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Second Meeting: Transcript of September 14

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       7      ADVISORY COMMISSION ON ELECTRONIC COMMERCE

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      18                  New York, New York

      19                 September 14-15, 1999

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       1                 P R O C E E D I N G S

       2               CHAIRMAN GILMORE:  Good afternoon,

       3     ladies and gentlemen.  We have delayed a few

       4     minutes because there were a couple of

       5     Commission members who were still coming in,

       6     and I think that we have gotten most, I think

       7     now, present so that we can begin.

       8               One or two I think are still in the

       9     elevator or the taxies and will probably be

      10     joining us here in the next few minutes.

      11               Welcome to New York.  Welcome to

      12     the second meeting of the National Advisory

      13     Commission on Electronic Commerce.  For those

      14     who are listening on our Web site, it's

      15     www.ecommercecommission.org.

      16               For those of you who are listening

      17     on our Web site, good afternoon.  Tomorrow

      18     our meeting will be Web cast live with both

      19     audio and video, and I hope that everyone who

      20     is listening will join us for those as well.

      21               First I want to thank the

      22     Commission members for all the hard work that









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       1     they've done leading up to today.  The first

       2     meeting in Williamsburg was a very

       3     productive.  It was a good organizational

       4     meeting.  It was also an opportunity to begin

       5     to get some of the data out that we wanted to

       6     consider.

       7               We had some presentations there.

       8     Subsequently we have had committee meetings,

       9     and most specifically a Work Force Committee

      10     meeting, which has met by teleconference

      11     twice.

      12               Staffs have worked on it

      13     considerably, and the Work Force Committee

      14     subcommittee group has now led to this agenda

      15     here in New York today.  It's all been very

      16     productive.

      17               The groundwork is now in place so

      18     that we can move forward on the critical

      19     issue that is at hand, and that is internet

      20     taxation.

      21               I want to thank all of the hosts

      22     and the sponsors who have helped to make this









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       1     meeting possible, especially Bill Rudin of 55

       2     Broad Street; the New York New Media Association;

       3     and the Governor of New York, Governor George

       4     Pataki.  We appreciate the assistance of

       5     everyone who assists this Commission as it

       6     goes forward.

       7               Everyone here has been provided

       8     with the agenda for today and tomorrow, which

       9     was set forth in the work plan, and in accord

      10     with that agenda I will now proceed.

      11               Today we are planning to listen to

      12     a variety of presentations, but they will be

      13     short, followed by a dialog between the

      14     commissioners, presenters, and other experts

      15     in the room.  Now, while we are interested in

      16     hearing from as many organizations as

      17     possible, due to time constraints we have had

      18     to limit each speaker to five minutes of

      19     remarks.

      20               Now, this is absolutely in accord

      21     with the wishes of the commissioners who wish

      22     to have the time to interact with you and to









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       1     interact with each other on these issues, and

       2     so we're going to do that.  We're going to

       3     make that five minutes for each person.  I

       4     hope the presenters will bear with me as

       5     chairman as I call you at the end of five

       6     minutes.

       7               So, get your watches out and work

       8     with us on this, and we'll have plenty of

       9     time, I think, for what we need to do.

      10               In addition to the speakers today

      11     we have a number of experts who will be able

      12     to answer any specific questions that may

      13     arise during our deliberations also.  I would

      14     ask that the speakers and experts remain

      15     during the deliberations so that we can have

      16     full access to their expertise.

      17               Let me say how grateful we are to

      18     the presenters and to any experts who are

      19     with us, many of whom have come, frankly,

      20     from some great distance at some expense.

      21               They have tough assignments in

      22     condensing remarks to a very a few minutes to









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       1     be ready to respond to a wide range of

       2     questions.  So, let me take this opportunity

       3     to thank you all very much for being here and

       4     for your involvement.  It's a very rarified

       5     group I might say, again, because we have

       6     limited the people who are in a position to

       7     speak to us about this.

       8               Just a couple of administrative

       9     matters.  Because this meeting is being

      10     transcribed, I would ask each of our

      11     presenters and experts to use microphones.  I

      12     believe there may be some standing

      13     microphones nearby if anyone else outside of

      14     the presenters is going to -- expert is going

      15     to be able to present.

      16               Always state your name, please,

      17     before answering any questions that are put

      18     forward by the Commission, and that way the

      19     transcript will be very clear as to who is

      20     answering what type of question.

      21               The first topic that we're going to

      22     hear about is local state and federal tax









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       1     issues associated with internet access and

       2     telecommunications.  This is one of the

       3     conglomerate subjects that we have put

       4     together in order to be able to cover the

       5     wide range of issues that have come before

       6     this Commission in Williamsburg.

       7               It's my pleasure to introduce our

       8     first group of speakers.  I'll introduce all

       9     of you, and then we'd be in a position to go

      10     from there.  First is Annabelle Canning, the

      11     vice president of the Committee on State

      12     Taxation; Mr. Jeffrey Eisenach, the president

      13     of The Progress and Freedom Foundation;

      14     Mr. Raymond Keating, the Small Business

      15     Survival Committee; and Mr. Shimizu --

      16     Shimizu, is that correct?  I don't have you

      17     down on the list, and who do you represent?

      18               MR. SHIMIZU:  I'm with GTE.

      19               CHAIRMAN GILMORE:  GTE.  Welcome.  I'm

      20     glad that you're here.

      21               Let's take these up, then, one at a

      22     time and begin at this time.  First, of









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       1     course, is Ms. Canning.  Thank you,

       2     Ms. Canning.

       3               MS. CANNING:  Good afternoon,

       4     Mr. Chairman and members of the Advisory

       5     Commission on Electronic Commerce.  My name

       6     is Annabelle Canning.  I am vice president

       7     and legislative director of the Committee on

       8     State Taxation, commonly referred to as COST.

       9     I appreciate the opportunity to speak to you

      10     today on behalf of the COST

      11     Telecommunications Task Force, which includes

      12     virtually every major telecommunications

      13     provider in the nation.

      14               COST is a non-profit association

      15     with an independent membership of more

      16     than 500 multi-state corporations engaged in

      17     interstate and international business.  COST

      18     membership is comprised of businesses from

      19     every sector of industry.  As a result, our

      20     members have many different tax concerns and

      21     priorities.

      22               Today I am here on behalf of the









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       1     Telecommunications Task Force to present the

       2     highlights of a 50-state study recently

       3     completed by the task force.  The study

       4     documents the relative tax and administrative

       5     burdens imposed on both general business and

       6     telecommunications providers under state and

       7     local transactional and property taxes.

       8               The solutions discussed in this

       9     presentation today represent the tax

      10     simplification priorities identified by

      11     members of the task force and not the

      12     organization as a whole.

      13               Telecommunications is a vital part

      14     of the U.S. economy.  A failure to address

      15     the concerns raised by this study will likely

      16     impact the growth of e-commerce of the

      17     nation's networks in a global economy.  The

      18     study highlights the problems faced by

      19     telecommunications providers who are subject

      20     to a myriad of taxes in a multitude of

      21     jurisdictions.  To our knowledge, this is the

      22     first study of its kind.









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       1               As business and residential

       2     customers become increasingly reliant on

       3     communication services, the burdens and

       4     complexities imposed by the existing system

       5     will have a substantial impact on the cost of

       6     such services.

       7               The highlights of the study set

       8     forth on this slide illustrate a tax system

       9     that is burdensome and no longer manageable.

      10     For purposes of this study we have assumed

      11     that general business and telecommunications

      12     providers are doing business in virtually

      13     every jurisdiction.

      14               This chart indicates a nationwide

      15     effective transactional tax rate applicable

      16     to telecommunications services of over 18

      17     percent.  This number includes federal,

      18     state, and local taxes compared to a

      19     nationwide average effective rate of 6

      20     percent applicable to sales of goods by

      21     general business.

      22               The chart also illustrates the









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       1     owner's filing requirements imposed on both

       2     general business and telecommunications.  As

       3     you can see, the number for

       4     telecommunications providers, over 55,000

       5     returns filed each year across the nation, is

       6     substantially higher than the greater 7,000

       7     required of general business.

       8               Finally, as you can see, there are

       9     three times as many taxes applicable to

      10     telecommunications services as for general

      11     business.  In addition to transactional

      12     taxes, the study also looked at property

      13     taxes.  Fourteen states apply property taxes

      14     to intangible values of such companies,

      15     and 15 states apply higher property taxes on

      16     tangible personal property of

      17     telecommunications companies.

      18               Nineteen states have an effective

      19     state and local tax rate in excess of 18

      20     percent.  On the average, one state and one

      21     local tax apply to local business.  However,

      22     an average of six state and local taxes apply









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       1     to telecommunications services.  The data

       2     suggests that the number of taxes and fees

       3     imposed on traditional telecommunications

       4     services is excessive.

       5               This chart illustrates the filing

       6     burdens imposed on general business and

       7     telecommunications providers.  Although the

       8     filing requirements are very burdensome for

       9     general business, in many jurisdictions the

      10     tax filing requirements are much worse for

      11     telecommunications providers.

      12               In 22 states, more than 750 returns

      13     must be filed each year.  Because

      14     telecommunications plays an integral part in

      15     transporting information over the internet

      16     and allowing the public to access the

      17     internet, a simpler and more equitable system

      18     of state and local taxation for

      19     telecommunications companies is essential for

      20     the development of the internet and the

      21     growth of electronic commerce.

      22               The report includes a discussion of









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       1     options for simplifying the number and types

       2     of taxes.  The task force proposes the

       3     following simplification options:  Reduce and

       4     streamline industry-specific taxes to create

       5     an efficient and equitable telecommunications

       6     tax system; reform property taxation

       7     applicable to telecommunications businesses

       8     to ensure equity; exempt communications

       9     equipment and other business inputs from

      10     transactional taxes to avoid the pyramiding

      11     of taxes; simplify the tax bases of

      12     transactional taxes; provide uniform rules

      13     for the sourcing of telecommunications

      14     revenues from transactional taxes to avoid

      15     multiple taxation; simplify the rate

      16     structure of transactional taxes imposed by

      17     state and local jurisdictions; simply tax

      18     administration through unified filing,

      19     unified audits, and unified exemption rules.

      20               We hope the Advisory Commission on

      21     Electronic Commerce will consider the

      22     information contained in this study and the









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       1     concerns raised in the accompanying report

       2     regarding the taxation of traditional

       3     telecommunications services in formulating

       4     its recommendations.  I would be happy to

       5     answer any questions you may have at the

       6     appropriate time.  Thank you.

       7               CHAIRMAN GILMORE:  Ms. Canning, I do

       8     expect there to be questions.  That's the

       9     whole the purpose of our format here.  The

      10     commissioners have asked that there be a big

      11     block of time set aside for questions and

      12     answers for everyone, so let us just run

      13     right through the presentations and then move

      14     immediately to the next five minutes.  By the

      15     way, Ms. Canning, that was very efficient I

      16     must say.  So, thank you very much.

      17               Mr. Eisenach, hopeful you will do

      18     about as well.  We appreciate that.

      19               MR. EISENACH:  I can't promise to

      20     be nearly as efficient, but I hope to be at

      21     least as brief.

      22               Governor, Mr. Chairman, it's an









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       1     honor to be before your Commission today.

       2     It's an honor to see some you and Governor

       3     Leavitt and others who last me heard me talk

       4     about this topic at the meeting of the

       5     National Governors Association in February of

       6     this year, and at that time I indicated that

       7     the Progress and Freedom Foundation, which I

       8     had, had undertaken a major study of

       9     telecommunications taxes, and I outlined some

      10     of the reasons why it is our feeling that

      11     that is becoming such an important issue.

      12               This Commission, of course, has set

      13     about the task of looking at taxes as they

      14     impact the internet, and because I think of

      15     the politics of the situation a little bit,

      16     or for whatever reason, the focus has been on

      17     sales taxes and how sales taxes can be

      18     collected across state lines.

      19               That's certainly an important

      20     issue.  There were about $9 billion in

      21     internet commerce conducted over the internet

      22     last year, retail commerce.  Five percent of









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       1     that, if you look at kind of an average

       2     excise tax rate, is $450 million.  That's a

       3     significant amount of money.  I guess the

       4     estimates are about $170 million of that

       5     failed to be collected by the states.  That's

       6     a non-trivial issue and I think it's

       7     important that you all are focusing on that.

       8               I'm here today, though, to talk

       9     about telecommunications taxes, and I'd like

      10     to put those in context.  We're talking about

      11     roughly a $300 billion industry that's paying

      12     taxes of roughly 15 to 20 percent.  The total

      13     on those taxes is being collected.

      14               We're talking, in other words

      15     upwards of $45 billion a year in

      16     telecommunications taxes that are being

      17     levied, and those taxes are being levied on

      18     the internet.  As central and meaningful a

      19     way as it is possible for taxes to impact any

      20     economic activity, telecommunications taxes

      21     impact the internet.

      22               Just as an example, my voice is









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       1     traveling through some wires here in front of

       2     me from the speaker, but it's traveling out

       3     onto the internet.  It's going from this

       4     hotel to a point of presence, an internet

       5     point of presence someplace in the New York

       6     area, and as it does that the odds are almost

       7     certain that it is traveling over telephone

       8     lines; if it is not, it's traveling over

       9     cable lines.

