone companies pay, and that's high. Beer, taxes on beer are 43 percent. The taxes on a can of Coca Cola are 34 percent of the actual cost of the product goes into the total tax burden that is hidden in various products.
One of the things that I think that it's very important for us to do is to make it very clear what people are paying for. Those who believe that the Government should run more of our lives, take more of our resources, and command more of our time, I think as long as they make it clear how much of our time and lives they're taking, and what we're supposed to be getting for it, then they can honestly say that the American people have chosen, through their representatives, this level of taxation. However, if taxes are hidden and dispersed and made unclear, then it's a little hard to argue that the American people signed up for increased level of taxes.
So I think it's very important that we move away from hidden taxes. I'm very much opposed to these new fees, and so on, which are another tax. I think if we're going to be asking people to pay more and more of their resources, we need to make it clear what the monies—we need to make it clear and have real votes on these tax proposals, and it's very important that all of the local telephone companies and national telephone companies put on the actual bill that you get exactly what these fees are. I mean, I saw everyone discussing how complicated it is to read these. If these are federally-mandated user charges or license fees or taxes, let's put those on. And if we're happy about it, let's put the names of the people who wanted to impose those taxes on alongside those. I think it's very important.
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We see the same thing in power companies. Both the Federal, State, and local government add fees and taxes to power companies, and in some States they've made it illegal for the power companies to tell their consumers that part of the fee that they're paying is a tax, because the politicians want people to get mad at the power company when they take their money rather than at the politicians. This seems to me to be an effort to get money from the American people and get the rest of us to all be mad at AT&T or MCI or Bell South, rather than at Al Gore.
I do think that transparency is a particularly important issue. Americans for Tax Reform every year calculates the cost of government day, because we recognize that the total cost of government is not simply the visible taxes, but includes regulations. So while we all think we've paid our taxes by May 9, as the Tax Foundation calculates each year, if you add the regulatory burden, we're actually working for government—Federal, State, and local—until July 3, which is as late in the year as it has ever been. The era of big government is not over; it's, unfortunately, continuing.
That said, I think it's important to say this is a tax. If you want to have a tax, it should be voted by Congress. It should be an up-and-down vote. It should not be delegated illegally to some other entity, a regulatory entity, to take money from the American people.
Thank you.
[The prepared statement of Mr. Norquist follows:]
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PREPARED STATEMENT OF GROVER G. NORQUIST, PRESIDENT, AMERICANS FOR TAX REFORM, WASHINGTON, DC
Mr. Chairman, my name is Grover Norquist and I am president of Americans for Tax Reform, a national coalition of taxpayer groups with 48 state affiliates working with hundreds of county and local taxpayers' organizations around the country. Americans for Tax Reform works to educate taxpayers on the true costs of government and thereby encourages them to demand government that is smaller, less costly, and less intrusive.
ATR sponsors the Taxpayer Protection Pledge, a firm pledge to oppose tax increases, which bears the signatures of 203 U.S. Representatives, 40 Senators, and nearly 900 state legislators. ATR offers this pledge to all candidates for state and federal office in the United States.
ATR supports a single-rate tax system, which taxes economic activity one time only in a visible, neutral fashion, and which includes a two-thirds super-majority vote requirement as protection against any tax increase.
ATR sponsors Cost of Government Day. Last year, Americans worked until July 3rd to pay the combined costs of taxes and regulations imposed by federal, state and local government.
ATR sponsors the Tax Visibility Project, showing the amount of hidden corporate taxes that are built into the prices of ordinary consumer items. Bread, for instance, includes a hidden tax of 31 cents on the dollar, according to a calculation by Price Waterhouse. For a telephone call, we calculate the hidden tax to be 50 percent.
ATR sponsors the ''In Half,'' a forthcoming educational program and book on how to cut the size of the federal government as a share of gross domestic product (GDP) in half over the next 20 years by holding spending constant while cutting taxes, privatizing Social Security, and implementing school choice.
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ATR last presented testimony before this committee in support of the Cox-Wyden Internet Tax Freedom Act (H.R. 1052), which would impose a federal moratorium on the many special, duplicative and discriminatory taxes which currently afflict commerce on the Internet. We testified that the Cox-Wyden bill is an important first step toward fundamental tax reform in the information economy. ATR strongly supports H.R. 1052 and we are grateful to this committee for reporting it out favorably.
UNCONSTITUTIONAL, ILLEGAL, AND FATTENING
In the Telecommunications Act of 1996, Congress authorized the Federal Communications Commission (FCC) to define the level of telecommunications service to which everyone in the United States should have access—in effect as a form of entitlement—and to subsidize the achievement of this ''Universal Service'' goal through taxes on long-distance telephone calls.
In the past, this universal service had been primarily a matter of subsidizing local voice telephone access—or ''Plain Old Telephone Service''—for residential customers at the comparative expense of business and long-distance telephone users and, similarly, subsidizing local telephone cooperatives in rural America at the expense of urban users.
Regrettably, however, Congress chose to expand the resulting mess of cross-subsidies by directing the FCC to develop an ''evolving standard'' of universal service that opened the way for virtually unlimited cross-subsidies among all types of telecommunication service as the FCC saw fit. Worse yet, Congress directed the FCC to develop special subsidy schemes for schools, libraries and rural healthcare providers as it saw fit. Given such astonishing carte blanche to indulge in pork-barrel spending, it is hard to see how the FCC could find a way to exceed its statutory authority, but sure enough, it did.
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In order to implement its universal service program, the FCC created three private non-profit corporations to set tax rates and disburse universal service funds to favored constituencies. These entities are the so-called Universal Service Administrative Corporation (USAC), the Schools and Libraries Corporation (SLC), and the Rural Health Corporation (RHC). Their function is clear enough: As the SLC says in its own website, the USAC collects money from telecommunications service providers and passes it on to SLC and RHC. These latter take ''applications'' from ''qualified'' organizations seeking subsidies and then write checks back to the service companies to reimburse them for the discounted services offered. The result is a revolving multi-billion dollar slush fund with ample opportunities for political mischief.
The FCC's actions in this case are plainly unconstitutional, illegal, and fattening, to the extent that they provide a sure-fire recipe for bloated big government with a heavy dose of entitlement politics and insider dealing. I say they are:
Unconstitutional, because the Constitution clearly vests power to tax in Congress alone and pointedly does not give taxing power to the Executive Branch. It is troubling enough when Congress questionably attempts to ''delegate'' authority for setting tax rates to an Executive Agency. It is clearly unconstitutional when the FCC on its own initiative delegates this ''authority'' in turn to a private corporation. This is tax policy for the Roman Empire, not the United States of America.
Illegal, because as the damning letter dated February 10, 1998 from General Accounting Office General Counsel Richard Murphy to Senator Ted Stevens clearly states, no federal agency may establish or acquire a corporation to serve as an agency of its own without specific statutory authority. Congress gave the FCC no such authority whatsoever.
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Fattening, because we are talking about open-ended tax increases to finance whatever these private corporations wish to do with virtually zero public accountability.
The President's budget proposal projects universal service charges rising an astonishing factor of 13 from $1 billion in 1997 to $13.4 billion in 2003. This puts the universal service tax on a par with major taxes we have long been struggling to eliminate, such as the death tax and the capital gains tax, which bring in approximately the same level of nominal revenue despite tremendous actual costs to the economy. For purposes of comparison, $13 billion is almost double the amount of federal revenue currently brought in through the transportation fuels tax—perhaps only the federal government could make the information superhighway cost double the price of maintaining the terrestrial Interstate highway system.
To offer another comparison, the projected universal services tax would amount to roughly $120.00 per American household only five years from now. A tax on this scale is surely enough to produce grave economic distortions, and it is only one of the many taxes and implicit subsidies that warp the market for telecommunications services. The federal telephone excise tax, which is a line-item on everyone's telephone bill, brings in about $7 billion a year—about half the federal income from the death tax or capital gains tax.
Let me reiterate a few basic points:
Is the Universal Service a Fund a tax? Yes. Consider the dictionary definition of tax, ''a compulsory payment, usually a percentage, for levied on income, property value, sales price, etc., for the support of government.''
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Is raising a tax from $1 billion to $13.3 billion by 2003 a tax increase? Yes.
Is this good tax policy? No. Invisible, discriminatory, excise-type taxes are always bad and should be eliminated.
Is it even rational to use long distance service as a means of raising this unwarranted tax? No. It turns out that long distance telephone service is highly price sensitive and usage declines when taxed. Also, low income people and residential customers who are presumably being subsidized by taxes on long distance service actually spend about as much of their phone bill, proportionally speaking, on long distance service as businesses do. Thus, they themselves pay a significant share of the very taxes that are returned to them as subsidies.
Is this even an efficient form of taxation? No. It is merely a politically expedient measure that gives Congress two layers of plausible deniability—''don't blame us, blame the FCC, and then blame those corporations we can't control.'' At present, the tax is also invisible, at least until there is firmly established a recipient base of those receiving rent transfers from the fund. It is worth noting that when certain long distance carriers threatened to list the universal service tax on their phone bills, the amount proposed for the SLC during the first half of this year was halved, although ultimately the phone companies were still bludgeoned into silence by threats of regulatory reprisal.
THE TAPROOT OF THE REGULATORY WELFARE STATE
What could possibly be wrong with a SLC or an RHC? The universal service taxes, however massive they are projected to become, are merely the tip of the iceberg of federal involvement in telecommunications services. The function of the SLC and RHC is not to provide any practical benefit, because they will not. As others will surely testify today, there is no need for a federal program to ''wire the public schools.'' Parents groups, private voluntary organizations, and projects such as Net Action Day, along with local and state governments, are already doing this effectively. The price of Internet Access and PCs is also dropping rapidly. With a fully equipped, Pentium-grade PC now available from top manufacturers, such as Dell and Compaq, at prices as low as $1,000, unimaginable even one year ago, it is hard to see what the federal government can offer that the market cannot.
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In fact, all the federal government can do is get in the way—and a big part of the fundamental problem we have today in expanding the Internet is very substantially one of the government's making, the heritage of excessive regulation over nearly seven decades as codified in such monstrosities as the Communications Act of 1934, even as amended in 1996. I refer, of course, to the crisis in band-width. One can argue at infinite length about who is at fault, if truly anyone individually is at fault, or what the solution should be, or how one handles the question of providing better access to the local loop for new competitors in local telephone service. The point is, the crisis in band-width is a largely artificial problem, created by outdated cost structures, antique regulatory mandates, obsolete tax regimes, cross subsidies, and other artifacts of government intrusion that make the true costs of the many services the FCC attempts to regulate virtually impossible on a market basis. Universal access subsidies will not make this situation better. They will only confuse matters further.
The SLC and RHC actually serve only a single purpose, and that is to serve as the leading-edge justification for the federal government's entire involvement in regulating telecommunications so as to conduct bizarre schemes in rent transfer and income redistribution out of public view and beyond the reach of angry taxpayers who can protest to Congress and frequently vote Congressional tax increasers out of office.
As explicit tax increases become impossible to foist on the public, and middle-class entitlements, such as Social Security and Medicare, collapse, there has sprung forth a new tap root for the regulatory-welfare state. It is called universal service. Just as we are still struggling to dismantle and privatize the rural electric cooperatives, water projects, and other New Deal-era cartelizations of public services, so too we will still have SLC and RHC with us 60 years from now as Congress amends the Communications Act of 1934 one more time 60 years from now in 2058.
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Let me close this observation with a particularly troubling thought. Thanks to the Telecommunications Act of 1996 and the FCC's interpretation of it, we are talking about cross-subsidies for the first time between packet-switched networks, such as the Internet, and circuit-switched networks, such as the telephone system. Right now, we see the flow of subsidies going from circuit-switched long-distance to the packet-switched Internet, but this flow will undoubtedly reverse in time, and there will be a call in the name of ''tax neutrality'' for universal service taxes on Internet access to subsidize the circuit-switched networks. This will, of course, only raise the price of Internet access.
Let me remind you that every time you make a long-distance telephone call, you pay something like a nickel a minute or more in local-service access charges, and this significant cost profoundly complicates the business of creating a truly competitive, truly rational, truly innovation-friendly market in communications services. Certainly, local telephone companies would argue that this is approximately what it costs to provide the dial-tone we take for granted, but until there is more scope for market forces to work, we really cannot be sure. Our goal should be to eliminate, reduce, make explicit, or otherwise rationalize this problem over time. Pretending to fix the problem by taxing information services on the Internet to an equal level or applying regulatory mandates to the Internet in the same way we already apply them to telephone service—thus spreading the damage around evenly—is ultimately the most destructive course we can follow.
