By
The Associated Press
updated 10/20/2003 10:15:06 AM ET 2003-10-20T14:15:06

State and local governments could lose $2 billion to $9 billion per year in tax revenue if Congress strengthens an existing ban on Internet access taxes, a policy group said on Monday.

CASH-STRAPPED STATES could lose revenue from telephone service, music and movie sales, and other activities that could migrate to the Internet over the next several years if the Senate passes a tax ban that has already cleared the House of Representatives, said the Center on Budget and Policy Priorities, a think tank which represents lower-income families.

Most taxes on monthly fees charged by Internet service providers like EarthLink Inc. are already prohibited by a temporary ban due to expire Nov. 1.

The House passed a bill last month that would make the ban permanent and extend it to cover the high-speed Internet access that is currently taxed in 27 states and the District of Columbia. The bill would also require nine states to repeal existing access taxes that had been “grandfathered” in the previous ban.

The Senate could vote on a similar measure as soon as this week, several aides said.

Supporters of the strengthened ban say it will create a consistent national policy that would encourage as many people to sign up for the more expensive broadband service, but Michael Mazerov, a senior policy analyst at CBPP, said those who could afford the $40 to $50 monthly broadband fee would not be put off by a few extra dollars in tax.

“This is really a subsidy for those who don’t need it,” Mazerov said.

States could lose $70 million in tax revenue annually from the broadband-tax ban, he said, while the elimination of the “grandfather clause” could drain an additional $80 million to $120 million each year from state coffers.

But a much larger impact could come over the next few years, as citizens increasingly use the Internet to place phone calls and download music, movies and software, he said. Language in the bill could render these activities tax-free if they are bundled with access fees, he said.

A spokeswoman for Oregon Democratic Sen. Ron Wyden, a major backer of the bill, said the taxable status of Internet-based phone calls or other online activities would not be affected.

“A phone call is a phone call is a phone call,” Wyden spokeswoman Carol Guthrie said.

“States and localities have said for years and years since the inception of this ban that Western Civilization would end at its passage, but five years of solid math and evidence show that this law works for the American people,” Guthrie added.

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