      10               It is using telecommunications

      11     services, and it is telecommunications

      12     services that are subject to very high tax

      13     rates that Annabelle Canning's excellent new

      14     study, the Committee on State Taxation's

      15     excellent new study, has done so much to

      16     detail and to lay out.

      17               I suggest to you in that context

      18     that this is an equally meritorious and

      19     equally significant and equally important

      20     topic for your consideration now, and our

      21     study at The Progress and Freedom

      22     Foundation -- we have just begun the process









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       1     of applying some economic analysis to the

       2     telecommunications tax regime in this new

       3     internet world.  It's extremely complex, as

       4     Ms. Canning suggested, and, frankly, the

       5     study has never been done.

       6               There has not been a lot of careful

       7     economic analysis of the impact of

       8     telecommunications taxation.  Why is that?

       9     Telecommunications taxation taxes have been

      10     easy in the past.

      11               Telecommunications taxes have been

      12     levied as part of a system of prices set by

      13     regulators within a public utility monopoly

      14     context.  So, when we have levied taxes on

      15     telecommunications services, we have done so

      16     as part of a broader system that has

      17     generally set prices in ways that, for

      18     example, are designed not to disadvantage the

      19     poor or others who we think need to have

      20     affordable access to telecommunications

      21     services.

      22               They've been built into a monopoly









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       1     system which has been very easy to

       2     administer.  One big phone company who

       3     provides telecommunications systems.  Ma

       4     Bell.  The phone company.  One phone company.

       5               Today we live in a world in which

       6     there are hundreds, if not thousands, of

       7     telephone companies, and the administrative

       8     problems are becoming much more substantial.

       9     But the single biggest issue, the single

      10     biggest change that the internet has brought

      11     to the telecommunications environment is the

      12     change in the responsiveness of demand for

      13     telecommunications services to taxes and to

      14     prices.

      15               I will just give one very brief

      16     example from our work, and it goes to the

      17     demand for broadband services, which is very

      18     sensitive to prices.  The preliminary work

      19     that we've done suggests that at the national

      20     average tax rate that exists in the United

      21     States today, about 165,000 households in the

      22     United States today are not getting access or









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       1     are being priced out of the market for

       2     broadband services, who would otherwise be

       3     purchasing broadband services.

       4               Furthermore, in those households,

       5     we're talking about 107,000 children, who we

       6     in this country have put a priority on

       7     getting fast access to the internet.  In

       8     those denied households, we're talking

       9     about 107,000 children.

      10               All of the evidence, furthermore,

      11     suggests that those denied households are

      12     disproportionately low-income households,

      13     disproportionately rural households,

      14     disproportionately precisely the people who

      15     we are trying hardest to get affordable

      16     internet access in this country.

      17               Sixteen percent tax rates, 18

      18     percent tax rates in some cities, as we show

      19     in the data we present here.  Tax rates as

      20     high as 35 percent are tax rates that bite.

      21     They're biting into people's ability to get

      22     onto the internet.









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       1               In our view and based on the work

       2     that we're doing today, we suggest that this

       3     Commission ought to be paying as much

       4     attention to those telecommunications taxes

       5     and getting taxes off telecom as it is,

       6     frankly, to the issue of what to do about

       7     interstate taxation of internet sales.  Thank

       8     you.

       9               CHAIRMAN GILMORE:  Thank you very much,

      10     Mr. Eisenach.  I appreciate that.  The third

      11     speaker that we have had -- I might mention,

      12     by the way, that all of the people who are

      13     presenters here today are here at the request

      14     of one or more members of the Commission, as

      15     opposed to simply being volunteers from the

      16     community.  We appreciate your responsiveness

      17     to the members of the Commission.

      18     Mr. Keating.

      19               MR. KEATING:  Thank you.  My name

      20     is Ray Keating, and I'm chief economist with

      21     the Small Business Survival Committee.  SBSC

      22     has more than 50,000 members across the









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       1     nation, and I very much appreciate the

       2     opportunity to speak to you today about taxes

       3     and e-commerce on the internet.

       4               As you well know, information

       5     technologies have become vital engines of

       6     economic growth in the United States, and a

       7     host of economic studies have pointed to

       8     that.  I'll just make one point, in the

       9     interest of time, that I believe the Commerce

      10     Department recently came out with a study

      11     that found that information technology

      12     industries accounted for more than a third of

      13     U.S. economic growth from 1995 to 1998.

      14               For small businesses, vastly

      15     expanded access to information, customers,

      16     and supplies through e-commerce is presenting

      17     enormous opportunities.  A survey by Bank One

      18     Corp., for example, found that half of all

      19     small businesses have internet access, and 20

      20     percent have their own Web sites.  That's

      21     defined as small businesses with ten or fewer

      22     employees.









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       1               Vast leaps in telecommunications

       2     and computer technologies are empowering

       3     entrepreneurs as never before and helping to

       4     place small enterprises on more equal footing

       5     with large businesses, both domestically and

       6     internationally.

       7               However, even as these information

       8     technologies are changing our lives and our

       9     businesses, some things unfortunately never

      10     change, and the major obstacle to continued

      11     robust growth in e-commerce and the internet

      12     and the economy is bad public policy.

      13               In SBSC's view, efforts to tax and

      14     regulate the internet are recipes for

      15     disaster.  SBSB believes that government

      16     should not be focused on trying to figure out

      17     how to extend current tax and regulatory

      18     regimes to e-commerce but instead should be

      19     reducing taxes and regulations across the

      20     board on internet- based and

      21     non-internet-based companies.

      22               Let's be clear.  Federal, state,









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       1     and local governments really have lost no

       2     revenues due to expanding e-commerce.  But

       3     they've gained revenues due to the economic

       4     growth that I mentioned earlier.  The economy

       5     is not a zero-sum game, and government does

       6     not possess, quite frankly, an inherent right

       7     to take a chunk of new and expanded private

       8     sector profits and revenues.

       9               While I haven't seen detailed

      10     research on the impact of e-commerce on local

      11     governments, it certainly is quite possible,

      12     given the amount of economic growth that

      13     we've seen, that net sales tax revenues are

      14     actually increased due to more and more

      15     people working of their homes and faster

      16     economic growth.

      17               The notion that state and local

      18     governments desperately need additional

      19     revenues is to say the least absurd or at

      20     least highly questionable.  I just finished

      21     several months of working on my next book,

      22     which is U.S. By the Numbers, and I look at









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       1     each of the states in terms of a whole host

       2     of indicators -- government spending, taxes.

       3     Trust me, governments are not wanting for

       4     revenues right now.

       5               There are other costs.  Trying to

       6     tax the internet would likely carry

       7     significant costs for, quite frankly, a

       8     relatively small payoff.  With vast

       9     improvements occurring in telecommunications

      10     and computer technologies, capital, labor,

      11     and consumption are becoming increasingly

      12     mobile with individuals and businesses

      13     greatly empowered to avoid heavy taxes and

      14     regulation.

      15               I'll skip a little bit in the

      16     interest of time, but I'd point out, as is

      17     the case with use taxes today on catalog

      18     sales, the idea that small businesses selling

      19     products and services on the internet should

      20     be responsible to figure out what tax

      21     jurisdictions apply to each transaction, what

      22     the latest laws and tax rates are in that









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       1     jurisdiction, and so on, would result in

       2     significant costs.  While leaps in

       3     information technologies and an increase in

       4     global economy, many businesses wishing to

       5     avoid high taxes cannot only move to another

       6     state, but many of them can move to another

       7     country.

       8               But that's not the case with small

       9     businesses.  So, when you see higher taxes on

      10     e-commerce and the internet in regions,

      11     that's going to hurt small businesses more

      12     because most small businesses aren't going to

      13     pick up and move to another country.

      14               In SBSC's view, the Advisory

      15     Commission should not be trying to dream up

      16     byzantine tax schemes in order to tax highly

      17     fluid e-commerce, but instead they should be

      18     coming up with measures that will further

      19     lift the burden of government on information

      20     technologies and the economy in general.

      21               E-commerce is rapidly changing the

      22     way the world works, and state and local









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       1     governments will have to adapt to this new

       2     environment.  Rather than trying to stop

       3     progress, why not enthusiastically embrace

       4     change and opportunity?

       5               We suggest pro-growth tax measures

       6     for the entrepreneurial 21st century like

       7     making permanent the current prohibition

       8     against new internet taxes; eliminating the

       9     FCC per-telephone-line charges on homes and

      10     businesses; eliminating taxes, like capital

      11     gains taxes, which are so critical to

      12     emerging businesses and technologies to have

      13     that capital in order to grow and obviously

      14     we're in favor of, with the world growing

      15     smaller and smaller by the day in terms of

      16     business free trade.

      17               Once again, thank you for this

      18     opportunity, and I would be happy to answer

      19     any of your questions.

      20               CHAIRMAN GILMORE:  Thank you,

      21     Mr. Keating.  Fourth and last presenter for

      22     today is Ed Shimizu.  Is that correct?









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       1               MR. SHIMIZU:  Yes, that's correct.

       2               CHAIRMAN GILMORE:  Welcome from GTE.

       3               MR. SHIMIZU:  Thank you.

       4     Mr. Chairman, members of the Commission, I

       5     really appreciate this opportunity to appear

       6     before you today.  What I'd like to do today

       7     is talk about the access to the on-ramps to

       8     the internet, and it's a critical issue that

       9     I believe is something this Commission ought

      10     to address precisely because if there is no

      11     access to these on-ramps, there is no

      12     e-commerce, and tax policy that you're

      13     considering becomes somewhat less relevant.

      14               Let me start by talking about the

      15     existing on-ramps to the internet.  Those

      16     are, as we know, as some of the previous

      17     speakers have referred to, the phone networks

      18     of this country, and they've worked quite

      19     well.  As a matter of fact, in looking at the

      20     recent report that was put out by the Federal

      21     Communications Committee as a staff report on

      22     the internet, there's a quote, "Because of









                                                             29
       1     the openness of the phone network, the

       2     internet has exploded.  Every American with a

       3     phone line and a computer can be part of the

       4     internet."

       5               But we all know that the phone

       6     networks weren't really designed to carry

       7     large volumes of data and graphics for

       8     extended log-on sessions.  They're basically

       9     voice-oriented, brief conversations.  That's

      10     really what the networks are all about.  So,

      11     the fact that they're carrying internet

      12     traffic is great, but they really weren't

      13     designed for that.

      14               One of the big concerns of uses of

      15     the current internet system is that we need

      16     more bandwidth; we need more speed.  So

      17     there's been a crying need for what I would

      18     call the second generation of internet

      19     on-ramps to the -- second generation of

      20     internet on-ramps, and these are what we call

      21     broadband on-ramps.

      22               There are primarily two major









                                                             30
       1     providers of these broadband on-ramps.  They

       2     are the phone companies, and we provide what

       3     is called DSL service, and without getting

       4     into a real technical discussion, let's just

       5     say they are phone lines on steroids.  The

       6     other major providers are the cable

       7     operators, and they provide what they call

       8     cable modem service.

       9               Both of these services are roughly

      10     fifty to a hundred times faster than the

      11     existing phone networks in transmitting data

      12     back and forth.  Just to give you a real

      13     layperson's idea of what that represents:  If

      14     you're trying to transmit the contents of

      15     Moby Dick, which would be about this thick,

      16     it might take you seven or eight minutes

      17     using the existing phone lines.

      18               Using either of these technologies,

      19     DSL or cable modem service, it might take you

      20     five to six seconds.  So, that gives you some

      21     idea of what kind of non-waiting that people

      22     have when they get on on broadband









                                                             31
       1     technology.

       2               The critical thing is looking at

       3     the deployment of these technologies and how

       4     they're coming across, and Mark, if we can go

       5     to that slide.  I believe you all have

       6     attached as part of my testimony this slide

       7     here.  There have been a number of analysts

       8     doing forecasting of the growth of broadband

       9     technology, and without question today it is

      10     a small part of how people access the

      11     internet.

      12               If you look at your charts, as

      13     of 1998 there were less than a million

      14     households in this country that had broadband

      15     access, but this is one projection by a Wall

      16     Street firm that says by the year 2008

      17     over 60 million homes in America, the

      18     majority of homes I might add, will have

      19     broadband access, and this one forecast shows

      20     that over 30 million of these homes will be

      21     provided by cable modem service and roughly

      22     another 30 million or so will be with DSL









                                                             32
       1     service, and this is, again, one analyst's

       2     forecast.

       3               The critical distinction here is

       4     that unlike the existing internet access or

       5     on-ramps, all of this broadband technology is

       6     not necessarily an open network.  The DSL

       7     technology of the phone networks or phone

       8     companies that are laying out across this

       9     country is an open network, and by that, any

      10     internet service provider that wants to get

      11     onto our networks can if we are providing

      12     that service in that community.

      13               The cable modem platform thus far

      14     has been deployed as a closed platform where

      15     the cable modem transport service is bundled

      16     with an affiliated internet service provider

      17     as a single package, and a consumer buys both

      18     services together.

      19               People are saying, "We really want

      20     the ability to just get the internet service

      21     provider separately from the transport

      22     because we may already have an existing









                                                             33
       1     account with America Online or CompuServe or

       2     anybody else," and that's really what the

       3     issue is all about.