Do we need the FCC picking winners and losers in the telecommunications market, or politically driven non-profit corporations deciding how tens of billions of dollars in federal procurement money will determine the mixture of technologies and services available to schools and libraries, and eventually the general public. The answer is no.
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WHO IS IRA FISHMAN?
Who is Ira Fishman, and why are taxpayers paying him a $200,000 annual salary, which is higher than that of any Congressman, Senator, Congressional staffer or Cabinet official? Fishman, a former White House and FCC Counsel, happens to be the Chief Executive Officer of the SLC. Without being unduly offensive, I wish to suggest he serves as Al Gore's political commissar, doling out $3 billion or more in subsidies to friendly interest groups this election year, and $10 billion in subsidies during the coming election year of 2000.
Members of this committee will learn much by visiting the SLC's website at www.eratehotline.org. They will find it a gaudy, brightly colored carnival of free-money opportunities for politically active taxpayer-financed groups, both non-profit and governmental, that sadly tend to lobby for higher taxes and even more pork in the future. Another interesting site is EdLink, at www.itc.org/edlinc, which provides a useful roster of pro-subsidy lobby groups along the side of its frame. A copy of the home page is appended to this testimony.
Whatever Mr. Fishman's intentions, this type of free-wheeling, retail merchandising in political pork can only breed corruption. The very nature of their business requires the SLC, RHC, and USAC to be subject to a higher level of public scrutiny than one would expect from a federal agency, not the other way around. The idea that these corporations should be subject to virtually no scrutiny, assuming Congress does not take the proper step and abolish them—is frankly shocking to the taxpayers' movement. I would ask in particularly these questions:
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Does the Federal Advisory Committee Act (FACA) apply to the meetings of these corporations? Mr. Fishman contends it does not. Thus, one might do well to ask what role he had, if any, in the White House Healthcare Task Force, which, a federal judge has ruled, was clearly in violation of the FACA.
Does the normal administrative law applying to federal agencies and corporations apply to the FCC-created non-profits? Mr. Fishman again says it does not. Though I am not a lawyer, I find this impossible to understand. The whole point of administrative law is guarantee transparency, accountability, consistency, public comment, and due process. Protections of this type are more necessary than with the unprecedented type of outfit Mr. Fishman hopes to run.
May for-profit hospitals have access to these funds? If so, why?
What about Davis-Bacon? Will SLC-funded efforts to wire public schools count as federal spending for purposes of Davis Bacon or not? Will wiring of schools be done by parents on the weekend, or by union workers making an inflated hourly wage?
In summary, there is only one course Congress should take with regard to the SLC, RHC and USAC. Abolish them immediately. If there is no easy way for Congress to do this, I would recommend an appropriations rider that allows no federal money to be spent by real federal agencies in making so much as a single telephone call or sending a single e-mail to them. The FCC's actions to date show more than its usual atrocious judgment. I would recommend that we abolish them too.
Mr. Chairman, the method by which the universal services fund is funded is unwise, unconstitutional, and ineffective. Parents, telecom companies, non-profit corporations, and concerned citizens are already working to wire America's schools and libraries. Let them complete their mission without complicating matters with federal mandates. Ultimately, if this body deems intervention on a national scale to be necessity, make the case to the American people that a tax hike is justified.
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59920ca.eps
Mr. GEKAS. We thank the gentleman, and we'll switch to Brother Miller for his testimony.
STATEMENT OF JAMES C. MILLER III, COUNSELOR, CITIZENS FOR A SOUND ECONOMY, WASHINGTON, DC
Mr. MILLER. Thank you, Mr. Chairman.
Mr. GEKAS. We will hear the testimony of Mr. Miller, and then we will recess for the purpose of running to the floor for the vote, and then if you can wait, we'll be back.
Mr. Miller?
Mr. MILLER. Thank you, Mr. Chairman. The work of this committee is important. Why? Because I believe that government works when its actions are transparent to the voters, to the citizens of our country.
With respect to aggregate budgetary and regulatory ways in which government acquires command over resources, for decades the particulars have become murkier and murkier. You have, for example, cuts in spending, which are not cuts as people ordinarily perceive, but in fact attenuations in the rate of increase. You have a surplus which is not a surplus in the way most people understand it. In fact, the Social Security surplus, as you know, is being spent. You have little mention of liabilities contained in the budget. You have an aspect of budgeting called offsetting receipts. That numbers something like $80 billion, and are treated in the budget not as revenues, but as so-called negative outlays. You have taxes that are hidden. You have regulation. You have $47 billion in certain exemptions from the tax code known as tax expenditures, and now you have this—over 5 years, an estimate by the administration of $13 billion in new taxes.
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This program is different in the following way: It grants to an independent agency the power to tax and to spend. Under the famous Humpheys Executor decision by the United States Supreme Court, this is an agency that does not come under the direct purview of either Congress nor of the Executive. And so, in my judgment, you have made an unconstitutional delegation of authority to an agency.
Now is it unconstitutional? I think probably it is. Is it illegal the way it has been established, the program of universal service fund has been established? At least the GAO thinks so.
But aside from those issues, I think this whole program is bad policy. Why? First of all, why should some users of telecommunications services subsidize other users of telecommunications services? If, in fact, there are deserving people to whom you want to provide Internet and other access, wouldn't it be better to have this explicitly nailed down and part of the total revenue side of the budget?
And what kind of users? Brenton Woods? Resort areas? People who choose, like Ted Turner, to live in very distant places, who could easily afford it, but are provided subsidized access at the expense of people who live in urban areas, for example?
It is a very inefficient tax. Dr. Jerry Hausman of the Massachusetts Institute of Technology at an AEI conference recently estimated that it takes an additional dollar and more out of the economy for every dollar that is transferred from users of one sort to consumers of another sort under this program.
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And, finally, think of the incentives. You are developing a new program, a new service. Somebody invents a new technology, and you say to them, because this is such a wonderful technology, we are going to tax you to provide the funds, so everybody can be a recipient of this technology. Doesn't this provide the wrong incentive? Won't there be some technologies that won't be developed because they are set to be taxed?
Mr. Chairman, I thank you for listening to me, and I will be prepared, as soon as you return, to answer any questions you might have.
[The prepared statement of Mr. Miller follows:]
PREPARED STATEMENT OF JAMES C. MILLER III(see footnote 1), Counselor, Citizens for a Sound Economy, Washington, DC
Mr. Chairman and members of the Committee, thank you for the opportunity to share my views on administrative taxation and policies toward universal service in the wake of the regulatory implementation of the 1996 Telecommunications Act. As you may know, I am Counsel to Citizens for a Sound Economy (CSE), and I present these views on behalf of CSE's quarter of million members and supporters.(see footnote 2)
INTRODUCTION
In 1543, Nicolaus Copernicus published ''On the Revolutions of Heavenly Spheres.'' His research and experience as an astronomer eventually changed how we view the relationship between the earth and the sun. Copernicus understood that the earth revolved around the sun, not the other way around.
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Some 250 years later, Revolution was the order of the day in America. As a result of American colonial experiences there was a fundamental change in how we view the relationship between Man and Government. Thomas Jefferson, James Madison, George Washington, and other Founding Fathers and Mothers of our country understood that in order to be free, to enjoy liberty, Government must be held accountable to Man, and not the other way around.
Today, the Universal Service Fund (USF) is not accountable to the American people. As a policy goal, universal service is suspect. As actual regulatory policy, the rules created by the Federal Communications Commission (FCC) are an abomination. Some classes of telecommunications consumers are forced to pay higher-than-necessary rates in order to subsidize other classes of telecommunications consumers. The authority to tax has passed through so many hands that it is nearly impossible to seek redress within the political process. Finally, the current system and its administration have created the impression of impropriety. Taxpayers, and schoolchildren, deserve better.
On its face universal service may appear to be simple wealth redistribution. Such is not the case. Our current policies not only redistribute wealth: they waste resources and lack significant oversight from Congress—the representatives we elected to govern.
The basis for the administration of the universal service program is an assumption of power—the type of assumption against which the Constitution is intended to protect. The taxes collected and the subsequent subsidies provided by the universal service program are not explicit to consumers—as was mandated by the 1996 Telecommunications Act. And finally, as a means of redistributing wealth—or the affordability of telecommunications services—the universal service program is highly inefficient.
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Bear in mind that American consumers pay for universal service subsidies on top of a federal excise tax on telecommunications service. In addition to a complex and controversial subsidy system associated with the FCC, the Departments of Agriculture, Commerce and Education each subsidize telecommunications services to various constituencies. To add injury to insult, as noted this week in an article in Fortune magazine, the Rural Utility Service subsidizes telephone service to such income-strapped locations as Hilton Head Island and Snowmass.(see footnote 3)
DELEGATION
Universal service policy is a prime example of excessive—arguably unconstitutional—delegation of power from Congress to an agency comprised of unelected officials. The constitutionality and legal foundation of the delegation doctrine have not been among my principal concerns in the past. However, as a taxpayer, as a consumer of telecommunications services, as an economist, and as a former public servant, I am well aware of how regulation and taxation affect the economy.
The power to tax cannot be delegated, but is reserved exclusively for Congress.(see footnote 4) Commonsense dictates that when government officials command economic resources from taxpayers, those officials should be those we elected to govern. Often this is the reason cited to explain why in our system of government, ''All Bills for raising Revenue shall originate in the House of Representatives.''(see footnote 5) Thus, I urge you not to accept the principle of delegation in this instance without the highest degree of scrutiny.
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Further, I am sure that you are aware of the recent report generated by the General Accounting Office in response to queries by Senator Stevens.(see footnote 6) This report finds key parts of the FCC universal service programs violate the Government Corporation Control Act and are without statutory authority. Absent an explicit mandate from Congress, the FCC cannot establish a corporation. It should be noted that the FCC argues that it did not actually establish a corporation: the FCC merely instructed the National Exchange Carriers Association to do so as a condition of becoming the temporary administrator of the three corporations associated with the USF.
Regardless of how the question of delegation is resolved for universal service, the effects of every delegated power must be overseen with the strictest of standards.
OVERSIGHT
The people of the United States, ''in order to form a more perfect union'' and ''to secure the Blessings of Liberty'' established a federal Constitution.(see footnote 7) The Constitution assigns the power of taxation to Congress. On its face, it may appear that the authors and signatories of the Constitution were mistaken—or confused. A stated purpose of the Constitution was ''to secure the Blessings of Liberty'' and yet the authors included the power to tax.
I do not believe that our Founders were mistaken or confused. On the contrary, they created a Constitution that established a government, but substantially limited its scope by specifying the circumstances under which it could impose levies on its citizens. One may argue that they could have done a better job at creating limits on the overall size of government, nonetheless, the power to tax is essential to the power of government and limitations on that power are central to the Constitution.
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There is no limit, save the good sense of five (technically, three) un-elected officials, to the extent of universal service funding. Consumers are left holding the bill for regulated telephone rates—rates that are often higher than they would be in an unregulated environment.
It is not an easy task to regulate entire industries. Regulation is hard and difficult business. As I and many others have concluded, no one can long survive in a regulatory environment and truly serve ''the public interest.''(see footnote 8) Inevitably regulators, even those with pure intentions, take action to promote and perpetuate regulation and the regulatory environment in which they work.
One explanation for the discrepancy between the public interest and the self-interest of regulators involves a simple examination of incentives. It is difficult to assign clear lines of accountability to independent regulatory agencies such as the FCC, the Securities and Exchange Commission, or the Federal Trade Commission. Compounding this problem is a high degree of technical expertise that is often ceded to independent regulatory agencies. Regulators perceive an incentive to perpetuate and protect regulation as well as their claim to a monopoly on technical acumen.
Despite these structural problems, one point is clear: taxes should be made explicit to the American people and debated openly. Likewise, government spending and appropriations should be made clear. After all, tax revenues are not government resources. Tax revenues are private resources given to the government for public purposes.
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The 1996 Telecommunications Act authorized the FCC to spend resources to provide discounted telecommunications services to certain consumers. The Act did not authorize the FCC, nor did it authorize the Schools and Libraries Corporation or the Rural Health Care Corporation to raise resources to provide discounted telecommunications services.
