House Subcommittee Debates E-Rate Funding

(August 5, 1998)  The Oversight Subcommittee of the House Ways and Means Committee held a hearing on August 4 on the financing mechanism for the e-rate.  Republicans argued that the current universal service based funding is an unconstitutional tax.  It collects money to pay for the schools and libraries program from charges added to long distance phone users' monthly bills.  They advocated replacing it with money raised from the existing excise tax on phones.  Democrats defended the FCC run program.

Related Pages

Summary of Schools & Libraries Program.
HTML Copy of  HR 4324.
Summary of HR 4324.

The two and one quarter hour hearing was largely a debate between Members of Congress.   All participants had well formed opinions from the outset, and argued them.   Also, there was a perfect correlation between party affiliation and where one came down on funding the e-rate.  Democrats defended the FCC run program.   Republicans asserted that the FCC funding mechanism constitutes an unconstitutional tax on phone users, and advocated passage of the Tauzin-Burns proposal.

Rep. Billy Tauzin (R-LA) and Sen. Conrad Burns (R-MT) introduced identical bills titled the "Schools and Libraries and Internet Access Act" in the House (HR 4324) and Senate on July 23.  This proposal would terminate universal service support for the e-rate program, and instead fund it at the rate of about $1.7 Billion per year from an already existing excise tax on phones.  The e-rate, and the excise tax on phones, would terminate after five years.

Prepared Testimony

Rep. Jerry Weller (R-IL).
Rep. Earl Blumenauer (D-OR).
FCC Lawyer Christopher Wright.

The Subcommittee heard from two panels.  The first panel consisted of Rep. Tauzin, Rep. Jerry Weller (R-IL), and Rep. Earl Blumenauer (D-OR).  Tauzin and Weller are both sponsors of the house version of the Schools and Libraries Internet Access Act (HR 4324), and spoke in favor of it.  Blumenauer is the leading defender of FCC run e-rate program in the House.

The second panel consisted of FCC Commissioner Harold Furchtgott-Roth and FCC General Counsel Christopher Wright.  The five member Federal Communications Commission is divided 3 to 2 on the propriety of the FCC's implementation of the e-rate program.   Republican Furchtgott-Roth is in the minority.  Wright testified on behalf of the majority.

"The issue is not whether we ought to fund a decent schools and libraries program, or that we ought to carry out the purposes of the e-rate program, ... We all agree that it is a good public national goal to make sure that children have access to Internet services," said Rep. Tauzin.  "The question is ... whether the e-rate tax is a tax or a fee."   And he argued that it was in fact a tax.

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Rep. Johnson

Ways and Means Oversight Subcommittee Chairman Nancy Johnson (R-CT), who presided over the hearing, stated that:

"Every school district, in rich districts and in poor, in cities and in remote rural areas, should have access to the Internet, and to the other services that will increase the technical skills of its students.  I support the goals of the e-rate program, and I believe that everyone on the subcommittee supports that program's goals.  We are not here today to discuss that program's purpose or goals.   Rather, we here to discuss how the e-rate program is funded."

She stated at the outset of the hearing the Constitutional issue.

"When the drafters of the Constitution established the three branches of government, they carefully delineated the duties and powers of each branch.   Congress, and Congress alone was entrusted with the power to levy taxes.   Congress should not and cannot delegate the authority to levy taxes.  That being established, we are here to determine whether the e-rate program as implemented by the FCC is a fee or a tax, because if it is indeed a tax, it has not been levied by Congress, but by an executive branch agency, and therefore is illegal."

All Republicans concluded that the FCC program did include an unconstitutional tax.

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They were also backed up by FCC Commissioner Harold Furchtgott-Roth who expressed bluntly his views on the decision of the majority of the Commissioners.

"They require an expansive, and I believe unlawful interpretation of Section 254(h)(2) to provide subsidies for internal connections of schools.  Let us be sure, the discussion is not about wire and fiber.   It is about sophisticated computer equipment, about servers, about routers that cost tens of thousands of dollars each.  And if the computer industry of America comes to the FCC [inaudible words] with their hands out.   Of the requests for 1998, 1.3 billion of the total of 2 billion dollars is required for this.  The telecommunications customer does not benefit from this, nor does the communications carrier.  It unambiguously transfers to the schools, libraries, and computer companies, without any benefit to those paying the fees.  It is in short a tax.  What authority does the FCC claim to establish this tax?  The usual citation to section 254(h)(2).  This section authorizes the FCC to establish rules to enhance access to advanced telecommunications information services.  Based on this language the Commission established rules that have lead to requests for federal subsidies for more than one billion dollars for computer equipment.  This sentence does not require any federal funds.  It does not require any discounts.  It does not require taxes.  It does not require anything other than rules which would enhance.  In short, the statutory language does not lead to a tax, only the Commissions peculiar interpretation of this language.  Who in short changed this process?  The American consumers who pay the tax?  Telecommunications carriers who pay the tax?  And this committee, which did not authorize the tax?  I trust that this Committee will find an appropriate remedy."