       4               As you look at these projections,

       5     the question is:  Do we want the next

       6     generation of the broadband network as it's

       7     deployed, these on-ramps to the internet, do

       8     we want them to be open as a current

       9     technology is, or do we want some of them to

      10     be open and some to be closed.  That's an

      11     important policy consideration we hope you

      12     will take up.  Thank you.

      13               CHAIRMAN GILMORE:  Thank you,

      14     Mr. Shimizu.  That concludes our presenters.

      15     I would remind people that the materials that

      16     staff has put together give you some of this

      17     background information, which you may have

      18     had an opportunity to see in advance.  In

      19     addition to that, material also is here from

      20     Mrs. Canning, which is at her desk also.  I'm

      21     also advised, by the way, among the materials

      22     that are at your desk is a letter from the









                                                             34
       1     United States House of Representatives

       2     regarding the Commission, which has been

       3     distributed, which I would draw your

       4     attention to, although I think it's more

       5     pertinent for tomorrow's discussion.

       6               That is, frankly, an objective here

       7     to get your topics out on the table, and it

       8     was the intention of the Commission now that

       9     time be spend on questions.  In fact, any

      10     discussion or speeches or pontification or

      11     anything else that the Commission members

      12     might wish to do.  We now have a full one

      13     hour and fifteen minutes to interact with the

      14     speakers and with ourselves on these issues,

      15     and I think that's a good thing.

      16               Many of the Commission members

      17     wanted to have questions sent in to make sure

      18     that they were thrown out on the table for

      19     beginners, and those have been compiled also.

      20     Why don't we just start with one of the

      21     questions, and I'm going to ask the panel,

      22     but I'm also going to ask the members of the









                                                             35
       1     Commission this, and this has come in from

       2     one of the Commission members.

       3               You know, before we set out to find

       4     inventive new ways to extract more taxes from

       5     the public, should we have a clear

       6     understanding of all the taxes that are

       7     currently incurred in the process of

       8     conducting electronic commerce?

       9               Does anyone here have a list of

      10     every federal, state, and locally imposed tax

      11     on telecommunications services and equipment,

      12     cable services and equipment, and the

      13     services and equipment necessary for the

      14     internet to function as it currently does?

      15               In short, what are all the taxes

      16     that are applied to it?  Does anyone have a

      17     comprehensive list?

      18               MS. CANNING:  The cost study is

      19     certainly an attempt at -- a comprehensive

      20     list.

      21               CHAIRMAN GILMORE:  Ms. Canning.  Pardon

      22     me, the --









                                                             36
       1               MS. CANNING:  The Committee on

       2     State Taxation, Telecommunications Tax Force

       3     Study -- certainly is a comprehensive list of

       4     the state and local.  There are a number of

       5     federal taxes that are also applied to

       6     telecommunications services.  I think they're

       7     probably relatively easily identified.

       8               But for purposes of our study, we

       9     put in a ballpark figure of 4 percent as the

      10     add-on for the federal.  We did not include

      11     in these numbers the numbers that are

      12     applicable to the cable systems, although

      13     they are briefly discussed in the report.

      14               CHAIRMAN GILMORE:  So you've got a total

      15     that has in fact been submitted to the

      16     Commission of all the various types of taxes

      17     that are applied.

      18               MS. CANNING:  That is correct.

      19     This study is broken out by state, and the

      20     state work sheets identify all the taxes and

      21     transactional taxes and fees and the property

      22     taxes that apply to telecommunications









                                                             37
       1     services in each of the 50 states, including

       2     the local jurisdictions.

       3               CHAIRMAN GILMORE:  Mr. Eisenach.

       4               MR. EISENACH:  Governor, on

       5     page 4 -- I hope you all were given a copy of

       6     this study.  If it hasn't been distributed, I

       7     think the staff may have them.  Did copies of

       8     this not get passed out, because I know they

       9     were left with the staff earlier.  Well, not

      10     to waste -- I'm sure they can be gotten.

      11               CHAIRMAN GILMORE:  We'll get those

      12     passed out also.

      13               MR. SHIMIZU:  On page 4 of the

      14     submission that we left with you today, we

      15     list 37 different types of taxes by state and

      16     local governments.  It's a very incomplete

      17     list, and with all due credit to the COST

      18     study, which I think is literally far and

      19     away the best single piece of work that's

      20     been done in this arena, so it's not in any

      21     way to diminish what they have done.  The

      22     task of simply counting all of the different









                                                             38
       1     telecommunications taxes is probably undoable

       2     in the sense that they are changing faster,

       3     and the basis for telecommunications taxes is

       4     changing faster than it would really be

       5     possible to count.

       6               At the federal level, it's

       7     relatively straight forward.  You have a 3

       8     percent federal excise tax; you have an

       9     e-rate tax, which is levied on long-distance

      10     providers and passed through to long-distance

      11     consumers at about $1.25 per line per month;

      12     and then you have whatever portion of access

      13     fees you want to count as being transferred

      14     as part of the universal service program

      15     which you would appropriately, I think,

      16     describe as taxes, and that's a subject of

      17     tremendous debate and discussion -- how big a

      18     proportion of those access fees.

      19               But the other piece of data that is

      20     in this submission that we have left with you

      21     I think is important is that three-quarters

      22     of all of the taxes on the internet on









                                                             39
       1     telecommunications are taxes levied by state

       2     and local governments of roughly $2.04 that

       3     is applied to the average monthly telephone

       4     bill in the United States.  $1.50 of that is

       5     accounted for by taxes at the state and local

       6     level.

       7               I'm sorry, Governor, in your home

       8     state of Virginia and our home state of

       9     Virginia, we have some of the highest

      10     telecommunications taxes.

      11               Indeed, using the FCC database that

      12     we relied upon in doing our work we found

      13     that Richmond, Virginia, at 35 percent of the

      14     monthly phone bill, almost $5 per month per

      15     telephone line, goes simply to paying the

      16     taxes on telecommunications, and obviously on

      17     an internet line that's -- so I think your

      18     work on -- many of your taxpayers are

      19     grateful for the work you did on the car tax

      20     and would hope that the telecommunications

      21     tax might be another opportunity for you in

      22     the future.









                                                             40
       1               CHAIRMAN GILMORE:  Now, we've got a city

       2     councilman in the room someplace from the

       3     city of Richmond.  I'm sure he'll want to

       4     chat with you after the meeting, but -- does

       5     anyone have any further comment on this or

       6     any other topic?

       7               Yes, sir, Mr. Andal.

       8               MR. ANDAL:  While we're on the

       9     subject of the COST study, I wanted to thank

      10     COST for their excellent study, and I'd like

      11     to -- it came out just a little before the

      12     Commission meeting.  The other commissioners

      13     might not have seen it, but it's really an

      14     outstanding body of work, and it gives us the

      15     real information that has been lacking in the

      16     past.  It leads me to a couple of questions.

      17     The purpose of this Commission is not to

      18     create law -- we don't have the power to do

      19     that -- but to offer recommendations to

      20     Congress.  I might add, we're not offering

      21     recommendations to state and local

      22     governments, but we're offering









                                                             41
       1     recommendations to Congress, and I think that

       2     envisions some type of action by Congress.

       3               If we identify a problem and we

       4     say, "Here's a solution," then we're asking

       5     Congress to do something.  That is pretty

       6     clear as to how that would be done on an

       7     excise tax.  If it's a federal tax, an excise

       8     tax for instance, and I'm strongly in favor

       9     of reducing those, the Congress has the power

      10     to do it by fiat.  They can just order to FCC

      11     to stop doing it, which arguably they should

      12     have done a long time ago.

      13               But then you go into other taxes

      14     that are state and local in nature, and the

      15     one that comes to mind is the property tax.

      16     An interesting part of your study was you

      17     talked about the different valuation methods

      18     that are used in every state, and some states

      19     use cost, sometimes they use capitalized

      20     income approaches.  The result is sometimes

      21     intangibles are taxed.

      22               That is different from other









                                                             42
       1     non-telecommunications companies' experience.

       2     The question is:  What can Congress do about

       3     that?  The only thing that comes to mind is

       4     some kind of -- if you're familiar with

       5     the 4R Act that relates to railroads, which

       6     is some kind of a Congressional action that

       7     said they can't tax it differently than other

       8     non- telecommunications businesses.  Is that

       9     what you envision?  I mean, how does it help

      10     to identify that disparity, the property tax

      11     disparity, and what is it that we can

      12     recommend to Congress that they could do

      13     about it?

      14               CHAIRMAN GILMORE:  I might say, by the

      15     way that while we're happy to address

      16     questions to the panel, and that's exactly

      17     what they're here for, I might mention that

      18     the commissioners should feel free to address

      19     any issue they want to any time they want to

      20     and answer each other.  I think that was,

      21     obviously, the objective of this exercise, as

      22     well as our panel.









                                                             43
       1               MR. ANDAL:  I offer my question to

       2     everybody in the room.

       3               CHAIRMAN GILMORE:  Well, not everybody

       4     in the room, Dean, but certainly the

       5     commissioners and the presenters and any

       6     experts that have checked in with staff, but

       7     does any member of the panel wish to address

       8     that, or any member of the Commission?

       9               MR. ANDAL:  I'd like to hear from

      10     these two at least.

      11               MS. CANNING:  Certainly the purpose

      12     of gathering the information for this study,

      13     one purpose was to be able to present this

      14     information here today and to highlight,

      15     really, the extent of the problem, the

      16     differences in the types of taxes,

      17     differences between jurisdictions, and

      18     certainly the industry hopes that this will

      19     not be the only purpose for this study.

      20               Beyond that, I think the industry

      21     hopes that possibly there might be some sort

      22     of framework developed as far as what might









                                                             44
       1     be models or parameters or that sort of

       2     guideline as far as what would be the

       3     appropriate taxation of telecommunications.

       4     Obviously, implementation would be very

       5     difficult due to the differences in the types

       6     of taxes and the budget and tax structures in

       7     each of the jurisdictions.

       8               CHAIRMAN GILMORE:  Did you have --

       9               MR. EISENACH:  I think that's a

      10     generic problem that confronts this

      11     Commission as, you know, what is the role of

      12     the Congress on, for that matter, the sales

      13     tax issue, and obviously it goes to the

      14     question of the reach and the impact and the

      15     depth and the breadth of the Commerce Clause.

      16               I think at some point you begin to

      17     conclude that highly discriminatory taxation

      18     of telecommunications services is the

      19     functional equivalent of highly

      20     discriminatory taxation of transportation

      21     services necessary for interstate commerce

      22     and that when a state puts up, in effect,









                                                             45
       1     barriers to interstate trade, that at some

       2     point -- and I'm not saying we're at that

       3     point -- but that at some point those levels

       4     of taxation become de facto violations of the

       5     Commerce Clause and need to be looked at in

       6     that context.

       7               I'm not suggesting a federal action

       8     here.  The fact is competition, I think, will

       9     do nicely.  We are going to see, I think, a

      10     very rapid competition for the offering of

      11     broadband services, for example, in

      12     attracting new economic development to every

      13     state.

      14               We already know that businesses in

      15     the top two or three or four things that

      16     businesses list in making locational

      17     decisions for new plants.  The access to

      18     affordable broadband communications is at the

      19     top of that list.

      20               So what I think we're going to see

      21     very quickly is states and localities that

      22     don't take a hard look at their current high









                                                             46
       1     levels of telecommunications taxes are going

       2     to start to see the bite in terms of their

       3     ability to attract new business, and in this

       4     kind of economy I think that works probably

       5     quicker than Congress.

       6               MAYOR KIRK:  Mr. Chairman, is your

       7     inference that state and local governments

       8     ought to mandate open access for ISP?

       9               MR. EISENACH:  Are you asking me?

      10     My answer to that question would be "No," but

      11     it was actually the gentleman from GTE who

      12     was addressing that.  The issue of open

      13     access to -- maybe I can put that in --

      14               MAYOR KIRK:  Why don't you answer

      15     both ways, because one, you know, as a local

      16     official we get hit with one side and taxes

      17     don't anything.  Then somebody comes in the

      18     back door and wants us to get involved a

      19     fight between local providers and

      20     long-distance carriers over who can provide

      21     what, and then we have a new group of people

      22     show up called ISPs that say, "Help us," so,









                                                             47
       1     in some rules, you know, they don't want us

       2     to regulate, but they do want us to come in

       3     if it -- I'd just be curious where you --

       4               MR. KEATING:  Just say "No" when

       5     they come in, whatever they're --

       6               CHAIRMAN GILMORE:  Mr. Keating, I'll

       7     come right back to you; instead, let's see if

       8     Dick Parsons of Time Warner might have a

       9     comment.

      10               MR. PARSONS:  Well, just as a point

      11     of information.  Does that issue of open

      12     access et cetera -- is that properly before

      13     this Commission?  If it is, I would love to

      14     join in the debate, but my -- I've been told

      15     that that's not within our jurisdiction, so

      16     I'm just trying to find out where we are.

      17               CHAIRMAN GILMORE:  Well, I certainly

      18     intend to cut off debate if anybody wants to

      19     take up any of these issues, but I don't

      20     believe that access to broadband was

      21     considered within the purview of the

      22     Commission.  But that doesn't mean that









                                                             48
       1     people can't assert it anyway.