The FCC has gone out of bounds. Congress has an obligation to taxpayers and consumers to rein in the FCC and its quasi-governmental corporations.
HIDDEN TAXES V. EXPLICIT TAXES
The Telecommunications Act mandated that all subsidies be explicit.(see footnote 9) Should it have said all taxes be explicit? Are universal service contributions the same as a tax?
Universal service contributions are forced payments, by individuals, which are collected to provide public services. In other words, they are taxes.
Consumers should see the taxes they pay. Only then will they know whether what they are buying is worth the cost. Currently American consumers have little idea about the payments they make—and in many cases the subsidies they receive.
The Congressional Budget Office (CBO) estimates that during the 1998 fiscal year outlays in universal service subsidies to schools, libraries, and rural health care providers will be $564 million. By fiscal year 2008, CBO estimates the same outlays will exceed $2.4 billion. While no one was looking, universal service became a costly entitlement.
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With hindsight, one may argue that this was the intent of Congress. I disagree. Nonetheless, the problem of this new entitlement must be addressed.
UNIVERSAL SERVICE IS INEFFICIENT
As long as universal service remains a goal of public policy, several billion dollars will be collected and distributed in the form of telecommunications services. The current system is inefficient in at least two ways. First, it does not do a good job of collecting the money. Second, the payments are poorly targeted—oftentimes providing subsidies to those who do not need them.
In a paper recently presented at the American Enterprise Institute.(see footnote 10) Dr. Jerry Hausman measured the efficiency costs to the economy by the FCC's current subsidy policies. He concluded that for every dollar raised to pay for Internet access by the Schools and Libraries Corporation, an additional $1.05 to $1.25 must be raised—beyond the money used for the discounts.(see footnote 11)
CSE Foundation has published as series of papers on universal service by Dr. Wayne Leighton. Of particular interest is his paper highlighting some of the absurdities in our current system—for instance, how the New Hampshire resort community of Bretton Woods receives a subsidy of approximately $82 per subscriber.(see footnote 12)
CONCLUSION
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Any taxes under the USF should be as small as possible and subsequent subsidies should be means-tested to insure they reach the most needy consumers, schools and health-care providers. They should be visible, not hidden.
The telecommunications industries should not be tax collectors for Uncle Sam. The Constitution was written, ratified, and substantively amended to prevent and curtail excessive, tyrannical government power, including taxation. The aspects of our Constitution that limit power were created as measures to protect individuals—including consumers of telecommunications services—from the power of government, a point doubly important when considering the power to tax.
If there is an indictment of taxation through universal service—it has been delivered by the President in his proposed budget. There, the President estimates that federal outlays for universal service will be $3.3 billion in fiscal year 1998.(see footnote 13) This number more than quadruples over five years to an estimated $13.4 billion in fiscal 2003.
Finally, I recommend that you examine the federal excise tax on telephone and teletype services, which will raise more than $4.8 billion in fiscal year 1998.(see footnote 14) This tax is earmarked for the general funds of the U.S. Treasury, and by no means do I endorse it. This excise tax is not on a ''sin,'' nor is it necessary to support a federal trust fund. One hundred years ago it was conceived as a luxury tax—to fund the Spanish-American War. This tax is unnecessary and harmful to our economy. That said, one must conclude that it is better than a tax-and-subsidy system that is invisible to both consumers and recipients, and is administered far removed from the democratic processes established to ''secure the blessings of liberty.''
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Mr. GEKAS. We thank you, Mr. Miller.
The subcommittee stands in recess pending the return of the members from casting a vote. We expect to be back by 11:25.
[Recess.]
Mr. GEKAS. The time of 11:25 having expired, because of the aforementioned rules, we must await the advent of another member of the subcommittee before we can proceed. We stand in recess.
[Recess.]
Mr. GEKAS. The subcommittee will come to order.
We heard the testimony of Mr. Norquist and Mr. Miller, and now we're poised for the testimony of Dr. Berthoud. Please proceed.
STATEMENT OF JOHN E. BERTHOUD, PH.D., PRESIDENT, NATIONAL TAXPAYERS UNION, ALEXANDRIA, VA
Mr. BERTHOUD. Thank you, Mr. Chairman, members of the committee. Mr. Chairman, may I commend you for holding these very important hearings today. You're doing an important public service.
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My name is John Berthoud. I'm president of the National Taxpayers Union. We are a nationwide, grassroots lobbying organization of 300,000 members.
We at the National Taxpayers Union, our members, for a variety of economic and political reasons, believe that this FCC universal service tax is very poor public policy. We do not believe that the FCC should have the power to levy taxes for two fundamental reasons:
First, the American public, as has been stated by several members, is already grossly overtaxed, and giving supporters of big government yet one more avenue to reach into Americans' pocketbooks is unconscionable. Given the present overreach of government, we believe that we should be making it harder, rather than easier, for Washington to be taking Americans' money.
Table 1 in my testimony, which I believe you all have copies of, shows that there has, indeed, been a great expansion in the amount of money that Washington is taking from the American public. Adjusted for inflation, going back to 1969, the last year the Federal budget was balanced, we have increased Federal receipts by 105 percent. Again, that is adjusting for inflation. So we believe revenues are too high, and this further compounds the problem.
But, more fundamentally, we believe that taxation by unelected bureaucracies is undemocratic. Taking the people's money should be one of the most difficult things that government does. Given the massive rise in the Federal tax burden, Congress already appears to have abrogated this principle all too often, but before one dime is taken, at a minimum, taxpayers should be given the ability to address elected officials on this topic and then later hold them accountable. It violates any and all basic tenets of democratic representation to allow unelected officials to levy taxes on the American public.
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Many support—and we've heard some comments to that effect this morning—current FCC policy because of a perceived public policy need. The National Taxpayers Union would suggest that the Congress step back and think first about larger principles. Some three decades ago, Barry Goldwater argued, ''I will not attempt to discover whether legislation is needed before I have first determined whether it is constitutionally-permissible. And if I should later be attacked for neglecting my constituents' 'interests,' I shall reply that I was informed that their main interest is liberty, and in that cause I am doing the very best that I can.''
This argument against FCC taxation is supported, as several other speakers this morning have mentioned, by the findings of Jerry Hausman. Of course, while the taxation imposed by elected officials certainly has many adverse economic consequences and externalities, the findings of Mr. Hausman, which have already been discussed, provide evidence that it is probable that taxation imposed by unelected bureaucracies will be even more inefficient.
Given that the National Taxpayers Union views this decision to delegate power to the FCC as wrong, we would likewise object to the delegation of this power by the FCC to three private, nonprofit corporations. A further concern to us in terms of good public policy is the fact that this tax is hidden from taxpayers. Only cellular and business customers will get full disclosure of this tax. While it may be politically appealing to hide taxes from the American public, and thereby lessen the apparent cost of government, by destroying a fair pricing mechanism, society fails to get an optimal balance, we believe, between government and private spending.
If Congress deems it important to fund universal access, we believe that it should cut other spending to pay for it. The universal service tax is funding a substantial expansion in government spending. The National Taxpayers Union believes again that government already plays far too large a role in the lives of Americans and in the American economy. We believe that Congress and the President should be finding ways to cut back on the role of government in our lives rather than expanding it. Thus, at a minimum, should Congress desire to create new programs, funding for these programs should come not from new taxes or fees, but rather from cutbacks elsewhere in the budget.
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The Federal Government will now be providing telecommunications subsidies for schools and libraries of around 60 percent, and will also be providing subsidies for rural health care providers. I have some tables in my testimony which present the numbers, as is reported by the Congressional Budget Office.
If the Federal Government wants to pay for things like wiring the classrooms, there is plenty of lower-priority spending in the Federal budget from which to draw. The Federal education budget has skyrocketed upward by over 178 percent since the creation of the Department of Education two decades ago. I have a table in my presentation which presents those numbers. Surely the time has come for Congress to systematically evaluate the results of these myriad programs and eliminate those that are ineffective.
To wrap up, we believe that funding for the wiring of classrooms should come, as all education funding should come, from State and local governments. We do not believe that the Federal Government should be involved in this process. And if these spending decisions were localized, many public officials, teachers, and parents might decide that these dollars were better spent elsewhere—on books, new desks, or any of a number of items. The point is that, once again, when Washington makes policy, it arrives in a one-size-fits-all package, and local education needs are as diverse as America's student population.
For the future, we believe in four key principles of policy in relation to this issue. First, in the spirit of promise of deregulation embodied in the 1996 Telecommunications Act, Congress should be phasing out, rather than expanding, cross-subsidies and universal service requirements.
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Second, Congress should end the new tax based on recent expansion of the universal service requirement.
Third, as Congress shapes tax policy, it should constantly endeavor to achieve fuller reporting of tax burdens to Americans.
And, finally, Congress should never allow taxation to be set by the FCC or any other regulatory agency.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Berthoud follows:]
PREPARED STATEMENT OF JOHN E. BERTHOUD, PH.D., PRESIDENT, NATIONAL TAXPAYERS UNION, ALEXANDRIA, VA
I. INTRODUCTION
Mr. Chairman and Members of the Subcommittee, my name is John Berthoud. I am President of the National Taxpayers Union, a nationwide grassroots lobbying organization of taxpayers with 300,000 members.
I come before you today to state our views on the FCC's Universal Service Tax. The National Taxpayers Union, for a variety of economic and political reasons, believes that this is very poor public policy.
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II. THE FCC SHOULD NOT HAVE THE POWER TO LEVY TAXES
We do not believe that the FCC should have the power to levy taxes, for two fundamental reasons. First, the American public is already overtaxed, and giving supporters of big government yet one more avenue to reach into Americans' pocketbooks is unconscionable. Given the present overreach of government, we should be making it harder, rather than easier, for Washington to take Americans' money.
It is estimated that the FCC will effectively be adding a charge of about $1.50 per month for every telephone line in the United States. Table 1 presents an overview of the great expansion in the federal take from the American public since 1969—the last time we had budgetary balance. In these past 30 years, federal receipts—after adjusting for inflation—have increased by over 104%. In these prosperous times, it is important to remind ourselves that in every year since 1993, the amount of taxes paid has risen faster than wages.(see footnote 15)
But more fundamentally, taxation by unelected bureaucracies is undemocratic. Taking the people's money should be one of the most difficult things government does. Given the massive rise in the federal tax burden, Congress appears to have already abrogated this principle all too often. But before one dime is taken, at a minimum, taxpayers should have the ability to address elected officials on the topic, and then later hold them accountable. It violates any and all basic tenets of democratic representation to allow unelected officials to levy taxes on the American public. As Paul Craig Roberts argues, ''We the People cannot rule ourselves when our elected representatives do not make the laws or impose the taxes. The unraveling of the separation of powers is leaving power unrestrained. This is the opposite of liberalism and repudiates its historic achievement.''(see footnote 16)
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Many support current FCC policy because of a perceived public policy need. We would suggest that the Congress step back and first think about larger principles. As Barry Goldwater argued, ''I will not attempt to discover whether legislation is 'needed' before I have first determined whether it is constitutionally permissible. And if I should later be attacked for neglecting my constituents' 'interests,' I shall reply that I was informed that their main interest is liberty and in that cause I am doing the very best I can.''(see footnote 17)
This argument against FCC taxation is supported by findings of Jerry Hausman of the Massachusetts Institute of Technology. Hausman finds that FCC taxing policy is extremely economically inefficient and results in an efficiency loss to the U.S. economy of $1.25 for each dollar raised.(see footnote 18) While taxation imposed by elected officials certainly has many adverse economic consequences and externalities, it is probable that taxation imposed by unelected bureaucracies will be even more inefficient.
