The Internet Exception

Why the wildly successful Internet needs what is, in effect, a government subsidy is anyone’s guess. But compromise legislation on the Internet’s special tax moratorium gives those who dislike all taxes two more years of bliss and those who think taxes should be raised for government programs the chance to make their case again in 2006.

The bill, S. 2084, is bipartisan in that its primary sponsors are Sens. Lamar Alexander, a Republican from Tennessee, and Tom Carper, a Democrat from Delaware, but more important than their political affiliations is the fact that both senators were once governors and know that budgets can’t be balanced with good intentions. They estimate that a competing bill, which would have made the tax break for getting on the Internet permanent, would have cost states $9 billion by 2006. The added cost to states, which they cannot afford, is due to not only the broad interpretation of what constitutes access, but to the growing interest in on-line phone service, books, movies and music, which could be tacked on to an access package.

Though some dispute the $9 billion figure, no one disputes that the bill would remove the grandfathered access taxes in 10 states worth, according the Congressional Budget Office, between $80 million and $120 million annually. These costs should remind the Senate of its Unfunded Mandates Reform Act, passed in 1995, which tells Congress that it is “not in order for the Senate or the House of Representatives” to consider any bill that increases costs to the states at the level that a permanent moratorium would produce.

The National Governors Association, which supports the Alexander-Carper compromise bill, argues that, “No one can predict where [the telecommunications] industry will be in two years when the moratorium proposed in this legislation will expire,” but that Congress might have a better idea in a couple of years. This is a good way to play for time, and it is the best deal governors mindful of their fragile budget conditions are likely to get.

Both Maine senators have supported a permanent moratorium on Internet-access taxes, but if a current debate over DSL within the bill can be worked out, both should support the two-year extension, with the intervening time spent developing congressional consensus over what makes the Internet so different that it cannot be treated like other industries. States, slashing programs while Congress slashes their sources of revenue, are eager for an answer.