       2               Mayor Kirk, help yourself.  Keep on

       3     going.

       4               MAYOR KIRK:  I thought that I heard

       5     Ed and Jeffrey raising that issue in context

       6     of tax (inaudible).

       7               CHAIRMAN GILMORE:  Well, I think in the

       8     context of taxes --

       9               MALE SPEAKER:  Jeff was right and

      10     Ed was wrong.

      11               CHAIRMAN GILMORE:  It may be

      12     appropriate.  Okay, any Commission members,

      13     or Mr. Keating, did you wish to add an

      14     answer?

      15               MR. KEATING:  I just want, yeah, in

      16     terms of the original question I want to echo

      17     what Jeff said in terms of competition really

      18     being the answer.  I do a study every year

      19     called "The Small Business Survival Index,"

      20     where we rate the states as to their public

      21     policy environment for entrepreneurship.

      22               You know, are they friendly or









                                                             49
       1     unfriendly?  It's amazing how, you know, when

       2     you look at taxes across the board and you

       3     come up with a comprehensive measure, and

       4     we're going to expand it to include internet

       5     taxation next time around, but, you know, the

       6     places that keep their taxes low and are very

       7     friendly are the ones that are creating jobs

       8     and growing, so I think competition really is

       9     the preferable answer rather than

      10     Congressional mandates, or action.

      11               MAYOR KIRK:  Raymond, in that vain,

      12     do you look at investment and higher

      13     education, quality of the work force, or do

      14     we just -- I mean, if you have no taxes and

      15     no schools, is that an entrepreneurial -- I

      16     mean, that would be wonderful.  You would

      17     have a tax-free zone, no schools, no -- I

      18     mean, I think there's probably some parallel

      19     between the intellectual work that goes on in

      20     southern California and Massachusetts and UT

      21     and others, and that role, and -- do you not

      22     look at that, or do you just look at the









                                                             50
       1     issue of taxation?

       2               MR. KEATING:  Well, what we look

       3     at -- I'm not saying education isn't a

       4     critical issue.  I would probably -- I mean,

       5     you could open up a whole can of worms here

       6     and debate whether spending more money on

       7     education works or not, but --

       8               MAYOR KIRK:  Well, it would help me

       9     if you have -- I'd like to see what criteria

      10     you measure beyond --

      11               MR. KEATING:  Well, actually I will

      12     get a copy of our index to everybody on the

      13     panel.  I'll make sure you get a copy of

      14     that.  But we focus on the direct costs

      15     imposed on small businesses and

      16     entrepreneurs, so it's income taxes, capital

      17     gains taxes, property taxes, sales taxes,

      18     workers comp costs, et cetera.

      19               CHAIRMAN GILMORE:  Mayor Kirk has raised

      20     the question intriguing whether or not all of

      21     these taxes that have been described here are

      22     sacrosanct in order to maintain education,









                                                             51
       1     jobs, roads, social services, and somewhat

       2     like that.  Of course, the question is always

       3     whether there's enough or what -- these are

       4     burdens, I think, on the use of the internet.

       5     That's the thrust of what you all -- many

       6     of -- some of you have said, I supposed, up

       7     to this point?

       8               MR. EISENACH:  May I say, governor,

       9     the objective of having an open access in

      10     competitives, many providers' access to the

      11     internet system is one that I think we all

      12     share and share very strongly, and towards

      13     that end I think it's very important that

      14     there be a level playing field, that what we

      15     don't do is set up a situation in which we

      16     have government policies which are one way or

      17     another advantaging one set of providers over

      18     another set of providers.

      19               If you look at the

      20     telecommunications taxation regime today, one

      21     could legitimately have concerns about

      22     whether the taxation that is applied to









                                                             52
       1     telecommunications carriers is different from

       2     the taxation that's applied to cable

       3     carriers, which tends to be lower.

       4               One could say, "Should we raise

       5     taxes on cable carriers to make them equal to

       6     the taxes on phone carriers, or shall we cut

       7     taxes on phone carriers to make them equal to

       8     the taxes on cable carriers?"  Our preference

       9     would be for the latter.

      10               The same set of issues (inaudible)

      11     has gotten to and maybe what Mr. Kirk was

      12     referring to is a regulatory set of issues.

      13     Shall we have a level playing field of

      14     regulatory environment, and the same question

      15     I think can be asked there.

      16               Argue is that one ought to be

      17     deregulating equally to create a level

      18     playing field and therefore to have many

      19     competitors just as one ought to be lowering

      20     taxes equally to have a level playing field

      21     of many competitors now raising taxes equally

      22     or regulating equally.









                                                             53
       1               MR. ARMSTRONG:  Mr. Chairman.

       2               CHAIRMAN GILMORE:  Mr. Armstrong.

       3               MR. ARMSTRONG:  First, I would hope

       4     that Ed's chart on the success of cable

       5     modems versus DSL would become available for

       6     public information.  I could use it at my

       7     next analyst conference.  I certainly

       8     appreciated that outlook.

       9               MR. SHIMIZU:  It's already out on

      10     Wall Street, I believe.

      11               MR. ARMSTRONG:  Second, I do not

      12     believe, as the chairman suggested, that the

      13     access issue was our mandate from Congress,

      14     but rather is a tax issue.  Third, I do not

      15     believe that the assertion to re-regulate

      16     telecom or cable is in order, but rather if

      17     GTE would like to begin commercial

      18     negotiations opposed to our contract with at

      19     home we would welcome commercial

      20     negotiations.

      21               Finally, the first question you

      22     asked, Mr. Chairman, was in our deliberations









                                                             54
       1     on this Commission:  Should we consider

       2     current taxes as we consider taxation on the

       3     internet?  Of course, it would be

       4     irresponsible for us not to consider current

       5     taxes in my opinion.

       6               CHAIRMAN GILMORE:  Other comments?

       7               MR. SHIMIZU:  Yes, Mr. Chairman.  I

       8     believe Jeffrey was addressing one of the

       9     points raised in my written testimony that I

      10     did not bring up in my oral testimony, and

      11     that's essentially the notion that the

      12     broadband on-ramp to the internet is, as I

      13     explained, a second generation of access to

      14     the internet, and that is a technology that

      15     is going to look remarkably functionally

      16     equivalent whether the phone companies are

      17     providing it or the cable operators are

      18     providing it, and the question from a tax

      19     perspective would be:  What would be the tax

      20     burdens, then, that the respective industry

      21     should bear?

      22               Because, clearly as Jeffrey was









                                                             55
       1     just indicating, they aren't their burdens

       2     today, or they're not even burdens; they came

       3     from totally different environments --

       4     regulatory and tax environments.  We have a

       5     whole host of taxes and fees that they don't,

       6     and they have a bunch that we don't.

       7               The question is:  When we provide a

       8     common service in the future that is

       9     functionally equivalent, what should the tax

      10     structure be?  So, from that standpoint, I

      11     think that's something that very important

      12     for this Commission to be looking at.

      13               CHAIRMAN GILMORE:  Help me with this.

      14     Are these taxes that are imposed upon the

      15     industries that are providing a service, or

      16     are they passed through the consumer?

      17               MR. SHIMIZU:  They're essentially

      18     passed through -- I think that all business

      19     is passed through their cost of doing

      20     business, taxes among them.  They're passed

      21     onto consumers.  But the point is, there is a

      22     variety of different taxes that you have to









                                                             56
       1     pass on, and if you have more taxes in your

       2     particular industry to pass on, the cost of

       3     your service becomes greater than your

       4     competitor's does if they don't have the same

       5     taxes --

       6               CHAIRMAN GILMORE:  A competitor in a

       7     different medium.

       8               MR. SHIMIZU:  Exactly.

       9               CHAIRMAN GILMORE:  Mr. Andal?

      10               MR. ANDAL:  Yes, I guess this

      11     question is for Ed and also for Mr. Armstrong

      12     while he's present.  It seems like the trend

      13     is to form companies that provide both cable

      14     and telephone.  As a matter of fact, I'm not

      15     sure if the man sitting next to me runs a

      16     telephone company or a cable company these

      17     days, and I guess my question is:  Does it

      18     really matter who's doing open architecture;

      19     who's doing closed architecture if these

      20     continued mergers make that a moot point?

      21               In other words, if both the

      22     currently owned closed architecture and the









                                                             57
       1     currently owned open architecture are

       2     eventually going to be owned by the same

       3     enterprises, why should we care about the

       4     interim period along the way?

       5               MR. SHIMIZU:  Well, point No. 1,

       6     we're certainly there yet.  I think certainly

       7     the federal antitrust regulators are going to

       8     have a great interest in whether or not we're

       9     going to reach that point in the future.  In

      10     terms of, you know, it's only the interim

      11     kind of concern, you have to remember in

      12     terms of internet life spans, a few years is

      13     really a life span.

      14               As I said, in 1998 there were less

      15     than one million homes in America that have

      16     broadband access.  In less than ten years,

      17     the majority of homes in America will have

      18     broadband access based on the forecast by a

      19     number of different analysts.  So, in just a

      20     few years' time, dramatic changes can happen,

      21     and if you don't have public policy that will

      22     allow certain things to happen, such as the









                                                             58
       1     continued growth of the internet with open

       2     access, then you may be acting too late.

       3               MR. ANDAL:  I don't mean to harass

       4     you but I'm interested.  If I understand the

       5     business of fiber- optic line right, the

       6     benefits of increasing the number of services

       7     or content that run through the same line to

       8     the house are beneficial to a company that

       9     provides it.

      10               If you own the line already, if you

      11     have your switching stations, you own all the

      12     infrastructure, and then if you can run more

      13     through it and you can charge for it, the

      14     better.

      15               So, the economics are driving

      16     companies to want to send both telephone

      17     service, data transmission, internet, video,

      18     all that through the wire.  Is it really

      19     conceivable that you're going to have closed

      20     architecture for all of those services?  If

      21     not, if it's not conceivable to have all

      22     those services provided under closed









                                                             59
       1     architecture, doesn't that drive as

       2     conventionally the closed architecture

       3     companies to open up?

       4               MR. SHIMIZU:  We would certainly

       5     hope so, and we would think that would be why

       6     those who were favoring a closed architecture

       7     today would recognize that, that from a

       8     business standpoint that's a smart thing to

       9     do.  But thus far they have opposed any

      10     attempts to allow open access.  So, it's an

      11     interesting proposition, and we believe that.

      12               CHAIRMAN GILMORE:  Well, let's see.  How

      13     many people do we want jumping on that one?

      14     We have three commissioners who wish to

      15     address this, and we'll go Mike Armstrong

      16     first and Dick Parson second, maybe

      17     Mr. Sidgmore third.  Then we can get a debate

      18     going here.

      19               MR. ARMSTRONG:  Thank you,

      20     Mr. Chairman.  Dean is absolutely correct.

      21     The technology of driving a new packet world

      22     of IP technology is going to enable the









                                                             60
       1     applications as voice, video, and data to

       2     converge over that connectivity and is going

       3     to enable the devices -- the television, the

       4     telephone, and the personal computer -- to

       5     converge.

       6               Just as Ed is predicting the future

       7     in ten years of broadband, it is equally both

       8     interesting and predictable to understand

       9     that those applications will converge, and

      10     the people who operate those networks -- be

      11     they telephone companies, which we certainly

      12     are; cable companies, which we certainly are;

      13     and several of us here are both of those

      14     things -- will find that the only way to make

      15     the best return on that investment is to

      16     carry the most content.  The only way you

      17     make money on the networking business is

      18     traffic.

      19               The company that has the most

      20     traffic and the most content will attract the

      21     most subscribers.  The way the companies who

      22     carry traffic, called telephone companies or









                                                             61
       1     cable companies, make their money is to get

       2     more people to sign up for their access fees.

       3     So, if you don't believe anything else,

       4     believe in self-interest and greed, that open

       5     architectures will prevail.

       6               CHAIRMAN GILMORE:  Well, we do have a

       7     dead horse we're beginning to beat, but

       8     that's okay.  Let's -- I mean, if we could

       9     keep it brief, Mr. Dick Parsons.

      10               MR. PARSONS:  Well, in the spirit

      11     of keeping it brief, I would only add to what

      12     Mike said.  The issue isn't where we're going

      13     and we're going to end up, it's how we're

      14     going to get there.  I would associate myself

      15     with remarks that Jeffrey made earlier.

      16               Let the marketplace -- and Mike

      17     made it also -- let the marketplace determine

      18     how we get there.  Don't mandate it.  That's

      19     the issue.  It isn't that the cable companies

      20     or the broadband providers are against

      21     opening up the architecture.  It's they're

      22     against being mandated to do so in a way that









                                                             62
       1     may be totally at odds with sensible

       2     evolution in the marketplace.

       3               CHAIRMAN GILMORE:  Mr. Sidgmore, did you

       4     have a transitional comment?

       5               MR. SIDGMORE:  I was going to make

       6     one comment that's not helpful to Mike, and

       7     then I'll help you out right after that.

       8     But, I mean, I think it's clear that, and if

       9     you look inside all the major western

      10     countries where the internet has grown, those

      11     countries where, you know, competition

      12     flourishes, have the highest growth rates.