Given that we view the decision to delegate the power to tax to the FCC as wrong, we would likewise object to the delegation of this power by the FCC to three private, non-profit corporations (the Universal Service Administrative Corporation, the Schools and Libraries Corporation, and the Rural Health Care Corporation). It is noteworthy that the General Counsel of the General Accounting Office (GAO) has written to Senator Ted Stevens of Alaska and offered GAO's view that:
the Commission exceeded its authority when it directed the National Exchange Carriers Association, Inc. (NECA) to create the Schools and Libraries Corporation and the Rural Health Care Corporation. The Government Corporate Control Act specifies that ''[a]n agency may establish or acquire a corporation to act as an agency only by or under a law of the United States specifically authorizing the action'' 31 U.S.C. 9102. These entities act as the agents of the Commission and, therefore, could only be created pursuant to specific statutory authority. Because the Commission has not been provided such authority, creation of the two corporations violated the Government Corporation Control Act.(see footnote 19)
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Of further concern in terms of good public policy is the fact that this tax is hidden from taxpayers. Only cellular and business customers will get full disclosure of this tax. While it may be politically appealing to hide taxes from the American public—and thereby lessen the apparent cost of government—by destroying a fair pricing mechanism, society fails to get an optimal balance between government and private spending.
III. IF CONGRESS DEEMS IT IMPORTANT TO FUND UNIVERSAL ACCESS, IT SHOULD CUT OTHER SPENDING TO PAY FOR IT
The Universal Service Tax is funding a substantial expansion of government spending. The National Taxpayers Union believes that government already plays far too large a role in the American economy and in the lives of Americans.
We believe Congress and the President should be finding ways to cut back on the role of the government in our lives and in our economy. Thus, at a minimum, should Congress desire to create new programs, funding for these new programs should come not from new taxes or fees on consumers, but from cutbacks elsewhere in the budget.
The federal government will now be providing telecommunications subsidies for schools and libraries of around 60 percent (although they will range from 20 percent to 90 percent).(see footnote 20) The government will also provide subsidies to rural health care providers (Table 2 provides CBO's estimate of these particular subsidies, while Table 3 provides OMB's estimate for total Universal Service Fund outlays).
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If the federal government wants to pay for things like the wiring of classrooms, there is plenty of lower priority spending in the federal education budget from which to draw. The federal education budget has skyrocketed up by over 178% since the creation of the Department of Education in 1979 as shown in Table 4.(see footnote 21) Surely the time has come for Congress to systematically evaluate the results of these myriad programs and eliminate those that are ineffective.
But more appropriately, funding for wiring of classrooms should come—as we believe all education funding should—from state and local governments. James Glassman makes this point: ''What is the federal government doing in this business anyway? Education is the ultimate local issue. If states want to spend money on Internet hook-ups, let them use their own tax dollars. Most, in fact, already have: In 1996, two-thirds of public schools had Internet access.''(see footnote 22) Beyond Glassman's point about the number of schools with Internet access, we note that many telecommunications and computer firms have spent literally hundreds of millions of dollars connecting schools and libraries to the Internet.(see footnote 23)
And of course, if these spending decisions were localized, many public officials, teachers, and parents might decide that these dollars were better spent elsewhere—on books, new desks, or any of a number of items. The point is that once again, when Washington makes policy, it arrives in a one-size-fits-all package, and local education needs are as diverse as America's student population.
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IV. CONCLUSION
The 300,000-member National Taxpayers Union is deeply troubled by the FCC's Universal Service Tax. We oppose any and all new taxes on the American public. But just as importantly, we oppose the manner in which these taxes are being levied: in hidden form and promulgated by an unelected bureaucracy. Senator John McCain has observed, ''Congress should stop trying to cover up this mess and start trying to clean it up instead.''(see footnote 24)
For the future, we believe in four key principles of policy in relation to this issue. First, in the spirit of the promise of deregulation embodied in the 1996 Telecommunications Act, Congress should be phasing out, rather than expanding, cross-subsidies and universal service requirements. Second, Congress should end the new tax based on the recent expansion in the universal service requirement. Third, as Congress shapes tax policy, it should constantly endeavor to achieve fuller reporting of tax burdens to Americans. And finally, Congress should never allow taxation to be set by the FCC or any other regulatory agency.
Mr. GEKAS. We thank the gentleman for his testimony, and we turn to Mr. McLean.
STATEMENT OF CHRISTOPHER A. McLEAN, DEPUTY ADMINISTRATOR, RURAL UTILITIES SERVICE, DEPARTMENT OF AGRICULTURE, WASHINGTON, DC
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Mr. MCLEAN. Thank you, Mr. Chairman. My name is Christopher McLean. I am the Deputy Administrator of the Rural Utility Service. The Rural Utility Service is a rural development agency of the Department of Agriculture. We have been dedicated to the mission of universal telephone service for nearly 50 years.
As a former Senate staffer, it also gives me great personal pleasure to be before the subcommittee in my maiden voyage giving congressional testimony. So I apologize in advance for any nervousness that I may show at this point.
Mr. GEKAS. I'm nervous, too. [Laughter.]
Mr. MCLEAN. Thank you, sir.
While universal service provisions of the Telecommunications Act of 1996 are a fundamental part of the law, the ideals of universal service have been the centerpiece of Federal communications policy for decades. The Communications Act of 1934 has as its purpose to make available to all the people of the United States a rapid, efficient, nationwide, and worldwide communications service with adequate facilities at reasonable charges, and that is in the very first sentence of the Communications Act of 1934.
Sixty years later, the Congress and the President sought to secure the promise of the 1936 Act by making universal service the central focus of the Telecommunications Act of 1996. The 1996 Act made clear the basic principles of universal service. Those principles are quality service at just, reasonable, and affordable rates; comparable rates and services between rural and urban areas; an evolving level of service; equitable and nondiscriminatory contributions to the preservation and advancement of universal service; specific, predictable and sufficient levels of support, and access to advanced services for schools, libraries, and rural health care providers.
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Universal service is the way that all Americans share the benefits and burdens of a ubiquitous nationwide, global telecommunications network. For more than 60 years, the ability of regulators to group consumers and services into exclusive service areas and grant telecommunication carriers the right to provide monopoly service was an important and significant means of providing and assuring universal service. It meant that easy-to-serve, profitable customers could be combined with hard-to-serve customers, and services could be packaged to create a sustainable market for telephone service.
In opening all markets to competition, the 1996 Act preempted State authority to grant companies exclusive service rights. The tradeoff for opening markets was to bolster and reform the system of universal service to assure that in a new, competitive market all Americans would continue to receive service at just, reasonable, and affordable rates, and to assure that all Americans had access to the information superhighway, by expanding the definition of universal service to include affordable service to schools, libraries, and rural health care providers.
To facilitate universal service in a competitive environment, the law required that obligations to support universal service be shared among all telecommunications carriers, and on a competitively-neutral basis. That was the fundamental bargain of the 1996 Act.
The e-rate within the Act promises to revolutionize American education, improve health care, and to ensure universal service is, indeed, universal. At the time the provision was being considered, many schools had some of the lowest levels of service provided at the highest business rates. The Nation was also entering the age of the Internet. In passing the e-rate, Congress assured that in a competitive environment, schools, libraries, and rural health care facilities will have affordable rates. Just as schools and libraries would not allow the cost of books to deter an earlier American quest for knowledge, schools and libraries were key to making the benefits of the information age available to all Americans.
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At the Rural Utility Service, we have had a glimpse of the future. For several years we have had a distance-learning and telemedicine program focused on loans and grants to purchase and deploy telecommunications hardware to meet educational and health care needs in rural communities. The DLT program—distance learning, telemedicine program—provides real-life examples of the value of telemedicine and educational uses of telecommunications technology. Thanks to DLT, a family in North Dakota is able to take their son to a community clinic and have a doctor two-and-a-half hours away examine the boy's recovery from ear surgery through a scope hooked up to an ISDN line, and a senior citizen double amputee can have his health care monitored via telecommunications network rather than being moved far away from friends and family to a distant nursing home.
In education, six school districts in rural Pennsylvania, using Rural Utility Service funds, developed a two-way interactive television network allowing six districts to connect with two colleges and the State Museum of Pennsylvania. School credit courses were shared. Teacher training is enhanced, and educational expenses are reduced.
The RUS Distance Learning Telemedicine Program gives us a glimpse of what will be possible once e-rate discounts are fully available. At the Rural Utility Service, we are very excited about the availability of discounts. They will leverage our infrastructure investments in a tremendous way.
Universal service is about sharing the basic costs of a telecommunications network. It is about the value of a national network. The Telecommunications Act requires that those costs be shared among all telecommunications carriers on an equitable and competitively-neutral basis. Universal service does not only benefit the small towns and rural areas of America; it benefits all America. Telephone service in rural areas enhances telephone service in urban areas. What makes the U.S. telephone network so valuable, so competitive, and so useful is that it is a network that reaches almost anywhere in the Nation. A telephone in New York City, Chicago, or Los Angeles would lose its value if it could not reach Valentine, Nebraska, Unity, Maine, or Cordova, Alaska.
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It is in the interest of every citizen that every other citizen is connected to the network. For the majority of Americans, competition will be the best means of providing universal service. Competition is a means, but not an end. The principle of competition complements, but does not substitute for, the principle of universal service. Without universal service support, telephone rates for 75 percent of America that is rural will go through the roof. And without discounts for schools, libraries, and rural health care, America risks being divided into a nation of information haves and have-nots.
At the Rural Utility Service, we embrace the changing, competitive environment in telecommunications. That new environment, while challenging, concentrates our attention on the core mission of assuring that citizens who live in the 75 percent of America that is rural are part of this one Nation.
Thank you, Mr. Chairman and members of the subcommittee.
[The prepared statement of Mr. McLean follows:]
PREPARED STATEMENT OF CHRISTOPHER A. MCLEAN, DEPUTY ADMINISTRATOR, RURAL UTILITIES SERVICE, DEPARTMENT OF AGRICULTURE, WASHINGTON, DC
Mr. Chairman and members of the subcommittee, thank you for your invitation. My name is Christopher A. McLean, and I am the Deputy Administrator of the Rural Utilities Service.
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The Rural Utilities Service is a rural development agency of the Department of Agriculture. We have been dedicated to the mission of universal telephone service for nearly fifty years through targeted lending, technical support, and policy guidance. As the only federal agency specifically dedicated to the mission of helping rural citizens gain access to safe, reliable and affordable telecommunications, power and water infrastructure, the RUS has been very active in the deliberations on the full and fair implementation of the universal service provisions of the Telecommunications Act of 1996.
While the universal service provisions of the '96 Act are a fundamental part of the law, the ideals of universal service have been the centerpiece of federal communications policy for decades.
The Communications Act of 1934 has as its purpose ''to make available to all the people of the United States . . . a rapid, efficient, nation-wide and world wide . . . communication service . . . with adequate facilities at reasonable charges . . .''
Sixty years later, the Congress and the President sought to secure the promise of the 1936 Act by making universal service the central focus of the Telecommunications Act of 1996. The 96 Act made clear the basic principles of Universal Service. Those principles are:
Quality service at ''just, reasonable and affordable rates;''
Comparable rates and services between rural and urban areas;
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An evolving level of service;
Equitable and nondiscriminatory contributions to the preservation and advancement of universal service;
Specific, predictable and sufficient levels of support;
Access to advanced services for schools, libraries and health care providers;
Universal Service is vital, not only to rural Americans, but to ensuring that the entire nation is tied together through telecommunications. It is the way that all Americans to share the benefits and burdens of a ubiquitous—nationwide—global telecommunications network.
For more than sixty years, the ability of regulators to group consumers and services into exclusive service areas and grant telecommunications carriers the right to provide monopoly service was an important and significant means of providing and assuring universal service. It meant that easy to serve, profitable customers could be combined with hard to serve customers and services could be packaged to create a sustainable market for phone service.
Even in this highly regulated environment, some phone companies were unwilling to serve some areas of the country. In 1949, the Congress expanded the Rural Electrification Act to assist in the provision of telephone service in rural areas. With the help of the Rural Electrification Administration (the predecessor to the RUS), this system brought affordable service to nearly 95% of all Americans.
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In opening all markets to competition, the '96 Act pre-empted state authority to grant companies exclusive service rights. The trade-off for opening markets was to bolster and reform the system of universal service to assure that in a new competitive market all Americans would continue to receive service at just reasonable and affordable rates and to assure that all Americans had access to the information superhighway by expanding the definition of universal service to include affordable service to schools, libraries and rural health care providers. To facilitate universal service in a competitive environment, the law also required that obligations to support universal service be shared among all telecommunications carriers and on a competitively neutral basis.