Rep. Tauzin also argued that there was another legal deficiency to the FCC run program.   Basically, the language of Section 254 creates an entitlement, yet the FCC is limiting who is entitled to receive funds for internal wiring to the neediest schools. "The problem with that is that when we wrote our bill in 1996 we created an entitlement.  We did so on purpose.  We did not want politics plaguing this program.  So we said that any school that filed a bona fide request for discounted services had to get them.  The FCC couldn't deny it.  Now they interpreted that to include a grant for construction funds.  Does that mean that schools, the richest in America, that applies for this money, has an entitled right to get that money."   He concluded that if excluded schools bring suit, and win, it would force the FCC to raise much more money from phone users.

Tauzin also pointed out that "under the FCC e-rate tax there is no sunset.   It theoretically could go on forever."  The Tauzin-Burns proposal, in contrast, would fund the e-rate for five years.

Several other Republicans participated in the hearing.  Rep. Kenny Hulshof (R-MO) and Rep. Jennifer Dunn (R-WA), who are both also co-sponsors of HR 4324 (the Tauzin-Burns proposal),  condemned the FCC run program, and advocated passage of their bill.  Rep. Weller was a "witness" on the first panel, and then walked up to his seat as a member of the subcommittee during questioning of the second panel.

On the Democratic side Ranking Minority Member William Coyne and Rep. Karen Thurman (D-FL) politely defended the FCC run program.  Rep. Neal, who is a member of the full Ways and Means committee, but not the Oversight Subcommittee, was permitted to participate.  His sole contribution was to angrily denounce Tauzin and Weller for using the term "Gore Tax."

Rep. Blumenauer stated in his prepared testimony that he favored continuing the current FCC run, universal service based, funding.  He opposed legislative attempts to defund the e-rate (HR 4032 and HR 4065).   Regarding the Tauzin-Burns proposal, he said:

"Rep. Tauzin ... has proposed an alternative source of funding to help schools and libraires gain access to information services.  While appreciated, I'm not convinced his legislation is necessary.  We have a mechanism for funding the E-Rate in place which, hopefully, will not be brought down by either the Fifth Circuit court, or through the Appropriations process.  ... Our best course of action would be to await the ruling of the Court before determining our next legislative steps on actual funding for the program."

Related Stories

Riley Attacks Tauzin-Burns Proposal, 7/30/98.
Comparison of E-Rate Programs, 7/27/98.
Tauzin-Burns E-Rate Reform Bill, 7/24/98.
Senate Hearing on SLC, 7/20/98.
Wm. Kennard Speech on E-Rate, 7/15/98.
Gingrich Criticizes SLC, 7/1/98.
E-Rate Debate Continues, 6/22/98.
FCC Modifies E-Rate, 6/15/98.
Senate Subcommittee Berates FCC, 6/11/98.
SLC in Trouble on Hill, 6/8/98.
E-Rate Defenders Fight Back, 6/8/98.
Clinton Condemns "Digital Divide", 6/8/98.
Riley Waits in Wings to Run E-Rate, 6/8/98.
Debate Over "Gore Tax" Heats Up, 6/5/98.
AT&T's Universal Service Charges, 5/28/98.
FCC Reports to Congress on SLC, 5/11/98.
Congress Decries FCC, 3/31/98.
GAO Reports SLC Is Illegal, 3/31/98.

Several Democrats took the opportunity to criticize the phone companies' billing practices.  Rep. Coyne stated the following:

"Why then have phone companies chosen to show the increase in universal service as a separate charge, and not as a part of the rate?   It is not because their costs have increased.  It is because doing that allows them to advertise a lower rate than they actually charge, and as a bonus, blame it on the government.  For example, itemizing the charge allows them to charge the hypothetical customer I was just describing about half a cent more per minute than their advertised rate, increasing the bill by about fifteen dollars a year.  I believe that the testimony that we hear today will help us better understand whether the phone bills our constituents receive are actually what is in their phone companies underlying costs.   I hope our committee will not be a party to legitimizing any rhetoric which prevents consumers from getting the full benefit of reductions in long distance telephone costs mandated by Congress.

Rep. Blumenauer took the opportunity to plug his "truth in billing" proposal, HR 4018, which would limit what phone companies can say on their customers' bills.

Rep. Weller summarized his objections to the FCC run program as follows:
"When we passed the Telecommunications Act of 1996, it included a simple directive that any telecommunications carrier serving a particular geographic area must make any of its services under the Universal Service Fund (USF) available at reduced rates to schools and libraries. Unfortunately, the FCC misinterpreted the Telecommunications Act and now jeopardizes the goal we all share, which is providing Internet access for all of America's children."

"First, the FCC determined that as much as $2.25 billion per year should be made available to support universal service for schools and libraries. Second, FCC expanded the scope of what was available for schools and libraries from just discounted rates on the telecommunications services and decided to include Internet access costs and internal connections (wiring)."

"Third, the FCC created a whole new bureaucracy, known as the School and Library Corporation to administer the e-rate program without any authorization from Congress to do so. Finally, with probably the most questionable of all of the provisions, the FCC determined that the funds supporting the e-rate, for schools and libraries should come from an assessment, or tax,, on all long distance telecommunications service providers. This controversial assessment, which is currently facing legal challenge, is now known as the "Gore Tax".