      13               There's no question about it.

      14     There's a direct correlation between the

      15     amount of competition in a country, the cost

      16     of access facilities, and the growth of the

      17     internet.

      18               I think it's also true here that

      19     companies tend to deal within their own

      20     self-interest.  Today the cable companies

      21     have concluded, and Mike included that, that

      22     it's not in their best interest to open up









                                                             63
       1     those cable facilities.  I suspect someday

       2     that will change.

       3               I guess the only part that confused

       4     me about Mr. Shimizu's argument -- I'd like

       5     to confirm this.  It sounds like you're

       6     proposing that we sort of propose to open

       7     access facilities on all sides, and so I just

       8     wanted to confirm that GTE is proposing here

       9     to open unbundled access to all of the -- you

      10     know, unfettered, unbundled access to

      11     facilities all the way through to the home

      12     because that really is the critical element.

      13     All this other stuff aside, there are 6,000

      14     ISPs out there today.  Lots of competition on

      15     the internet.

      16               Generally speaking, there are only

      17     two ways into the home:  There's a cable

      18     company and there's an Arbock or a GTE.

      19     Unless you get unfettered, unbundled access

      20     right into the home, you don't have it.

      21     That's what you need to get competition in

      22     most of America.  I just wanted to confirm









                                                             64
       1     that that's what you're proposing because I

       2     would say that's probably fair to both sides.

       3               CHAIRMAN GILMORE:  Mr. Shimizu, I would

       4     remind you you're not under subpoena .

       5               MR. SHIMIZU:  Thank you.  What we

       6     are proposing I think is what I would call

       7     unbundling light, if you will.  It is a

       8     simple depackaging.  As I explained, the

       9     cable operators are packaging their service

      10     of the transport -- the cable modem transport

      11     service -- along with the ISP that's

      12     affiliated with that cable operator, and

      13     we're simply saying that it ought to be

      14     depackaged, if you will, so a consumer can

      15     buy either side separately.  That's what

      16     we're proposing.

      17               CHAIRMAN GILMORE:  Let me get one more

      18     commissioner, Ed, and then we do want to

      19     close this topic and move onto a different

      20     subject.  But first, Delna Jones.

      21               MS. JONES:  Well, this is all very

      22     interesting, and some of it is worthwhile and









                                                             65
       1     some of it is just posturing I realize.  So,

       2     one of the things -- I think that over -- the

       3     history of taxation of telecommunications is

       4     an interesting one, not one I'm unfamiliar

       5     with, but the issue today to me is do you

       6     really have a recommendation for this

       7     Commission in relationship to a couple of

       8     things?

       9               First of all, FCC, which is a

      10     federal issue, which goes to an issue in

      11     Congress.  Do you have a recommendation about

      12     what you'd like to see this Commission say to

      13     Congress regarding the FCC?  Would you like

      14     to see it abolished?  Would you like to see

      15     its conditions changed in terms of what it

      16     can regulate?

      17               Recognizing also that different

      18     than a lot of businesses, the telephone

      19     communications business often passes directly

      20     through the taxation that the feds require.

      21     So I realize there's a bit of difference

      22     there.









                                                             66
       1               CHAIRMAN GILMORE:  Delna, I think the

       2     Congress prohibited us from making a

       3     recommendation on a change of governmental

       4     structure or conduct of federal agencies,

       5     but -- go ahead.

       6               MS. JONES:  But I think Congress

       7     does have impact, that we could request that

       8     they look at the laws affecting in

       9     relationship to the taxation issue.  That

      10     would be my point.

      11               CHAIRMAN GILMORE:  If we uncouple it

      12     from a specific agency, I think it's an

      13     appropriate question.  Mr. Eisenach?

      14               MR. EISENACH:  I will just be very,

      15     very brief.  The federal excise tax on

      16     telecommunications isn't an anachronism.  It

      17     should be repealed.  There's no basis for

      18     singling out.  Think of the things that we

      19     tax.  The third largest excise tax other than

      20     gasoline, which goes into a trust fund, the

      21     third largest excise tax that we have is on

      22     telecommunications at the federal level.









                                                             67
       1               The fourth largest is on tobacco.

       2     We understand why we do that.  We could argue

       3     about it, maybe, but we understand what we do

       4     that.  We want to discourage tobacco use.  We

       5     want to pick up some of the social costs of

       6     that.  The same kinds of arguments apply to

       7     alcohol.

       8               Distilled spirits and beer and

       9     wine, which we also tax heavily.  It's a

      10     luxury.  Whatever arguments you want to

      11     apply, we all some notion that there are

      12     reasons why we would distinguish alcohol from

      13     other products.  But why, for goodness sakes,

      14     would we single out the driving force behind

      15     the digital economy, the driving force behind

      16     the thing that's created budget surpluses for

      17     every governing entity in this room I

      18     suspect, and say, "We're going to tax you and

      19     get less of you."

      20               That makes no sense, and the

      21     federal excise tax on telecommunications

      22     accordingly should disappear.  By the same









                                                             68
       1     token, if we're going to subsidize, which I

       2     think there's a very strong argument that we

       3     should subsidize internet access into the

       4     schools, computers into the schools, the same

       5     for libraries and rural health care centers.

       6               Why would we put that burden on the

       7     telecommunications system?  We don't force,

       8     for example, construction companies to pay

       9     for housing vouchers or for the housing

      10     programs.  We don't levy a special tax on

      11     food to pay for food stamps.  But why would

      12     we single out telecommunications and say

      13     you're going to get to pay for why we did

      14     that a long time ago -- or, actually, we're

      15     doing it now as part of the (inaudible)

      16     program, but as part of a mind set that goes

      17     back a long time when this was a regulated

      18     public service, public utility, which you

      19     obviously know about so well.

      20               Again, that tax ought to be

      21     repealed.  There's simply no basis for

      22     funding that program through that mechanism.









                                                             69
       1               The third specific goes to the

       2     question of access charges and the universal

       3     service program, which, again, ought to be

       4     funded out of the general fund for the same

       5     reasons I just described, because we don't

       6     pay for construction companies to pay for

       7     housing subsidies.  We don't force food

       8     companies to pay for food stamps.

       9               By the same token, we should not

      10     force the telecommunications, really

      11     customers, to be paying for the

      12     subsidization, some people to receive below-

      13     cost telecommunications services, however

      14     valuable or meritorious those subsidies may

      15     be.  We ought to fund those as we do other

      16     good things I think out of the general fund.

      17               MAYOR KIRK:  Mr. Chairman, I can't

      18     help it, Jeff, you had me there for a while,

      19     but do you know of any construction companies

      20     that have an exclusive ability to build

      21     everything in the country?  I'm just begging

      22     the question -- I mean, going forward, I









                                                             70
       1     agree with you.

       2               MR. EISENACH:  Going forward is my

       3     only point.

       4               MAYOR KIRK:  Was there any

       5     construction company, any grocery store that

       6     said the only grocery store in the whole

       7     state of Texas is going to be Ron and Jeff's?

       8     The only construction company in the

       9     entire -- and that's appealing to me, believe

      10     me -- I mean, I -- you had me there but, I

      11     mean, you ignore one critical element of it.

      12     At least up until 20 years ago these

      13     industries had a monopoly, and I think you

      14     can't escape that in terms of --

      15               MR. EISENACH:  But with due

      16     respect, sir, I think the task of -- well, I

      17     won't tell you what the task is --

      18               MAYOR KIRK:  Well, I'll try to be

      19     more elusive, though, than I was.

      20               MR. EISENACH:  -- my suggestion

      21     would be that on a going-forward basis that

      22     things have in fact have changed









                                                             71
       1     substantially.

       2               MAYOR KIRK:  But these industries did

       3     very well for a very long period of time

       4     without competition.

       5               MR. EISENACH:  Absolutely.

       6               CHAIRMAN GILMORE:  We certainly do want

       7     to move onto, I think, a new topic, but,

       8     Mr. LeBrun?

       9               MR. LEBRUN:  If I understood the

      10     number that Mr. Eisenach gave us, he said

      11     this is a $300 billion industry and that

      12     their taxes are between 15 and 20 percent.  I

      13     don't know if that's strictly

      14     telecommunications tax or if it also includes

      15     income tax.  But then somebody else said that

      16     about three- fourths of the taxes levied are

      17     for state and local government.  Well, 15

      18     or 20 percent of $300 billion is a lot of

      19     dollars, and I'm just wondering whether we

      20     reduce those or eliminate them, what do state

      21     and local governments do to replace those

      22     revenues.









                                                             72
       1               MR. EISENACH:  The question of

       2     revenue replacement, I think, is one that

       3     goes to a couple of different issues.  One

       4     is, I think that what state and local

       5     governments need to focus on is the

       6     composition of the tax burden and to

       7     structure tax systems wisely in ways that are

       8     most efficient, that accomplish effectively

       9     the desirable social purposes, and that make

      10     that make them effective in the competition

      11     across geographical areas for new business,

      12     for new citizens, and to make their own

      13     communities prosperous.

      14               What I'm suggesting is that while

      15     it may have been the case 20 years ago, the

      16     telecommunications taxes met all those

      17     standards.  Good place to tax if you're a

      18     state, if you're a locality.  Smart place to

      19     tax.  Good way to pay for your schools.  What

      20     I'm suggesting today, sir, is that those are

      21     not good places to tax by any of those

      22     criteria, that they are not efficient taxes,









                                                             73
       1     that we're tax -- you're taxing -- it would

       2     be like taxing railroads or roads in the 19th

       3     century.

       4               You're taxing the very things that

       5     are driving growth, and so what I am

       6     suggesting, and I don't suggest it's easy,

       7     but what I am suggesting is that states and

       8     localities need to look for ways to shift

       9     their tax burdens away from the very

      10     industries that are driving economic growth,

      11     and I do want to point out and emphasize, and

      12     also away from taxes which are extremely

      13     regressive.  We no longer have the kind of

      14     universal service programs that we had in the

      15     past.  You can't have those kinds of cross

      16     subsidies in a competitive marketplace.  So

      17     the taxes that we're now levying on

      18     telecommunications are going directly at

      19     those who can least afford to pay for them.

      20               If I can offer one very quick

      21     example, I'll be done.  If I were to go to

      22     the store today and buy my daughter a $600









                                                             74
       1     computer, which I can do, and if I were to

       2     then sign her up for a DSL line from the

       3     local phone company and pay, let's say, $60 a

       4     month for that, which is pretty good average,

       5     and if I were to pay the tax rate currently

       6     in Chicago, Illinois, which is far from the

       7     highest -- 25 percent of taxes on that line

       8     were to go to -- 25 percent of the price of

       9     that line -- $15 a month were to go to pay

      10     taxes, I'd be paying $15 a month, $180 a

      11     year, or over three years -- over the

      12     three-year life of that computer, I'd be

      13     paying as much in telecommunications taxes as

      14     I paid for the computer itself.

      15               Now, why in a world in which one of

      16     our first priorities is to get 12-year-old

      17     daughters like mine, and I can afford to do

      18     this but many can't -- in which our first

      19     priority is to get those 12-year-olds hooked

      20     up to the internet -- why would we begin by

      21     levying in effect a 100 percent marginal tax

      22     rate on connected computing?









                                                             75
       1               CHAIRMAN GILMORE:  Mr. Norquist, I think

       2     you had a -- you requested to be heard.

       3               MR. NORQUIST:  Actually, it was,

       4     Jeff, just on that point that you raised, one

       5     of the questions that people have brought up

       6     is the digital divide and lower income people

       7     not being able to get access to the internet,

       8     and I wanted to hear from each of the

       9     panelists your view on how the present level

      10     of taxation on cable and telecommunications

      11     affects the digital divide.  Does it increase

      12     it?  Does it have no effect on t?

      13               MR. EISENACH:  I'll go first and

      14     just be very brief.  Every study that's ever

      15     been done I think of taxes suggests that

      16     excise taxes are the most regressive tax.

      17               Actually pull taxes, per-month

      18     taxes, as a big chunk of our

      19     telecommunications taxes, are probably the

      20     most regressive form of tax.  Right after

      21     that would be excise taxes -- number one.

      22     Number two, the most price-sensitive









                                                             76
       1     consumers are those at the lower end of the

       2     income spectrum.

       3               If the price of a monthly phone

       4     bill went up five bucks a month or ten bucks

       5     a month, if it went up, let's say, by 20

       6     percent, very few people probably give up

       7     their phones.  Some would, and that would be

       8     a cost but not a huge proportion.

       9               By contrast, these broadband

      10     services -- these internet access services

      11     that we're talking about -- are very price

      12     sensitive, especially for those at the lower

      13     end of the income spectrum.

      14               So, every percentage that we raise

      15     taxes on -- internet access, in effect --

      16     we're driving -- at the 33 percent tax rate,

      17     for example, we show -- our estimates show

      18     that 20 percent fewer households, 20 percent

      19     fewer children will have broadband access to

      20     the internet in their home, predominantly

      21     among low-income and also in rural areas

      22     where costs are high.









                                                             77
       1               MR. NORQUIST:  What's that as a

       2     number now?  I mean, how many people are not

       3     getting access because of the present

       4     taxation policies of the federal, state, and

       5     local governments?