The '96 Act also includes for a provision known as the E-Rate. It promises to revolutionize American education, improve health care and to ensure that universal service is indeed universal. At the time the provision was being considered, many schools had some of the lowest levels of service provided at the highest business rates. The nation was also entering the age of the Internet. In passing the E-Rate, Congress assured that in a competitive environment, schools, libraries and rural health care facilities will have affordable rates. Just as schools and libraries would not allow the cost of books deter an earlier American quest for knowledge, schools and libraries were key to making the benefits of the information age available to all Americans.
At the RUS, we have had a glimpse of the future. For several years we have had a Distance Learning and Telemedicine (DLT) program focused on loans and grants to purchase and deploy telecommunications hardware to meet educational and health needs in rural communities. Where we have been able to use our limited funds, it has changed lives, spurred development and enhanced infrastructure in rural areas.
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The DLT program provides real life examples of the value of telemedicine and educational uses of telecommunications for technologies. Thanks to DLT, a family in North Dakota is able to take their son to a community clinic and have a doctor two and a half hours away examine the boy's recovery from ear surgery though a scope hooked up to an ISDN line and, a senior citizen double amputee can have his health monitored via telecommunications network rather than being moved far away from friends and family to a nursing home. In education, a six school districts in rural Pennsylvania using RUS funds developed a two-way interactive television network allowing the six districts to connect with two colleges and the State Museum of Pennsylvania. School credit courses are shared, teacher training is enhanced and tax dollars are saved.
The RUS DLT program gives us a glimpse of what will be possible once E-RATE discounts are fully available. At RUS we are excited about the availability of discounts. They will leverage our infrastructure investment in a tremendous way.
Universal Service is about sharing the basic costs of a national telecommunications network. It is about the value of a national network. The Telecommunications Act requires that those costs be shared among all telecommunications carriers on an equitable and competitively neutral basis.
Universal Service does not only benefit the small towns and rural areas of America. It benefits all America. Telephone service in rural America enhances telephone service in urban America.
What makes the U.S. telephone network so valuable, so competitive and so useful is that it is a network which reaches almost anywhere in the nation. A telephone in New York City, Chicago or Los Angeles would lose its value if it could not reach Valentine, Nebraska, Unity Maine or Cordova, Alaska. It is in the interest of every citizen that every other citizen is connected to the network.
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For the majority of Americans, competition will be the best means of providing universal service. Competition is a means, and not an end. The principle of competition complements but does not substitute for the principle of universal service.
Without Universal Service support, telephone rates in the seventy-five percent of America that is rural will go through the roof and without discounts for schools, libraries and rural health care, America risks being divided into a nation of information haves and have nots.
At RUS, we embrace the changing competitive environment in telecommunications. That new environment, while challenging, concentrates our attention on our core mission of assuring that the citizens who live in the seventy five percent of America that is rural, are part of this one nation.
Thank you, Mr. Chairman and members of the subcommittee.
Mr. GEKAS. It dawns on me, Mr. McLean, you should become a Member of Congress; you ignore the gavel. [Laughter.]
Mr. MCLEAN. I apologize, sir.
Mr. GEKAS. The Chair yields itself time to take care of some housekeeping. The written testimony in our panels referred to the process the FCC has used to set up the universal service tax. Accordingly, I submit for the record the following documents: the GAO's letter to Senator Stevens, which is part of some of the statements, and it now has become part of the record, without objection; the document circulated at the Universal Service Administration Company's meeting on January 26, 1998, and a copy of the minutes thereof. It lists reasons why the National Exchange Carriers Association and USAC are not subject to administrative laws, listing those laws, and the portion of the FCC's order requiring the Administrative Corporation to have open meetings, and copies of meetings where the Board of Schools and Library Corporations met and conducted business, including entering into contracts by conference call. Without objection, we offer those for the record.
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Mr. GEKAS. The question I have for Mr. McLean: Do you suggest by your emphasis on the universal service concept that this hearing is about opposition to that?
Mr. MCLEAN. No, sir.
Mr. GEKAS. Yes, I wanted to make that clear, that the issue is not whether or not we should have universal service; that's been established. The question is whether this new attachment comes within the concept of universal service. That's the real question. Do you agree?
Mr. MCLEAN. Yes, sir.
Mr. GEKAS. Yes, all right. So I didn't want—your testimony is weighted so heavily against—I mean for universal service, which we're all for, that I wanted you to be clear about that.
Now if a golf course is in an absolutely rural area and there's a club involved, and it's one of the richest entities in that county, do they still get the discounted, subsidized universal service that pertains to rural areas?
Mr. MCLEAN. Well, universal service in rural communities is a function of the cost of that service.
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Mr. GEKAS. Yes.
Mr. MCLEAN. So if it were a high-cost service to provide, that would qualify for universal service support. However, in terms of schools and libraries, the discount provisions would not apply.
Mr. GEKAS. Well, don't we have some anomalies in the application of the universal service concept? Mr. Miller indicated in his testimony that Ted Turner, I believe, is a beneficiary of this subsidy. Is that correct?
Mr. MILLER. Yes, sir.
Mr. GEKAS. And in the written portion, Jim, you say that Hilton Head is a recipient of some of the benefits of this. Is that correct?
Mr. MILLER. Yes, sir.
Mr. GEKAS. Now why is that? Is that because the definition of application to rural areas encompasses an enterprise like Hilton Head?
Mr. MILLER. Yes, that's my understanding. It's not means-tested. It's cost-tested.
Mr. MCLEAN. Correct, it is cost-tested.
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Mr. MILLER. Mr. Chairman, could I——
Mr. GEKAS. Go ahead, you may answer.
Mr. MILLER. Could I be one to take issue with the notion of so-called universal service? I think a lot of bad policy, excessive cost, and a lot of unfairness go under the rubric of so-called universal service. Back 20 years ago, I began a work on airline regulation—I guess it was 25 years ago—and one thing my co-author and I found was that a lot of the air service that people perceived was there only because of a Civil Aeronautics Board requirement for public convenience and necessity would have been provided anyway. In fact, the deregulation of the airlines, which was a law signed by President Carter, implemented by President Reagan, led to universal airline service without the compulsion.
My suggestion here is that, with technology moving at lightening speed, that the notion of a Federal Government having to impose public service requirements, of the Federal Government's having to engage in a massive program of redistribution in order to assure universal service, is very wasteful, because if there were no program, there would be universal service as we have come to know it. The prices might be a little different. Ted Turner wouldn't be subsidized, neither would Bretton Woods and other places like that.
So I would urge you to reconsider the whole notion of compulsory Government-regulated, Government-mandated universal service, and allow markets to provide universal service.
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I remember testifying before Senator Kennedy in the airline deregulation debate, and pointing out that nothing is so essential as something to eat.
Mr. GEKAS. As what?
Mr. MILLER. As something to eat, as groceries. My wife and I have had a little place up in the mountains of Virginia for over two decades, and I made photographs of little establishments along the roads to Standardsville and to Charlottesville from that place of ours that sell groceries, and no Federal agency provides universal accessibility of groceries for people living in that isolated area. I think the market would do that, and I would urge you to consider eliminating the circumscribing, cutting back on these programs of universal service.
Mr. GEKAS. Dr. Berthoud, you indicated—and you're the second witness to indicate—that every dollar that is raised by this new concept really cost $1.25. Can you briefly tell us how that comes to be? I can't envision how that happens. Is that because of the cost of administering it?
Mr. BERTHOUD. I would reference the committee to the work of Dr. Hausman.
Mr. GEKAS. Yes.
Mr. BERTHOUD. Those are largely economic externalities that he has found in the application of the tax. Again, I would suggest that while there are always externalities and costs from any tax, certainly elected officials I believe would be more cognizant and more sensitive. Stepping back for a minute, it seems to us, on a principle of whether the FCC or any regulatory agencies should be allowed to apply for the tax, these people are not elected, unlike yourself, unlike Congressman Nadler, and have less of a feel for that because, if there are economic inefficiencies in taxes, you will certainly hear of them. So I think the findings of Dr. Hausman take us to the larger point as another reason why taxation by regulatory agency is poor public policy.
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Mr. GEKAS. Yes, you have a notation in which you reference the taxation by telecommunications regulation article by Dr. Hausman. Although it isn't reprinted in your statement, would you mind researching that for us and getting us a copy?
Mr. BERTHOUD. I certainly will get that over to you this afternoon.
Mr. GEKAS. That would be very helpful to the chairman's thinking on this matter, if for no one else. If there would be no objection, that will be accepted as part of the record when rendered.
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The time of the Chair has expired. The gentleman from New York is recognized.
Mr. NADLER. Thank you, Mr. Chairman. Mr. Chairman, I must take some exception to your comment that this hearing is not about universal service. Listening to all the witnesses, the majority, none of them seem to support universal service. Dr. Miller said that explicitly. He says in his prepared statement, ''As a policy goal, universal service is suspect, and again, universal service contributions are forced payments by individuals which are collected to provide public services. In other words, they are taxes.'' Dr. Berthoud says, ''Congress should be phasing out, rather than expanding, cross-subsidies and universal service requirements.''
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I have two questions. I would request brief answers, please, from both Dr. Miller and Dr. Berthoud.
First, do you, each of you, do you regard the pre-1996 universal service charge as a tax? Dr. Miller?
Mr. MILLER. It's what an economist calls an implicit tax.
Mr. NADLER. It is a tax? So the new tax, or this Internet service access, is the same type of implicit tax?
Mr. MILLER. It is an explicit tax.
Mr. NADLER. As opposed to the implicit tax? Why the difference? What is the difference?
Mr. MILLER. Well, the implicit tax does not show up on the Federal budget prior to 1996. That's the reason it's called an implicit——
Mr. NADLER. And this would show up on the Federal budget?
Mr. MILLER. That's the reason it's called an implicit tax. It is a requirement on someone——
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Mr. NADLER. Yes, but the new Internet access would not show up in the Federal budget, would it?
Mr. MILLER. Could I finish?
Mr. NADLER. I'm sorry.
Mr. MILLER. So forcing someone to pay a higher cost than would be otherwise is what an economist calls an implicit tax. My understanding is that both OMB and CBO score the UF, universal service fund, as explicitly in the budget as now an explicit tax.
Mr. NADLER. Dr. Berthoud, would you also regard the old universal service charge as a tax?
Mr. BERTHOUD. Yes, and I would certainly agree with—I think Dr. Miller has presented the case well.
Mr. NADLER. Okay, so you both disagree with Mr. Glassman. I don't know if you heard the prior time when he said it wasn't a tax.
Mr. GEKAS. Well——
Mr. NADLER. The second question is—yes, he did; he said it wasn't a tax; the new one is a tax; the old one wasn't.
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Mr. GEKAS. Yes.
Mr. NADLER. We're talking about the old one. He said it wasn't a tax.
Mr. GEKAS. That doesn't argue against its being an implicit tax.
Mr. NADLER. I don't know. We didn't ask—he didn't make that distinction. He said it wasn't a tax.
Mr. GEKAS. Well, I'll make it for him.
Mr. NADLER. Okay. [Laughter.]
Second, the second question, I take it that, Dr. Berthoud—or Dr. Miller—do you think it's an improper use? The Government—well, let me just ask you this: You said in airline deregulation you got universal service with deregulation without Government imposing a tax on anybody. I wasn't aware we had universal service. I know a lot of towns and cities that don't have airline service anymore since deregulation. That may be a good, bad, or indifferent thing, but certainly you can't say we have universal service. There are hundreds, and maybe thousands, of towns and cities in this country that used to have airline service and now do not.
Mr. MILLER. Those numbers are, sir, not the particularly—not thousands——
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Mr. NADLER. Hundreds.
Mr. MILLER [continuing]. Maybe hundreds. That probably is not—it's been much more than offset by those that have received service that did not have service under the old system. Under the Federal Aviation Act of 1938, there was a public convenience and necessity requirement that the Civil Aeronautics Board interpreted to mean requiring some services that were not remunerative and arrange for cross-subsidies for more remunerative services in the same fashion that the general—that this program that we're talking about applies.
Mr. NADLER. Okay.
Mr. MILLER. A set of implicit taxes. But one of the great concerns about deregulation in the airlines was that all these communities would lose service. What the administration——
Mr. NADLER. And you're saying some did and some gained it?
Mr. MILLER [continuing]. Did was provide an insurance plan, essentially, assuring that any service lost would be provided by—made up, and there was very little requirement.
