Statement of John E. Berthoud, Ph.D.
On the FCC's Universal Service Tax
February 26, 1998
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.
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.1
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." 2
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."3
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.4 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:
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).6 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).
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 4.7 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."8 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.9
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.
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."10
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.
1 J. T. Young, "Workers Need Tax Cuts, Not a Minimum Wage," The Wall Street Journal, February 23, 1998, Page A22.
2 Paul Craig Roberts, "Congress Should Grab Back the Reins of Power," Business Week, January 26, 1998, Page18.
3 David Frum, Dead Right (New York, NY: Basic Books, 1994), Page 34.
4 Jerry Hausman, "Taxation by Telecommunications Regulation," NBER Working Paper 6260 (Cambridge, MA: The National Bureau of Economic Research, November, 1997).
5 Robert P. Murphy, (General Counsel of the United States General Accounting Office), Letter to Senator Ted Stevens, February 10, 1998, Pages 1-2.
6 "Federal Subsidies of Advanced Telecommunications For Schools, Libraries, and Health Care Providers," (Washington, DC: The Congressional Budget Office, January 1998, Page ix.
7 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).
8 James Glassman, "A New Tax for the New Year," The Washington Post, December 2, 1997, editorial page.
9 Thomas J. Duesterberg, "Behind the Budget Deal: A Stealth Telecom Tax," Investor's Business Daily, August 4, 1997.
10 "Come Clean on the Phone Tax," Investor's Business Daily, December 29, 1997.