       6               MR. EISENACH:  A minimum using our

       7     most conservative estimates of 165,000

       8     households do not have not broadband access

       9     to the internet today because of current

      10     taxes on telecommunications, and there we

      11     estimate according to the Census

      12     Bureau 107,000 children live in those

      13     households.

      14               Now, if you go out three years

      15     where the chart that Mr. Armstrong was

      16     referring to has had a chance, those lines

      17     have gone up a little bit in terms of the

      18     number of people who have the opportunity to

      19     buy broadband access.

      20               By 2002, a minimum, according to

      21     our estimates, of 1.2 million households will

      22     be denied broadband access to the internet,









                                                             78
       1     and that translates to 800,000 children in

       2     those households, and again,

       3     disproportionately, children in low-income

       4     households or rural households where the

       5     income is lower, the costs are higher.

       6               MR. KEATING:  I would -- I mean,

       7     obviously Jeff gave us a rundown on basic

       8     economics essentially is what we're talking

       9     about here.  Increase the price and you're

      10     going to get less of it; increase the price

      11     and lower-income individuals are not going to

      12     be able to have access to all the wonders of

      13     the e-commerce/internet revolution that's

      14     going on right now.

      15               That goes back to an issue that we

      16     heard earlier.  How are we going to -- you

      17     know, this seems to be a major question,

      18     obviously, that you're wrestling with.  How

      19     would state and local governments make up the

      20     lost revenue that if we cut taxes on

      21     telecommunications access and services.  I

      22     think it's a false question.









                                                             79
       1               Number 1, you've got to look again

       2     at the impact that prices have, that costs

       3     have.  You've got to do a dynamic analysis.

       4     We've seen that economic growth is being

       5     tremendously increased by information

       6     technology.  So, I think you're going to get

       7     the growth, the revenue feedback in other

       8     taxes.

       9               I think that happens -- we've seen

      10     it time and time again.  When you do

      11     pro-growth tax cuts, you're not going to lose

      12     as much revenues as you might think and as

      13     straight static analysis.

      14               Besides the fact that -- I'd just

      15     like to add that when you look at the

      16     revenues that have been rolling in the door

      17     adjusted for inflation, adjusted per capita,

      18     that have been rolling in the door, the doors

      19     of state and local governments, for decades.

      20     I mean, this isn't just recent.

      21               I mean, we've seen a 300 percent

      22     increase in real per capita state and local









                                                             80
       1     revenues in this country over the last

       2     three-plus decades.  There is no shortage --

       3               MR. NORQUIST:  What is that number

       4     again?

       5               MR. KEATING:  Almost 300 percent.

       6      297 percent from 1962 to 1966 to be exact.

       7     That's an astounding post-inflation increase

       8     in revenues, so I think -- and that has to

       9     be -- that goes back to the original question

      10     of we've got to deal with the tax system that

      11     we have now.  How much money is government

      12     already taking out of the private sector?

      13               If I could just throw in, while

      14     I've got the microphone, on open net or open

      15     access or -- take what we have right now with

      16     the 1996 telecom act where everyone agreed --

      17     right -- reluctantly, maybe, but everybody

      18     agreed, and look at what's been going on with

      19     that now.  We've been -- you know, we have

      20     monopolists trying to protect their monopoly

      21     turf at the local level; we've got lawsuits

      22     now.









                                                             81
       1               Take that model and put it to

       2     high-speed networks and you're just going to

       3     create more headaches, quite frankly.  I

       4     would advise -- and our position has been

       5     leave it to the marketplace.

       6               MAYOR KIRK:  Mr. Chairman, I hate to

       7     keep being the contrarian, but again,

       8     Raymond, I don't have your paper here, but I

       9     would -- I'd just be curious to see what

      10     you're basing this 300 percent on, because, I

      11     mean, I only -- you know, as a mayor I can

      12     only look at the rural experience -- you

      13     know, in Dallas, which is a reasonably

      14     profitable community that's not going through

      15     any of the economic depression as cities in

      16     the east, but if you look at every major city

      17     in the country there's not one that wouldn't

      18     want, in a severe depression from a period of

      19     the mid-'80s through early '90s in which tax

      20     growth revenues shrank dramatically, and

      21     ours 25 percent, and we're just back at

      22     revenue levels that we were 15 years ago, and









                                                             82
       1     I would imagine that has to be the same case

       2     in cities and states in the east, and so I

       3     would --

       4               MR. KEATING:  It's certain

       5     cities --

       6               MAYOR KIRK:  Yeah, but I mean I'd

       7     have to see -- I mean, I --

       8               MR. KEATING:  It's Commerce

       9     Department stuff; it's Commerce Department

      10     data.  It's straightforward numbers, and I

      11     will be glad to give it to you.  I don't know

      12     the specifics on Dallas --

      13               MAYOR KIRK:  Well, just because it's

      14     (inaudible) don't make it true.  I mean, I'm

      15     dealing with government.

      16               MR. KEATING:  I'll have to remember

      17     that.

      18               MR. NORQUIST:  Ray.  Ray, could you

      19     get us those numbers for tomorrow?  Could you

      20     get us those numbers for tomorrow?

      21               MR. KEATING:  Yes, I can get

      22     them --









                                                             83
       1               MR. SOKUL:  Governor.

       2               CHAIRMAN GILMORE:  The questions on

       3     either fact or truth.  Yes, sir, Mr. Sokul.

       4               MR. SOKUL:  I have two questions.

       5     The first is:  Do any of you know how the

       6     rates of taxation imposed by our governments

       7     on our companies compare to what other

       8     nations are doing to their telecom companies

       9     in terms of our -- despite this, we are still

      10     the world leaders, and this -- are there any

      11     comments you have as to what's going on to

      12     our international competitors?

      13               MS. CANNING:  We did not look at

      14     that data in a study.  I'm sure the

      15     industry -- you know, members of the industry

      16     would be happy to look at some of those

      17     numbers.

      18               MR. EISENACH:  I also have not

      19     looked at that data, but we do know that the

      20     U.S. has one of the more deregulated -- New

      21     Zealand maybe being the other example -- but

      22     one of the more deregulated









                                                             84
       1     telecommunications systems.  My suspicion is

       2     that taxes would be higher in other countries

       3     one way or another.

       4               MR. SOKUL:  One other question,

       5     maybe for some of the commissioners.  This is

       6     a damning report in many ways, and there is

       7     no, as far as I know, no -- you were

       8     suggested by business representatives on the

       9     commission -- no state and local commissioner

      10     suggested panelists for this particular

      11     topic.

      12               The prosecution has made its case,

      13     and I was wondering if there was any state

      14     rep that would like to jump to the defense --

      15     not the need for revenue, but the way it's

      16     being raised.  But before that, I'd like to

      17     say, and maybe the panelists could comment on

      18     this --

      19               MR. ANDAL:  I thought that was what

      20     Mayor Kirk was doing.

      21               MR. SOKUL:  What does this mean for

      22     our recommendation to Congress for federal









                                                             85
       1     policy?  You know, we can, I guess, use a

       2     bully pulpit, if you will, and tell the

       3     states to perform the way they raise revenue.

       4     But what can we -- is there a way that we can

       5     leverage that activity through a

       6     recommendation to Congress?

       7               MS. CANNING:  I think to a certain

       8     extent the question I was really asked by

       9     Dean Andal earlier, and I think possibly

      10     there may be -- and granted these are state

      11     and local taxes imposed on those

      12     jurisdictions, and there are dynamics within

      13     the particular jurisdictions that impact

      14     their revenue needs and where, you know, how

      15     they may choose to impose their taxes.

      16     However, possibly -- the goal was really to

      17     provide a framework to provide the

      18     information.

      19               I think a number of times before

      20     the industry has attempted to get these

      21     issues examined and there was never really

      22     before the information, so a large purpose is









                                                             86
       1     really to provide the information and

       2     determinations to how, you know, solutions

       3     can be implemented.  We'll go from there.

       4               CHAIRMAN GILMORE:  Mr. Keating.

       5               MR. KEATING:  I would say just try

       6     to make recommendations that, quite frankly,

       7     make it as tough as possible to raise taxes

       8     on the internet/internet access whether

       9     their -- what avenues you have available

      10     through interstate commerce, the prohibition

      11     against new internet taxes, making that

      12     permanent.

      13               It's -- I think, again, rather than

      14     loosening things up and letting them find new

      15     ways to tax, I would say keep it as tight

      16     as -- recommend to Congress to keep it as

      17     tight as you possibly can and then again let

      18     the market and competition work.

      19               MR. SOKUL:  Don't make things worse

      20     on the federal level.

      21               MR. KEATING:  That's always with

      22     government.  Don't make things worse.









                                                             87
       1               CHAIRMAN GILMORE:  Mr. Norquist.

       2               MR. NORQUIST:  Yeah, I'm just

       3     looking at the summary of the charts the

       4     Congress gave us.  It asks us ways to

       5     simplify federal, state, and local taxes

       6     imposed on the provision of

       7     telecommunications services, so our

       8     recommendation should include federal, state,

       9     and local, and our recommendation goes -- I

      10     mean, the whole country can read it, mayors

      11     and governors as well.

      12               So, I think we should -- I mean,

      13     obviously what's your pointing here is one of

      14     the reasons for the digital divide is because

      15     states and local governments have so heavily

      16     taxed this industry, as with electricity,

      17     which used to be a regulated monopoly and is

      18     now getting deregulated as with

      19     telecommunications.

      20               It once may have made sense,

      21     because this was just a pass-through.  That

      22     doesn't hold now.  I understand the argument









                                                             88
       1     that maybe it made sense in the future, but

       2     we're going through this also with

       3     electricity generation and with

       4     telecommunications.

       5               So, I would hope we would speak

       6     loudly to state and local governments that

       7     are standing in the way of 800,000 kids from

       8     getting internet access because of their tax

       9     policies, things that they're failing to do

      10     reducing those taxes.

      11               CHAIRMAN GILMORE:  Yes, sir,

      12     Mr. Pittman.

      13               MR. PITTMAN:  Just in listening to

      14     it, it seems there are two issues here which

      15     are getting wrapped together.  One is the

      16     money from all these different taxes; the

      17     other is the administration work and the

      18     complexity of dealing with them.

      19               I'm an operating person, and what I

      20     think you look at is there is only -- there's

      21     a finite amount of resources in any company,

      22     and if taxes become too numerous, too









                                                             89
       1     complicated, we deploy our resources for

       2     dealing with that, and they come from

       3     somewhere, and where they come from is

       4     growing the business.

       5               I think, on the issue of whether

       6     there's a lot of money or a little money or a

       7     lot of taxes, little taxes, I think the

       8     determining factor -- and somebody asked

       9     about business people putting -- asking for

      10     these people here -- I think the concern of

      11     the operating people is that whatever we come

      12     to, and what I'm hearing here is more about

      13     the money, but the issue that resonates with

      14     me is the idea that it needs to be simple so

      15     we don't have to steal resources from growth

      16     because the very area we're looking for in

      17     the future growth of this country and driving

      18     the economy, which everybody benefits from,

      19     is for us to all put our resources against

      20     continuing to grow, continuing to meet

      21     consumer demand, and give the people what

      22     they want in a way that is economically









                                                             90
       1     viable.

       2               MR. EISENACH:  If I could just

       3     respond to that very briefly.  It's about to

       4     get dramatically worse, and the reason it's

       5     about to get worse is that we're moving from

       6     a essentially one-product marketplace where

       7     we could all agree that anything the phone

       8     company sold you was a telecommunications

       9     service into a multi-product marketplace with

      10     lots of bundled products.

      11               If Mr. Armstrong, for example, is

      12     going to sell phone service and cable service

      13     and internet access service and whatever else

      14     will fit in those lines, I guess, all in one

      15     package, the question's going to have to get

      16     asked and answered.

      17               Is that taxed as a

      18     telecommunications service, pay an excise

      19     tax; taxed as a cable service; pay a

      20     franchise fee; taxed as an internet access

      21     service, pay nothing I guess, unless someone

      22     got in under the grandfathering rules.  Those









                                                             91
       1     questions are in fact getting asked and

       2     answered by real live lawyers in real live

       3     states in real time today, and they're

       4     getting asked and answered in different ways

       5     depending on where you ask and answer them.

       6     Your all's current engagement with Bell

       7     Atlantic, for example, may be taxed

       8     differently as I understand it, I think, in

       9     New Jersey versus Pennsylvania, because in

      10     one state a DSL line leased from a phone

      11     company used to provide internet access is

      12     called telecommunications, and in the other

      13     state the exact same circumstances are called

      14     internet access.

      15               Maybe the bigger state is the one

      16     where you got the right answer -- that's

      17     okay, but you paid a lot of lawyers $450 an

      18     hour or whatever for that answer, and so I

      19     think your point is exactly right.  That's

      20     one of the many reasons why we've got to be

      21     backing these things down rather than as

      22     history.  Recently we've been raising them.









                                                             92
       1     Over the last 15 years we've raised these

       2     telecommunications taxes 62 percent.  So,

       3     we're headed in the wrong direction; we need

       4     to turn the corner.