Mr. NADLER. And if we were to end the cross-subsidies and the universal service charges, you think we would get universal access. Wouldn't the result be that many people in rural areas, many low-income people in all areas, that there would be a huge increase in the cost, and that they simply wouldn't be able to afford a telephone or—well, a telephone, the simplest——
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Mr. MILLER. Total cost of the telephone service would go down, not up. The present redistribution that takes place is probably regressive inasmuch as the people who pay the higher prices tend to be—the incidence of the tax is more on people with lower incomes rather than higher incomes.
Mr. NADLER. But you didn't answer my question. The people in the rural areas, where the cost of serving an individual is huge compared to the cost of serving somebody in my district in Manhattan, and the lower-income people, let's say, among them, not to mention the low-income people in Manhattan, even if the average cost might go down—I'm not so sure I agree with that, but let's assume the average cost went down; wouldn't the cost that they would have to pay go way up, if there were no cross-subsidy?
Mr. MILLER. In those higher-cost areas, and many of these would be in rural areas, the cost would go up, yes.
Mr. NADLER. So a lot of the—Mr. McLean?
Mr. MCLEAN. Very dramatically.
Mr. NADLER. Three to five hundred percent?
Mr. MCLEAN. You could look at telephone rates in places like Montana, whether Mr. Turner is there or not, $150 or $200 a month, if you wiped out everything that we consider universal service. We have 900 borrowers at the Rural Utility Service who represent a cross-section of small, rural providers. Our costs on average are three times more expensive than it is in urban areas. You would have very significant, dramatic increases.
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Mr. NADLER. So, Mr. McLean, it would be fair to say, accurate, that if we listened to the ideological opposition on this and eliminated the cross-subsidies and the universal service charges, you'd have a lot of people simply without telephones?
Mr. MCLEAN. It would be very much like America before the interstate highway system. You would have good quality service maybe in urban areas and in places in rural areas you'd have dirt roads. You would have a network that wasn't a national network. You would have people drop off the telecommunications network because they could not afford to pay those charges.
Mr. NADLER. And I couldn't call them, even if I could afford it?
Mr. MCLEAN. That's correct, and that's the whole point of universal service, is that we need universal service to support the national network, and schools and library discounts are very much a part of that national network as we move into that information age, where telephone service is a thing of the past. When we look forward, when you talked about converging technologies, the Telecommunications Act meant to make the universal service system respond to that evolving level of service, so that we wouldn't have urban residents with affordable, vast numbers of services and choices and rural residents with the most basic, four-party phone service.
Mr. NADLER. Let me ask you—and I'll ask the Chair for two additional minutes——
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Mr. GEKAS. Without objection.
Mr. NADLER. Thank you.
I have two questions for you, which I hope we can do in the 2 minutes. One, do you see the—I forget the technical titles for these things—do you see the Internet access fee, call it the new one, as being different in character from the old universal service charge? Is it more a tax or less a tax? I mean, is it different or is it similar, the same thing?
Mr. MCLEAN. well, I think it's very much part of the universal service system, and it was part of the section 254 of the 1996 act. It was a fundamental part of the concept of universal service, and I think it's just a natural extension of that concept of an evolving level of service.
Mr. NADLER. Thank you. My other question is—I'm sorry that Mr. Norquist isn't here. He said something that I found—in his written testimony—that I found fascinating, and I want to ask your comment on it. He said, why should people in urban areas subsidize the cost for telephone calls and other telecommunications for people living in Montana or rural areas? And I would simply reverse the question, because the question comes up in a different context: Why should people in rural areas—probably some of the same people ask the same questions—why should people in rural areas subsidize the cost of a subway ride in Manhattan, in New York? I think it's the same question.
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Mr. MCLEAN. In fact, I was at a conference with rural telephone engineers where that very point came up, and that is a fair question, but it is also about the fundamental bargain of the Telecommunications Act. The Congress, preempted State authority to control those markets, to group good customers with bad customers, to group services, so that you could have rates that were affordable. That was a dramatic preemption of State authority, and the bargain for that preemption was we would have universal service to assure that rates don't skyrocket.
In aviation, the very same—very similar thing happened, and we learned a lesson from aviation. We do have a universal service program in aviation called the Essential Air Service Program. I will recall that during my service with Senator Exxon on the Budget Committee that the Reagan administration sought to zero-out that program for every year that I can recall, and essential air service did not provide a sufficient level of service. We needed something different. So we learned the lessons from aviation. It's dramatically more expensive to fly to a rural community in America than it is to fly to Europe. So we learned those lessons, and this is about having a network that everybody can afford to be on, because that gives the value to the network.
Mr. NADLER. Well, let me just say, thank you for your testimony. I just want to observe that it's sort of interesting that Dr. Miller sort of had a skeptical look when you said, it became very dramatically more expensive, and given that attitude, since I think you were Budget Director then, I understand why the Reagan administration sought to zero that out, because of that attitude, which contrasts with your attitude, and there's clearly a disagreement here.
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Mr. GEKAS. On which note——
Mr. NADLER. I agree with you, sir, obviously.
I thank the chairman.
Mr. GEKAS. The Chair will yield to Dr. Miller for a final rebuttal. [Laughter.]
Mr. MILLER. Let the record show that, as Budget Director, I excluded myself from any discussions of this issue because I was part of the negotiations that led to passage of the Airline Deregulation Act. And so I didn't feel it was particularly appropriate for me to step in and urge zeroing-out. So the decision was made by someone else.
The Essential Air Service Program spent very, very little money because the insurance it provided was the loss of service that was already in place at the time of passage of the deregulation act, and so there was very little service lost, and therefore, very few outlays to assure that service would continue.
Let me just say—and I say this not to question anybody's integrity or anybody's ability, or whatever, and I used to be a regulator; I was the Chairman of the Federal Trade Commission for 4 years. I was Budget Director when we went through the negotiations of the Budget Deal of 1987. It's so easy for people in government to get the notion that the market works only because they make it work, or certain things happen only because they force them to happen. The history of deregulating markets is that costs fall, service improves and increases, no matter what the claims of the critics. The same arguments were made in the case of trucking deregulation, that all of these little communities would lose access to trucking services. The same arguments were made with respect to barge and railroad deregulation.
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This is an industry that is probably the least likely to pose any problems, simply because technology is moving at very rapid speed. Any market glitch would be filled immediately. Any increase in cost under existing technology would probably find providers with new technology providing services at lower cost. I'm very confident that, beyond the role of the FCC in identifying frequencies, providing some certainty about or quasi-property rights on frequencies, what it does, in addition to that with cross-subsidy, with limiting competition, hurts us rather than helps us, and for that reason, I would urge this committee to consider substantial cutbacks in the FCC's authority to engage in economic regulation or to slow the deregulation that was envisioned under the 1996 Act.
Thank you.
Mr. GEKAS. This subcommittee stands adjourned, with the great gratitude that we express for our witnesses. Thank you.
[Whereupon, at 12:25 p.m., the subcommittee adjourned subject to the call of the Chair.]
A P P E N D I X
Material Submitted for the Hearing Record
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THE PROGRESS & FREEDOM FOUNDATION, PROGRESS ON POINT, PERIODIC COMMENTARIES ON THE POLICY DEBATE, RELEASE 4.1, JUNE 1997
THE FCC'S $13 BILLION TAX HIKE
BY DONALD W. MCCLELLAN, JR., ESQ.(see footnote 25)
I am proud of the fact that because of the computer and microsolutions to problems, we don't need big government bureaucracies to do some of the things that used to be done. But as I have said repeatedly, the era of big government may be over, but the era of big challenges for our country is not, and so we need an era of big citizenship.
| President Bill Clinton |
| April 28, 1997, Philadelphia, PA |
Today, at last, after three and one-half years of work, we can say that we have by law and rule a fully funded national commitment and national plan to connect every classroom to the information highway. . . .
| Chairman Reed Hundt |
| May 8, 1997, Washington, DC |
Congress and the White House recently agreed on a five-year budget plan that, among other things, cuts taxes by $85 billion. What few in Congress seem to recognize is that four unelected commissioners at the Federal Communications Commission (FCC or Commission), led by Chairman Reed Hundt, have unilaterally raised taxes by as much as $13.25 billion over the same period, reducing the true tax cut from $85 billion to just over $70 billion. The FCC's ruling seeks to further a laudable goal, wiring the nation's schools, hospitals and libraries for access to the Internet, but the FCC's approach is likely to slow progress towards this goal, while imposing new costs on Internet access. Additionally, the FCC's action creates a very dangerous precedent: The ability of an independent regulatory commission to establish, without statutory authority, a massive new tax and entitlement program.
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The FCC's action is also emblematic of a larger, more fundamental problem: Under the auspices of ''deregulatory'' legislation, the Commission has erected a new regulatory regime designed to ''manage competition,'' without deconstructing major pillars of the existing regulatory apparatus. The result has been more, not less, regulation of the telecommunications sector—directly contravening the intent of Congress in enacting the Telecommunications Act of 1996. Moreover, the computer sector, which is currently leveraging the growth of the broader economy, faces the prospect of being negatively impacted by the continued regulation of the communications industry or, worse yet, being swept up in this regulatory cacophony.
The wiring of schools, hospitals and libraries is proceeding at a remarkable pace thanks to the efforts of localities, states and voluntary national activities such as NetDay. The Clinton Administration, which previously has supported such efforts, now proposes to accomplish this goal by creating a classic Federal tax-and-spend bureaucracy. The Administration would be well-served to rethink its approach, and Congress ought to make clear that the FCC's action is not what it had in mind when it, first, heard President Clinton declare that ''the era of big government is over'' and, second, passed the Telecommunications Act of 1996.
The FCC's action will no doubt be challenged in court, probably successfully, on both constitutional and legal grounds. Pending action by the courts, there is a real danger that the voluntary efforts that have been so successful in connecting America's schools, libraries and hospitals to the Internet will be put on hold. If so, the FCC's action could significantly set back America's efforts to provide children with the tools they need to succeed in the digital age. As a result, telecommunications and computer industry leaders should affirmatively step up to the plate, together with NetDay founder John Gage, and commit to completing the job of connecting America's schools, libraries and hospitals to the Internet without governmental coercion, dictates, mandates, taxes or entitlements.
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The FCC's Proposal
In passing the Telecommunications Act of 1996, the Congress inadvisably chose two worthy social goals—education and health—for special attention. Congress instructed the Commission to, first, identify interstate services for schools, libraries and rural health care providers to be eligible for universal service discounts and, second, establish what those discounts should be. Specifically, a new Section 254(h) of the Communications Act provided that schools, libraries, and non-profit rural health care providers receive price discounts on telephone lines needed to connect to the Internet.(see footnote 26)
Congress' intent in enacting these provisions appeared fairly clear. All the Commission needed to do was to create a rate plan that outlines which discounts these entities would receive for which communications services. The discounts were described in the new law as those ''appropriate and necessary'' to ''ensure affordable access.'' Many states already provide such discounts, so Congress clearly did not expect the cost to be very high. To accomplish its aim, and not wishing to specify precisely which services would be covered, Congress directed the FCC to identify the telecommunications services for which a discount is to be provided to schools, libraries and health providers.
In its order covering universal service issued on May 7, 1997,(see footnote 27) however, the Commission went well beyond providing for telephone service discounts as provided for in the Act. Instead, the FCC proposed to establish what is, in effect, both a new tax and a new entitlement program, both administered by a subsidy bureaucracy.
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<http://www.fcc.gov/ccb/universal_service/fcc97157/97157.html.>
Under the entitlement portion of the program, the FCC would require schools and other eligible recipients to apply for funding. Under such a scenario, funding could apparently be sought to pay for computer equipment inside schools, libraries and hospitals, all inside wiring costs (which are not telecommunications services), and whatever else the FCC may deem appropriate from time to time by modifying the definition of ''universal service.'' The FCC order would establish an annual $2.25 billion fund for schools and libraries, plus $400 million more, annually, for rural health care centers.
To pay for this new program, the FCC would establish a new tax to be paid by socializing the cost through to all interstate and intrastate telecommunications users. The impact will be felt by everyone carrying a pager, everyone making a cellular call, everyone making a long distance call, and everyone using local exchange service. In particular, to help pay for the program, the Commission will raise per line charges on residential subscribers and small businesses who use two or more telephone lines. In rural and other high cost areas, each of these additional lines could incur up to a $9.00 per line per month charge, e.g., a $3.00 increase in existing subscriber line charges plus $5.00 to $6.00 in new presubscribed interexchange carrier charges. For example, a small business that uses six telephone lines would incur additional charges of $540 per year (five lines times nine dollars times 12 months). A residential subscriber with three lines—one for the parents, one for the teenagers and one for the computer/fax—would pay additional taxes of $216 per year.