       5               CHAIRMAN GILMORE:  Other points on this?

       6               MR. ANDAL:  Yes.

       7               CHAIRMAN GILMORE:  Mr. Andal.

       8               MR. ANDAL:  Thank you.  Just to

       9     pick up where I started on this COST study,

      10     it seems to me that we have to look at

      11     recommendations that fit the tax.  They're

      12     not all the same; they don't all have the

      13     same legal structure; and, for the sake of

      14     argument, I'll split it up into three

      15     categories.

      16               It can probably be done in more.

      17     One is the excise taxes that are applied

      18     because Congress and the federal government

      19     grant the license necessary to do the

      20     business, and the tax falls off of that and

      21     so they the federal role is pretty clear.

      22               I am one of those that asserts that









                                                             93
       1     they've over-exercised that power and taxed

       2     that technology too much to a certain extent.

       3     That drives the costs unnecessarily because

       4     the states wouldn't do that.  But it also

       5     puts a burden on a customer that the states

       6     don't want to burden more.  That's clearly a

       7     federal role.  We can clearly offer some

       8     recommendations about some of those taxes.

       9     Congress has a role to play.

      10               The second area would be state

      11     taxes that are state taxes.  Property tax

      12     comes to mind.  The property is in a state,

      13     in a singular state, unless you want to talk

      14     about intangible assets like licenses and

      15     copyrights, which most states say they don't

      16     want to tax on paper and sometimes do.

      17               Then the third is what we're about

      18     to deal with tomorrow, which is sales and use

      19     tax.  That's kind of an in-between ground

      20     because the sale occurs between states, and

      21     that goes to Congress' Interstate Commerce

      22     Clause authority.









                                                             94
       1               I'm wondering why it is on the

       2     state-specific taxes -- not those other two

       3     categories but those like the property tax

       4     that are in one state entirely.  It is not

       5     the recommendation of the industry to simply

       6     seek a law like the 4R Act, and for being in

       7     initiated 4R Act means that you have to tax

       8     the property in question the same way that

       9     other businesses in that state would be

      10     taxed.  For instance, in California, the

      11     Board of Equalization (inaudible) taxes the

      12     railroads.

      13               We must tax the railroads at a

      14     relatively similar burden that we do other

      15     companies, and that's done under the 4R Act,

      16     and because we have Prop 13 in California

      17     that means that the railroads get, under

      18     federal law, about the same tax that they

      19     would have if they have Prop 13 protection in

      20     California as a local business.

      21               If your primary concern is

      22     technology -- as a telecommunications









                                                             95
       1     industry -- is that you have all these taxes

       2     that are discriminatory on the business,

       3     different from what other businesses pay,

       4     then why aren't you seeking just that level

       5     playing field?  It seems to me that that's

       6     the place where we could have at least a

       7     conceptual agreement, that perhaps Congress

       8     could intervene and make sure that level

       9     playing field exists.

      10               I don't believe that once

      11     telecommunications companies lose their

      12     monopoly there's any case to be made for just

      13     discriminatory tax.  We can all face the

      14     fact, the past, that most of these people

      15     weren't running those companies then, but

      16     there was kind of unholy alliance in the old

      17     days.

      18               There was a monopoly.  Telecom

      19     Company got the monopoly; Telecom Company

      20     made money; politicians wanted to raise taxes

      21     for a program; Telecommunications Company

      22     agreed, gratefully, with the tax increase;









                                                             96
       1     customer paid; taxes skyrocketed up.  The

       2     world has now changed and telecommunications

       3     companies, because of these price points and

       4     other arguments, care about how high the

       5     taxes go, and they should care.

       6               So, I'm wondering -- you know,

       7     those other two issues are different.  The

       8     federal government can directly affect the

       9     excise fees, and the Interstate Commerce

      10     Clause authority has been exercised on the

      11     issue of state and jurisdictional nexus.  But

      12     on the issue of these other taxes, why not

      13     simply seek an even playing field with other

      14     businesses and leave it at that?

      15               MS. CANNING:  The study covers, as

      16     I mentioned, property taxation and

      17     transactional taxes.  With respect to the

      18     property taxes, I understand your point, and

      19     they are typically within the jurisdictions.

      20     However, the study also covers transactional

      21     taxes, and those taxes are frequently on

      22     telecommunications services that crossed









                                                             97
       1     jurisdictional state, jurisdictional

       2     boundaries, and those taxes maybe --

       3               MR. ANDAL:  Just so I understand

       4     what you're talking about, that's --

       5     somebody's using a cellular phone, they're in

       6     the middle of a call, they cross a state

       7     line -- is that type of telecommunications

       8     service you're talking about?

       9               MS. CANNING:  It really -- again,

      10     it varies, but obviously the problem here is

      11     the differences are so great from

      12     jurisdiction to jurisdiction.  Certain

      13     jurisdictions tax with their transactional

      14     taxes interstate services.  So, a call from

      15     one state to another state.  Other taxes may

      16     be imposed on only intra-state services.

      17     Certainly many of the recent ordinances that

      18     had been drafted with respect to the

      19     imposition of local franchise fees on

      20     telecommunications were drafted with the

      21     language that was approved by the Supreme

      22     Court in the Goldberg case, which is









                                                             98
       1     interstate services.  So, there is a big

       2     variance from -- and many statutes may only

       3     be on a, as I said, an intra-state service.

       4     So, it varies from tax to tax.  But on the

       5     whole, the transaction taxes pick up all

       6     different types of services.

       7               CHAIRMAN GILMORE:  Delna.

       8               MS. JONES:  Let me see if I can

       9     weigh in for a minute and tell me how much of

      10     this you agree or disagree with.  First of

      11     all, I always have a real hesitancy coming

      12     from a couple of areas in my life, and one of

      13     them is I've not usually not found the Feds

      14     in a better position to make good tax policy

      15     than local and state people, and most of you

      16     have a lot of local and state lobbyists that

      17     deal with the issues of taxation, and

      18     sometimes you're a lot more successful there

      19     than you are at the federal level.  So, the

      20     questions that relate to that are how much do

      21     you want to recommend to this commission to

      22     make the federal government "in charge," as









                                                             99
       1     it were, of definitions or tax policy that

       2     relates to the local government, either state

       3     or local; and do you have a consensus of the

       4     industry that says we do, in fact, want you

       5     to have a specific definition that relates to

       6     what you can and cannot tax?

       7               Because it reminds me of the

       8     franchise fee issues.  You win a lot at the

       9     state level that you might not be able to win

      10     if you were doing it at the federal level.

      11     So, I think the industry might not be

      12     together.

      13               CHAIRMAN GILMORE:  We might want to hear

      14     from some of the industry people, but -- who

      15     are even on the Commission.  Did you have a

      16     response, Ms. Canning?

      17               MS. CANNING:  I was just going to

      18     say really my purpose was to present the

      19     factual information, and I'm not really here

      20     to comment on the objectives of the

      21     individual companies, which may vary.

      22               CHAIRMAN GILMORE:  Look, we're not









                                                             100
       1     taxing communications companies, are we.

       2     We're taxing consumers that use

       3     communications companies, right?  So, that's

       4     what we're really doing.  The taxpayer, the

       5     individual citizen who's out there buying his

       6     computer and trying to get access to the

       7     internet -- he's the one paying all these

       8     additional fees already for the privilege of

       9     using the internet, right?

      10               MR. EISENACH:  Correct.

      11               CHAIRMAN GILMORE:  Well, I mean -- and

      12     when I asked that question about 30 minutes

      13     ago, the members of the Commission responded,

      14     "Well, yeah, and if you drive prices up then

      15     we're not competitive anymore with our

      16     competitors."

      17               Well, who are the competitors?

      18     Certainly it may be that these people in a

      19     general business are not competitors.  You

      20     know?

      21               Grocery store people who are paying

      22     one level of tax in a filing system and so on









                                                             101
       1     like that are not competitors in the supply

       2     of internet services and so on like that, so

       3     there may be a good reason for discriminating

       4     between telecommunications and other types of

       5     businesses.

       6               It may be other business -- Mayor

       7     Kirk, we may be agreeing on this, I don't

       8     know.  You know, it may be that there is an

       9     illegitimate policy reason for distinguishing

      10     between one type of industry or another.  Who

      11     are the competitors to the telecommunications

      12     industry, wireless?  I don't know.  Cable?

      13     Cable?  We'll they're being -- they're not

      14     being included in these filings, is that

      15     right?

      16               MR. EISENACH:  If I could quote

      17     someone who you and I would probably both

      18     consider an unlikely advocate of markets and

      19     competition, former White House Internet

      20     Advisor Ira Magaziner, who we both remember

      21     from his previous occupation dealing with

      22     health care as well.  But at a recent









                                                             102
       1     conference that the Progress and Freedom

       2     Foundation held in Colorado, he said the

       3     following:  "With the internet and this new

       4     environment of convergence, we are going to

       5     have the greatest amount of competition the

       6     world has ever seen.  We are going to have

       7     telecom companies, computer companies,

       8     software companies, satellite companies,

       9     wireless companies, consumer electronics

      10     companies, and electric utilities all

      11     competing to build out this infrastructure,

      12     and the best thing we could do is let that

      13     competition take place and try not to

      14     regulate it or interfere with it."

      15               Now, my personal view has been that

      16     if the advocate of what I consider to be a

      17     very regulatory and intrusive health care

      18     proposal could come to that conclusion about

      19     the internet, I wasn't going to be for more

      20     regulation than he was in this context, so --

      21     and I agree fully with what he says there.

      22               We don't know the shape









                                                             103
       1     competition's going to take.  We do know

       2     that, for example, one of the competitors to

       3     all of the telecommunications companies in

       4     this room is a company called North Point,

       5     which is a brand new company about six months

       6     old, which is offering DSL services over the

       7     phone lines in competition with both cable

       8     and ARBOX in 27 major markets, virtually

       9     every major region around the United States

      10     and is doing so with major investments from

      11     Microsoft, from Intel.

      12               So these old telephone monopolies

      13     are starting to see competition from some

      14     other big players, and that's really what's

      15     going on here.  We don't know what the shape

      16     of the free-for-all is, but to say let's go

      17     tax phones differently from cable,

      18     differently from wireless or to tax all of

      19     that at a higher level than we would tax

      20     other things in the economy doesn't strike me

      21     as good.  I don't understand what a rationale

      22     for that would be.









                                                             104
       1               MR. KEATING:  In terms -- if I

       2     could -- of general, sound tax policy, I

       3     think you want to get away from elected

       4     officials and politicians deciding, you know,

       5     we're going to tax this industry, we're not

       6     going to get a little more than this industry

       7     or a lot more than the other industry.

       8               I mean, as a general principal of

       9     taxation, you want low taxes and pretty much

      10     fairly applied to everybody, and I think

      11     that's a sound policy to move forward on.

      12     For example, at the federal level I never

      13     understood -- I mean, I know why they're

      14     doing it, but in terms of taxing the FCC's

      15     taxes on telephones doesn't make any sense to

      16     me.

      17               Why is the federal government

      18     taxing telephone calls or telephone lines and

      19     not taxing Twinkies?  I mean, it just doesn't

      20     make any sense.  That's clearly a

      21     discriminatory tax.

      22               CHAIRMAN GILMORE:  Well, they do tax









                                                             105
       1     Twinkies, but --

       2               MR. KEATING:  Well, not directly,

       3     but, yeah, you're right, they do eventually.

       4               CHAIRMAN GILMORE:  What else?  What?

       5     It's ten minutes of five and we have

       6     exhausted this topic?  I don't think so.

       7     Does anyone else have any different topics

       8     that they want to -- I'm not sure we've got

       9     anymore, but does anybody want to pursue

      10     this?  We have -- I think that we have ten

      11     minutes of five and we want to, at five

      12     o'clock, go into some of the administrative

      13     issues.  Grover, I think that you wanted to

      14     present a couple of resolutions on this

      15     topic.  Is that correct?

      16               MR. NORQUIST:  Yes.  I submitted

      17     three resolutions, one of them dealing with

      18     an expression of support for the Clinton

      19     Administration's opposition to tariffs on

      20     electronic commerce internationally.  That I

      21     understand will be discussed tomorrow.  The

      22     other two -- one was a call for abolishing









                                                             106
       1     the 3 percent telecommunications tax.  It's

       2     been discussed here.

       3               It was put in to fund the

       4     Spanish-American War, which, although I went

       5     to public school, I understand is over,

       6     and -- Paul slipped me a note -- and it was

       7     actually introduced as a tax on rich people

       8     because only a hundred thousand people they

       9     taxed had phones at the time, so it really is

      10     a prototype of a tax that was introduced to

      11     be temporary and became longer lived than a

      12     number of our Constitutional Amendments and

      13     was introduced as a tax based on envy -- only

      14     other people were going to pay it, and of

      15     course now everybody pays it.

      16               I think that one of the things that

      17     I hope our Commission will do is make it

      18     clear that this tax, and given what we've

      19     heard today, I think we should speak also to

      20     state and local taxes.  The other resolution

      21     speaks to tax on access to the internet and

      22     calls for the abolition of all internet









                                                             107
       1     access taxes, no taxes or fees levied on

       2     internet access.

       3               I sent this out to everyone both by

       4     mail, by phone, by e-mail three or four

       5     times, and I was very happy to get back

       6     people's comments and we have a super

       7     majority in favor of all three of these

       8     measures.