By raising the costs of the second telephone lines families need to access the Internet, this new tax will, ironically, actually make it harder for some families to gain Internet access for their children. Moreover, taxes will flow into the new fund even if all the money is not spent. Excess collections will simply accumulate—until being used to pay for some future, as yet unimagined social purpose the Commission may identify.
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FCC Chairman Hundt, the proud architect of this new tax and spend initiative, in a recent remarkably candid interview with James Glassman, host of PBS's Technopolitics, forthrightly touted the collectivist nature of his undertaking: ''It's a very small additional subsidy . . . It will be contributed by communications companies. Will they pass it onto somebody? Yes, they'll pass it on to everyone in America in insignificant ways down to, you know, pennies per day. It will be a collective action by all of America.'' Glassman retorted: ''if it's passed on in an equal way, as you say, or spread out, why not just tax people? Why not raise general tax revenues or cut spending somewhere else? Why use the phone system as a means to generate revenues for what you consider to be social goods?'' Chairman Hundt's response? ''Probably the most equitable way that you could raise the money for a national purpose would be through contributions by communications companies, because they cover the whole country.''(see footnote 28)
Unlike every other similar tax and entitlement spending program, however, this new initiative is being established not by Congress, but by the FCC, an ''independent'' regulatory agency. As a result, the costs and expenditures of the program will not be subject to the annual federal budget process. Indeed, they will not appear at all in the budget, will not be reviewed by the budget, appropriations or authorizing committees of Congress—or be voted on by any elected official. There would appear to be virtually no precedent for such an approach. It is, nevertheless, a new precedent that if permitted to stand unchallenged will most surely be repeated. Advocates on the left clearly see such an approach as an essential tool given public disenchantment with traditional tax and spend initiatives. As Robert Kuttner pointed out in a recent Washington Post article in praise of FCC Chairman Hundt and the ''surprisingly assertive regulators'' in the Clinton Administration: ''Because of budget pressures there will be little new.public spending for the foreseeable future, though the country still needs much that the private market doesn't provide. Government is now left with one oar—regulation—to promote public purposes. It would not be smart to throw that oar overboard.''(see footnote 29)
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In this context, policy makers should recall that the federal government is already spending billions of dollars on computer technology through the regular budgeting process. As former FCC and NTIA official Ken Robinson recently pointed out in congressional testimony, the President's budget proposal already included some fourteen programs totaling close to $8 billion all aimed at buying computers and Internet service for public service operations.(see footnote 30)
Wiring the Schools: An American Success Story
According to the 1996 U.S. Statistical Abstract, 98.6 percent of schools already have computers. The President himself, following his weekly radio address on April 19, 1997, said that 64 percent of all schools are already connected to the Internet—a figure that was confirmed in a recent study by the Education Testing Service, which administers the SAT and other exams.(see footnote 31) Most promising, according to the recent Education Testing Service study, is how rapidly Internet connections have grown: from 35 percent just two years ago to 65 percent today. In some states, like Maine and West Virginia, virtually 100 percent of the schools now have Internet access.
This American success story is in large measure a result of voluntary efforts, such as the nationwide ''NetDay'' that began in 1996. NetDay is an historic grass roots effort in the classic American barn-raising tradition. NetDay's goal is quite profound: to install all the basic wiring needed to make five classrooms and a library or computer lab in every school in the country Internet-ready. NetDay is an all-volunteer effort. If paid for by the government with taxpayer dollars, it would cost $1,000 per classroom.
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Instead, through NetDay the cost is kept below $400 per school. The first NetDay, March 9, 1996, provided wiring to more than 20 percent of the classrooms in the state of California. Close to 100,000 volunteers, over 2,000 organizers and 1,200 corporate sponsors contributed their time, energy and $25 million worth of equipment and labor to the schools. This California success acted as a catalyst for a nationwide volunteer effort. By the end of 1996 more than 250,000 volunteers cooperated to wire more than 50,000 classrooms in more than 40 states and the District of Columbia.(see footnote 32) Such a grass roots, voluntary approach, which brings together volunteers from business, educational institutions, parents and local communities creates a framework for lasting partnerships and continuing support for the schools. It is run like a business. NetDay is designed to use the volunteer talents of people experienced in installing high technology equipment, with labor, engineering, administration, and tools being provided at no cost to schools.(see footnote 33)
Founded by John Gage, NetDay has been praised by the Vice President, who stated that: ''NetDay sponsors, organizers and volunteers help to build a bridge to the 21st century for all of our nation's children—rich and poor, urban and rural.''(see footnote 34) The President himself has written glowingly of NetDay: ''In my State of the Union Address, I challenged Americans to connect every classroom and library in America to the Information Superhighway by the year 2000, with trained teachers and top quality educational software. NetDay is an exciting response to that challenge . . . I encourage all of you to join in this electronic 'barnraising.' ''(see footnote 35)
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<http://www.netday.org/applause_usa/endorsements.html.>
<http://www.netday.org/applause_usa/endorsements.html.>
This clearly is not a situation where only the federal government in Washington is willing and able to help. States, local school boards and communities all over the country have been in the forefront, and that is exactly where they should remain. There is, of course, more work to do. What we do not need, however, is a giant new Washington grant and subsidy program that boxes in or, worse yet, discourages localized, private-sector-led decision making. This would be particularly ironic given President Clinton's call only recently for increased voluntarism at the Philadelphia summit.
The Bigger Picture
Americans do not want a replay of the Great Society with vast sums of money being tossed in the general direction of some perceived problem. The FCC's responsibility is to actively eliminate regulation of the telecommunications industry in the age of digital information plenty, not to diversify into social engineering for which all telephone rate payers, technological advancement and the American economy will have to pay. The President's appointees at the FCC clearly must have been out of town during his 1996 State of the Union address when he instructed the nation that the ''era of big government is over.'' Under the auspices of ''deregulation'' legislation, the FCC has transformed itself into a tax-making, entitlement-creating, social-services agency with no apparent check on its powers or its appetite for regulatory zealotry.
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As a result of these and other recent FCC actions, regulation of the telecommunications and media industries is at its apogee. Instead of deregulation, the Commission has established a new layer of regulation without removing any significant pillars of the old regulatory paradigm. As a result, the computer sector is now at risk of, at worst, being subjected to regulation or, at a minimum, being negatively impacted by the regulation of the telecommunications sector.
The stakes are exceedingly high. Communications and computers have become the core backbone for the emerging ''Digital Economy'' in 21st Century America. Congress sought to contain and eliminate communications industry regulation—to simply get government out of the way—for at least two, related reasons. First, as communications and computers converge, any unwarranted regulation of communications could spill over and result in federal regulation of the computer sector. Such spillover could have disastrous consequences for this high-tech, growth industry, not to mention the American economy. Second, as computer applications including the Internet become increasingly dependent on communications links, any inefficiencies in communications due to unwarranted regulation will ripple throughout the computer industry, impairing its productivity and competitiveness.
To emphasize the importance of these points consider that the personal computer industry—software, hardware and on-line community—now generates as much revenue as the entire telephone industry. It took the phone companies 100 years to reach this point while the personal computer industry has taken less than two decades. Additionally, the combined market capitalization of computer industry leaders Microsoft and Intel is just slightly below the market capitalization for the entire U.S. regulated telecommunications sector. According to Barrons, growth in the computer industry currently accounts for two-thirds of the U.S. gross domestic product growth. The difference between the two industries is that the telecommunications industry was heavily regulated at the federal and state level for all of these years, while the computer industry flourished outside the reach of the long arm of the state.
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Despite the acknowledged importance of telecommunications, despite the rapid digital technological changes sweeping the industry, and despite the enactment of the Telecommunications Act of 1996, designed to free all communications markets from the yoke of government regulation, the sad reality is that we continue to be stymied and hobbled in America by a regulatory system where existing, antiquated regulations are rarely circumscribed while new-fangled ''transitional'' regulations are layered on top of the existing regime.
It is high time Congress restores some sanity to this out-of-kilter picture by recommitting itself to its successful march to modernize and liberalize communications laws. Ultimately, the central question for Congress is whether a five member ''independent'' Federal Communications Commission, based on a railroad model from the turn of the last century, makes any sense as America prepares for the 21st Century and an age of digital plenty.
Would anyone today seriously suggest that we create a Federal Computer Commission to regulate the most vibrant sector of the American economy? Of course not. Yet, by standing aside, Congress may be allowing precisely such a scenario to take place.
Policy at a Cross-Roads: Voluntarism or Bureaucracy
In announcing the FCC's ruling, FCC Chairman Reed Hundt lauded the Commission's new program: ''From this conversation [with Vice President Al Gore] came this Commission's desire to include classroom connections as an essential goal of universal service. . . . today, at last, after three and one-half years of work, we can say that we have by law and rule a fully funded national commitment and national plan to connect every classroom to the information highway. . . . The Commission has delivered the result our children deserve, and I am completely delighted to have been a part of this process.''(see footnote 36) Just two weeks earlier, President Clinton stated in his ''voluntarism summit'' in Philadelphia that: I am proud of the fact that because of the computer and microsolutions to problems we don't need big government bureaucracies to do some of the things that used to be done. But as I have said repeatedly, the era of big government may be over, but the era of big challenges for our country is not, and so we need an era of big citizenship. That is why we are here, and that is what we should promise ourselves we will do.''(see footnote 37)
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Which path will America take to bring our schools and other public institutions into the digital age? The question will never be more clearly defined than in the FCC's proposed ruling. Voluntarism or bureaucracy, that is the question.
The path of voluntarism is well-established and easily taken. NetDay is a strong and vibrant institution, with support from a broad array of private-sector companies that includes the leading communications and computing firms in the United States. Moreover, the local telephone companies have offered to step up to the plate with even more resources, establishing a Connected Classroom Foundation funded at $450 million to supplement what is already being done. Unlike the FCC, which makes no promises (or even offers estimates) of the impact of its proposed program, this voluntary program promises to have 100 percent of the schools wired by the year 2000. Such a telecommunications industry commitment, together with similar pledges from the computer industry and the continuing leadership of NetDay founder John Gage and others could be a formidable combination in establishing a compelling, voluntary alternative to the Commission's proposal.
The FCC's proposal is a turning point not only for telecommunications policy but for the relationship between Congress and this Administration. Will Congress stand meekly by while.the FCC raises taxes by $13.25 billion over five years? Will it allow its statutory authority to be flaunted by unelected regulators? Will it permit the establishment of a vast new Federal bureaucracy in place of a proven and very active national volunteer movement? Was the Telecommunications Act of 1996, hailed by Congressional leaders and the Administration alike as a step in the direction of deregulation, really just a cover for the expansion of Federal taxes, spending and regulation? Will telecommunications and computer industry leaders stand tall and challenge the FCC's action in court, while simultaneously recommitting themselves to the successful, voluntary effort to wire the schools, libraries and hospitals?
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These are the questions that confront policy makers and industry leaders as they consider the FCC's proposal for wiring the schools.
A private, non-profit, non-partisan idea center established in 1993, The Progress & Freedom Foundation studies the impact of the digital revolution and its implications for public policy. It brings together a diverse group of thinkers and policy experts and shares their work with the American people through seminars, conferences, publications and electronic media of all forms. Tax-exempt under Section 501(c)(3) of the Internal Revenue Code, the Foundation is supported by tax-deductible contributions from individuals, foundations and corporations. The Progress & Freedom Foundation does not engage in lobbying activities. The views expressed here are those of the author and do not necessarily reflect the views of the board, officers or other staff of The Progress & Freedom Foundation.
PREPARED STATEMENT OF ANNE L. BRYANT, EXECUTIVE DIRECTOR, NATIONAL SCHOOL BOARDS ASSOCIATION
The National School Boards Association (NSBA) and the 95,000 school board members we represent through our federation of 53 states and territories would like to take this opportunity to emphasize the critical importance of the E-rate. The E-rate is vital to helping schoolchildren across the country successfully meet the challenges of the 21st century while increasing student achievement today. We applaud Congress for establishing this program with the ''Telecommunications Act of 1996.''
Indeed, the challenge of connecting every school and library to the Internet, distance-learning opportunities, and other educational databases is significant. The National Center for Education Statistics has found, for example, that currently only 14 percent of all public school instructional rooms have Internet access. For public schools in poverty areas, this number plummets by half. Only four percent of private schools and 28 percent of libraries have Internet access. Fortunately, there is a strong consensus among the American people that technology access for schools must be a priority. A recent Phi Delta Kappa/Gallup poll found that 81 percent of Americans believe that placing a computer in every classroom ranked first as a method for improving student achievement. Moreover in a November 1996 poll of registered voters, NSBA found that 81 percent of Americans believe that schools should pay an ''education rate that is deeply discounted for telecommunications services.''
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Fortunately, the E-rate is well on its way to reaching the goal of connecting our country's students to the wealth of knowledge available through technology. So far, 17,000 applications have been submitted to the Schools and Libraries Corporation (SLC) in just one month. In addition, 24 states have filed for E-rate discounts on behalf of all school districts in the state. In such a short timeframe, this is an unprecedented response that shows the level of school district and state support for the program.
The academic achievement and future success of America's students in tomorrow's labor market depends greatly on the availability of affordable technology access for our schoolchildren. By providing universal access to each student and lifelong learner, we are strengthening the economic and social stability of our country as we enter the 21st century. Again, we applaud Congress for establishing one of the most important programs ever created for our nation's schoolchildren.
PREPARED STATEMENT OF NATIONAL FEDERATION OF INDEPENDENT BUSINESS
Mr. Chairman, the National Federation of Independent Business (NFIB) is pleased to have the opportunity to submit the views of its constituents before the Subcommittee on Telecommunications, Trade and Consumer Protection.
NFIB is the nation's largest small business advocacy organization, representing 600,000 members in all fifty states. The typical NFIB member has five employees and grosses $250,000 in annual sales. Our membership reflects perfectly the nation's commercial economy—we have the same representation of retail, service, manufacturing and construction that makes up the nation's business community. NFIB sets its legislative positions and priorities based upon regular surveys of its membership.
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Federal mandates have always been a hurdle for small business. The regulatory structure which so burdens our nation's economy falls disproportionately on the shoulders of those who own and operate the smallest businesses, resulting in higher prices for consumers, lower wages for workers and hiring disincentives.
It is for exactly this reason that we submit this testimony for you today. In 1996, under the guise of deregulation, Congress passed the Telecommunications Act, intending to lower prices for consumers by increasing competition in the delivery of communications services ranging from long distance to cable television. Small business owners had a right to be hopeful about the provisions of the new law but, as with so many government initiatives, reality as implemented by bureaucrats has proved a bitter perversion of the good intentions of the legislature.
For many years, the Federal Communications Commission (FCC) and state regulators have allowed phone companies to set artificially high rates for certain classes of customers in order to provide subsidies to high-cost customers—for example, residents in remote rural areas. In addition, the FCC has administered a Universal Service Fund, designed to further offset the cost of rural hookups, to provide subsidies for low-income people to pay their monthly phone bills and to fund phone service subsidies for the hearing impaired.
As obviously inequitable as these (and all) subsidies are, at least their impact to date has been comparatively small—roughly $1 billion in fiscal 1997. That is about to change.
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The Telecommunications Act expanded the concept of universal service so that phone ratepayers will now be forced to subsidize the costs of a wide variety of telecommunications services, most notably the provision of Internet access to schools, libraries and rural health providers. The services will be offered through a system of government-paid discounts to these institutions as they purchase them from private firms. The Congressional Budget Office (CBO) now estimates that the cost to taxpayers—or phone users—of the schools and libraries program could run to $20 billion between 1998 and 2008 and $1.3 billion for rural health care providers over that same period. Initial annual limits were $2.25 billion for schools and libraries and $400 million for rural health.
The costs of these enormous new programs will be devastating for small business. To pay for the expansion, the FCC would establish a new tax to be paid by passing the cost on to all interstate and intrastate telecommunications users. In particular, the Commission will raise per line charges on residential subscribers and small businesses that use two or more telephone lines. In some areas, each additional phone line could cost an additional $9 per line per month. A small business that uses six telephone lines would incur additional charges of $540 per year!
Even more troubling than the additional cost, is that this new tax (and accompanying entitlement spending program since schools, libraries and rural providers need only apply to qualify for matching grants) was not explicitly established by Congress, but is instead being implemented by the FCC. As a result, the program will be largely free of Congressional budget discipline. In fact, the entire tax and entitlement program will be run entirely by the unelected bureaucracy—without review by any duly elected official.
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Congress should not delegate the power to tax. In fact, the Constitution forbids it. Due to some vague language in the Telecommunications Act, there is no limit to the extent of universal service funding save the ''good sense'' of five unelected commissioners. Inevitably, bureaucrats (even those with good intentions) take action to promote and perpetuate themselves and the programs they administer.
Not surprisingly, the FCC's interpretation of the Telecommunications Act mandate seems to have far exceeded the scope envisioned by Congressional sponsors. NFIB applauds the recent efforts of Chairman Bliley, Representative Oxley and others who have sought to rein in the runaway tax and spending impulses exhibited by the FCC. At a minimum, it is doubtful that Congress intended to pay all the costs of schools hooking up to the Net—including internal connections such as local area computer networks connecting individual classrooms and charges for satellite transmissions for distance learning.
It is instructive to note that, as is so often the case, voluntary efforts have already made great strides in providing computer services to schools. With the help of massive investment by computer companies, by 1996 fully two-thirds of public schools were already using the Internet. That number is probably far higher today. NFIB believes that, rather than creating a new federal program, states and localities should be empowered to fill in any remaining gaps
NFIB opposes the unfair and burdensome universal service tax and entitlement program. Just as important, we oppose the manner in which an unelected bureaucracy is being allowed to usurp the powers that the Constitution reserves to Congress. Congress should act now to fulfill the promise of deregulation embodied in the Telecommunications Act of 1996. It can start by working to reverse the universal service program.
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(Footnote 1 return)
I wish to thank my colleague, Citizens for a Sound Economy telecommunications policy analyst Kent Lassman, for assistance in the preparation of this statement.
(Footnote 2 return)
Neither CSE nor CSE Foundation receive any funds from the U.S. Government.
(Footnote 3 return)
See Doug Bandow, ''Federal Agencies You Can't Kill,'' Fortune, March 2, 1998, p. 48.
(Footnote 4 return)
See Nichole L. Millard, ''Universal Service, Section 254 of the Telecommunications Act of 1996: A Hidden Tax?,'' Federal Communication Law Journal, Vol. 50, No. 1, p. 257.
(Footnote 5 return)
U.S. Constitution, Article I, Section 7; and Federalist Papers XLV.
(Footnote 6 return)
See, for example, letter from GAO General Counsel Robert P. Murphy to Hon. Ted Stevens, February 10, 1998.
(Footnote 7 return)
U.S. Constitution, Preamble.
(Footnote 8 return)
See, for example, George W. Douglas and James C. Miller III, Economic Regulation of Domestic Air Transport: Theory and Policy (Washington: Brookings Institution, 1974); Robert J. Mackay, James C. Miller III, and Bruce Yandle, Public Choice and Regulation: A View from Inside the Federal Trade Commission (Stanford: Hoover University Press, 1987), and James C. Miller III, The Economist as Reformer: Revamping the FTC, 1981–1985 (American Enterprise Institute, 1989).
(Footnote 9 return)
Public Law 104–104, §254 of the USC, subsection (b), (5).
(Footnote 10 return)
See Jerry Hausman, ''Taxation by Telecommunications Regulation,'' Ameican Enterprise Institute, February 20, 1998; also found at http://www.nber.org/papers/w6260.
(Footnote 11 return)
Jerry Hausman, ibid., p. 3.
(Footnote 12 return)
See Wayne Leighton, ''Telecommunications Subsidies: Reach Out and Fund Someone,'' CSE Foundation Issues and Answers, January 5, 1996. See also ''What to Do About Universal Service Subsidies: Support for High-Cost Areas,'' CSE Foundation Issues and Answers, September 30, 1996; and ''Apples for Students, Carrots for the Schools: Avoiding the Big-Stick Approach to Educational Subsidies,'' CSE Foundation Issues and Answers, November 1, 1996.
(Footnote 13 return)
President's Budget, FY 1999, Historical Tables, p. 125.
(Footnote 14 return)
President's Budget, FY 1999, Analytical Perspectives, p. 76.
(Footnote 15 return)
J. T. Young, ''Workers Need Tax Cuts, Not a Minimum Wage,'' The Wall Street Journal, February 23, 1998, Page A22.
(Footnote 16 return)
Paul Craig Roberts, ''Congress Should Grab Back the Reins of Power,'' Business Week, January 26, 1998, Page 18.
(Footnote 17 return)
David Frum, Dead Right (New York, NY: Basic Books, 1994), Page 34.
(Footnote 18 return)
Jerry Hausman, ''Taxation by Telecommunications Regulation,'' NBER Working Paper 6260 (Cambridge, MA: The National Bureau of Economic Research, November 1997).
(Footnote 19 return)
Robert P. Murphy (General Counsel of the United States General Accounting Office), Letter to Senator Ted Stevens, February 10, 1998, Pages 1–2.
(Footnote 20 return)
''Federal Subsidies of Advanced Telecommunications For Schools, Libraries, and Health Care Providers,'' (Washington, DC: The Congressional Budget Office, January 1998), Page ix.
(Footnote 21 return)
For a discussion of the expansion of federal education spending since 1979, see John Berthoud, ''The Budgetary Implications of Eliminating the U. S. Department of Education,'' (Arlington, VA: The Alexis de Tocqueville Institution, May 1995).
(Footnote 22 return)
James Glassman, ''A New Tax for the New Year,'' The Washington Post, December 2, 1997, editorial page.
(Footnote 23 return)
Thomas J. Duesterberg, ''Behind The Budget Deal: A Stealth Telecom Tax,'' Investor's Business Daily, August 4, 1997.
(Footnote 24 return)
''Come Clean On The Phone Tax,'' Investor's Business Daily, December 29, 1997.
(Footnote 25 return)
Mr. McClellan is Senior Fellow for Communications Legal and Policy Issues at The Progress & Freedom Foundation. He served as Senior Republican Communications Counsel for the U.S. Senate during consideration of the Telecommunications Act of 1996.
(Footnote 26 return)
Telecommunications Act of 1996, Pub.L. No. 96–104, Section 101(a), 47 U.S.C. 254(h) (1996). The relevant language reads: ''All telecommunications carriers serving a geographic area shall, upon a bone fide request for any of its services that are within the definition of universal service . . . provide such services to elementary schools, secondary schools, and libraries for educational purposes at rates less than the amounts charged for similar services to other parties. The discount shall be an amount . . . appropriate and necessary to ensure affordable access to and use of such services by such entities.''
(Footnote 27 return)
Report and Order In The Matter Of Federal-State Joint Board On Universal Service, FCC 97–157, CC Docket No. 96–45 (May 8,1997)
(Footnote 28 return)
See Notable and Quotable, Wall St. J., June 23, 1997, at 18.
(Footnote 29 return)
Robert Kuttner, Clinton's Talented and Tenacious Regulators, Wash. Post, June 2, 1997, at A19.
(Footnote 30 return)
Oversight Hearing On National Telecommunications and Information Administration (NTIA) Before The House Subcommittee On Telecommunications (April 24, 1997) (Statement of Kenneth Robinson).
(Footnote 31 return)
Richard Coley, John Cradier, and Penelope Engel, Computers and Classrooms: The Status of Technology In U.S. Schools (Education Testing Service Princeton, N.J., 1997).
(Footnote 32 return)
See <http://www.netday.org.>
(Footnote 33 return)
Ibid.
(Footnote 34 return)
Letter from Vice President Al Gore to NetDay organizers (October 26, 1996)
(Footnote 35 return)
Letter from President Bill Clinton to NetDay organizers (October 26,1996);
(Footnote 36 return)
Chairman Reed E. Hundt, Opening Statement at the Federal Communications Commission Agenda Meeting (May 7, 1997) (emphasis added).
(Footnote 37 return)
President Bill Clinton, Address at the ''Philadelphia Volunteer Summit,'' Independence National Historical Park, (April 28, 1997).