       9               I would like to ask tomorrow for an

      10     actual vote because I do want this Commission

      11     to stand with the Clinton Administration as

      12     they go out to negotiate later this fall on

      13     behalf of all of us to try and keep tariffs

      14     and taxes at the border of electronic

      15     commerce.

      16               The other two resolutions -- I'm

      17     pleased that a super majority of the

      18     commissioners expressed support for them.  I

      19     think that I would just ask that we work to

      20     include in the general, in the final report

      21     as we move along.

      22               It's not necessary to have a vote









                                                             108
       1     right now, but I was glad that there -- it

       2     appears to be a consensus on both of them and

       3     it would simply point out that a number of

       4     the commissioners had spoken on

       5     telecommunications tax last time, and that

       6     Governor Locke had been most instant on

       7     oppositioning -- no, access tax -- I want to

       8     credit him for his support for that, and it

       9     was largely at hearing his strong opposition

      10     to internet access taxes that I thought that

      11     would be a consensus issue.

      12               So, I think the three

      13     resolutions -- I was pleased to get people's

      14     consensus on them.  I will defer on a vote on

      15     the 3 percent tax and the internet access tax

      16     but would hope tomorrow that we could vote

      17     and show our support for the Administration

      18     as it moves into international negotiations,

      19     which will take place before our final

      20     report.  Thank you.

      21               CHAIRMAN GILMORE:  Grover, would you just

      22     make sure that the staff has a current copy









                                                             109
       1     of these in the hands of each of the

       2     commissioners.

       3               MR. NORQUIST:  I accepted a

       4     friendly amendment that somebody -- that I

       5     put forward at the request of some to strike

       6     the discussion of the Gore tax in the

       7     telecommunications tax.  Otherwise, they

       8     stand.  I think the Administration people

       9     also had some technical changes, all of which

      10     were cheerful and improved my grammar.

      11               CHAIRMAN GILMORE:  Okay.  Thank you very

      12     much.  We have a few moments remaining -- not

      13     many -- before we go on the agenda to the

      14     issue of administration.  Are there other

      15     matters to be taken up on this topic today

      16     before we move on in the agenda?  Yes, sir,

      17     Mr. Parsons.

      18               MR. PARSONS:  Just a point of

      19     clarification, Jeffrey.  These numbers that

      20     you were throwing out around the digital

      21     divide.  Help me understand what they're

      22     supposed to say.  Was I correct in my









                                                             110
       1     assumption that your study somehow concluded

       2     that because of the imposition of certain

       3     levels of taxation, that factor determined

       4     how many homes, but for that fact, would have

       5     been online homes, shall we call them?

       6               MR. EISENACH:  Yes, sir.  The basic

       7     economics here is fairly straightforward.

       8     Prices go up, your people purchase, you

       9     impose taxes, and some or all of those taxes

      10     are passed through in the form of higher

      11     prices.

      12               There's a series of estimates, and

      13     let me emphasize that these are preliminary

      14     work in the midst of a major study that we're

      15     doing, but we're relying on the best

      16     estimates that we have of elasticities of

      17     demand.  That's the responsiveness of the

      18     amount purchased, the number of, in this

      19     case, households hooked up to the internet,

      20     to the price, and to the other underlying

      21     economic factors in this particular market,

      22     and when we apply what we know about









                                                             111
       1     elasticities of demand and about the impact

       2     of taxes on this market, what we get as a

       3     preliminary matter but one that I think

       4     represents sound economics that we feel very

       5     confident of, is at a minimum today, given

       6     a 16 percent national average tax rate on

       7     telecommunications, including broadband

       8     services, 165,000 households this year will

       9     not purchase broadband access to the

      10     internet.

      11               That's Roadrunner; that's DSL

      12     service primarily, or At Home service --in

      13     those households roughly 107,000 children,

      14     looking out three years the other numbers

      15     which I cited.

      16               MR. PARSONS:  Stop there.  How

      17     would those homes be reflected across the

      18     marketplace?  I mean, did you do any analysis

      19     of that, or is that simply a statistical

      20     fallout, that if we lower the price of the

      21     product a buck -- let's just make the

      22     assumption that the tax burden was a buck out









                                                             112
       1     of twenty, that 165,000 more homes would be

       2     on.

       3               MR. EISENACH:  That's based on

       4     statistical analysis of the nature of the

       5     demand for telecommunications -- not analysis

       6     that we performed but analysis that's been

       7     performed by other economists around the

       8     country in looking at the demand for

       9     broadband services.  So, we're citing other

      10     academic estimates of the elasticity of

      11     demand there and then, and simply suggesting

      12     on the basis of those estimates and what we

      13     now know about the level of

      14     telecommunications taxation that the impact

      15     is that many fewer people would purchase.

      16               Then, I think your other question

      17     may go to who isn't purchasing, the question

      18     of how -- are these upper-income households

      19     or lower-income households?

      20               MR. PARSONS:  Are they, you know --

      21     is a speckled pattern or are the

      22     non-purchasers proportionately represented









                                                             113
       1     across the economic spectrum or have you done

       2     some work that can help us understand better

       3     who those people are?

       4               MR. EISENACH:  What we know there

       5     is -- on the basis of what we know about the

       6     elasticity of demand for broadband services,

       7     we believe the elasticity of demand is

       8     higher, which is to say people are more

       9     sensitive to price changes at lower income

      10     levels.

      11               Now, that is part inference and

      12     part solid statistical work, and I could walk

      13     through that with you and maybe take longer

      14     than we should take up in this meeting.  I

      15     could walk through the modeling of that and

      16     why we believe that's true.

      17               Secondly, we do know that the

      18     elasticity of demand -- again, the

      19     sensitivity to higher taxes is higher the

      20     higher up in the price range you go, so that

      21     the sensitivity to price changes is higher

      22     between $50 and $60 a month than it is









                                                             114
       1     between $40 and $50 a month.  From that we

       2     can infer that in rural areas -- in

       3     particular where the cost of providing those

       4     services is higher, more likely to be in

       5     the $50 to $60 range than in the $40 to $50

       6     range -- that we're more likely to have a

       7     disproportionate impact in rural areas.  So,

       8     that's where those two inferences come from,

       9     and I think it would be the exception to kind

      10     of general rules of economics if that weren't

      11     to be the case in these circumstances.

      12               MR. PARSONS:  Thank you.  Governor.

      13               MAYOR KIRK:  Governor, if I might.

      14     Richard, there's been a lot more work done on

      15     the issue of the digital divide by the Center

      16     on Budget and Policy Priorities out of

      17     Washington.  I know the Urban League and

      18     others have looked at this, but looked at it

      19     purely from the equitable aspect of creating,

      20     however unintended, essentially a sales tax

      21     re-environment on the net and the advantage

      22     that gives higher-income citizens over lower









                                                             115
       1     income, and their analysis roughly shows that

       2     those families that earn over $80,000 a year

       3     are seven times more likely to have a

       4     computer because of income, because of

       5     education, than those families that

       6     earn $20,000 or less.

       7               The fact that lower-income families

       8     are, as a reality, going to buy most of their

       9     goods and services at the corner market and

      10     they're going to pay sales taxes, and their

      11     greatest concern is creating an environment

      12     in which you make it possible for those who

      13     earn more and have higher incomes to operate

      14     in a tax-free environment because of their

      15     ability to buy goods and services over the

      16     internet.  I think we had suggested them as a

      17     speaker.  They are not on the program for

      18     tomorrow, but we have some information, a

      19     little bit that I'll be happy to share with

      20     the Commission.

      21               MR. SOKUL:  Governor.

      22               CHAIRMAN GILMORE:  I think it would be a









                                                             116
       1     good topic to add on tomorrow, even in the

       2     absence of a presenter.  Mr. Sokul.

       3               MR. SOKUL:  Governor, I have a

       4     follow-up to Mr. Parsons question to about --

       5     and it also gets to what Mayor Kirk just

       6     brought up.  The digital divide exists.

       7     That's a fact.  It's a terrible fact, and the

       8     question is:  How do you close it?  What do

       9     you do -- I mean, do we just want to just --

      10     we want to act to improve and have no digital

      11     divide.  Your study is on broadband, which is

      12     more expensive than narrowband or just buying

      13     AOL or another ISP for $21.95 a month, or

      14     whatever -- whatever it is now.  107,000

      15     households don't have broadband access.  Can

      16     you speculate on narrow band, what that would

      17     translate?

      18               MR. EISENACH:  I don't have those

      19     numbers with me but I would point out this,

      20     that as you go up the spectrum, if you will,

      21     of access -- essentially a phone line is a

      22     necessity.  Ninety-six percent of American









                                                             117
       1     homes I think have phone lines today.  The

       2     ones that don't have phone lines -- there is

       3     some sensitivity to income, but, frankly, the

       4     ones that don't have phone lines -- there are

       5     a lot of reasons they don't have phone lines.

       6     This is not -- we have lifeline services

       7     for $5 a month, so price is not the main

       8     reason people don't have a single phone line.

       9               Now, you go beyond that, kind of

      10     stepping of the internet ladder, if you will,

      11     one question I think we have to think about

      12     in thinking about the digital divide is how

      13     much cheaper than free does a computer have

      14     to be before we stop thinking income

      15     influenced our ability to have one.

      16               I can literally -- any of us can

      17     literally pick up a telephone today and have

      18     a computer delivered to our house for zero

      19     dollars a week from today, thanks to a number

      20     of programs, and, if not for zero dollars,

      21     then from Mr. Wade or from others for

      22     something close to that, thanks to the









                                                             118
       1     rebates offered by America Online.

       2               You can get to zero dollars or

       3     something very close, so you've got to begin

       4     to say, well, at zero dollars, is income

       5     really the determining factor on whether we

       6     have PCs in each household?  Maybe not.  Then

       7     you go beyond that and you start looking at

       8     the combination of internet access

       9     services, $20 a month -- and what's the other

      10     thing you need if you're going to get on

      11     line?

      12               Maybe you need a second phone line.

      13     I mean, really, that's the first way a lot of

      14     people get on line and, in fact, the

      15     percentage of phones with second phone lines

      16     has gone from about 2 percent 15 years ago

      17     to over 18, 19 percent today.  So, we see

      18     this dramatic increase in second lines.  Some

      19     of those I guess are being used by teenagers

      20     for who knows what, but many of them no doubt

      21     are being used for internet access.

      22               What we know about the demand for









                                                             119
       1     second phone lines is that while the

       2     sensitivity to taxes is not as high as for

       3     broadband, it's much higher than the

       4     sensitivity for the first line, which, again,

       5     is not surprising.  You're getting into

       6     luxuries, choices that people make, and price

       7     starts to matter at that level.

       8               CHAIRMAN GILMORE:  Mr. Eisenach, we're

       9     going to be able to take this up again some

      10     more tomorrow without any doubt, and we

      11     should proceed.  Furthermore, I notice that

      12     everybody in the room got on the edge of

      13     their seat when you started talking about the

      14     free computer, so I think you're going to

      15     have a lot of people that want to talk to you

      16     at the conclusion of this.

      17               Why don't we go ahead and close

      18     this session at this point and move on on the

      19     agenda.  Ladies and gentlemen, thank you very

      20     much for the presentation you've made today,

      21     and I think it's been very enlightening on

      22     this topic.  Thank you.









                                                             120
       1               CHAIRMAN GILMORE:  Are going to take a

       2     break?  We have on the schedule -- I think we

       3     would all like to take a break, but the

       4     schedule calls for us to conclude at 5:30.

       5     If you need to step out for one minute, we'll

       6     understand, but I think this -- I certainly

       7     have an appointment shortly after the 5:30

       8     deadline for adjournment today, and some

       9     others have told me they do as well have

      10     places that they need to be, so if we can

      11     proceed on on the administrative matters and

      12     see if we can't adjourn as close to the

      13     appointed time of 5:30 as we can.

      14               The first administrative item will

      15     be the approval of the minutes from the first

      16     Commission meeting.  In your books that have

      17     been sent out, that is Williamsburg tab 11.

      18     We have, again -- everyone is aware that we

      19     have just concluded some remarks on telecom.

      20     Tomorrow we have the main topic of internet

      21     technology, the third topic of international,

      22     which is still on tomorrow.  We have just a









                                                             121
       1     few administrative things that we need to do

       2     to make sure that we keep moving forward.

       3               Each of you has seen the approval

       4     of the minutes, I believe, or the minutes,

       5     that they have been presented.  First of all,

       6     is there a motion to approve those minutes?

       7               Mr. Andal moves to approve the

       8     minutes; is there a second?  Second by Delna

       9     Jones.  All in favor of approval of the

      10     minutes, please say "aye."  All oppose,

      11     "nay."  Thank you very much.  If there are

      12     any matters you wish to bring before the

      13     staff on the minutes, just let us know and

      14     we'll try to accommodate those as well.

      15                    Motion carried.

      16               There are a couple of other

      17     administrative matters, Operating Rules at

      18     tab 2.  Tom Griffith, I believe, is here in

      19     the room.  At the first Commission meeting we

      20     approved the operating rules with several

      21     changes and then agreed that if there were

      22     other revisions needed we would consider them









                                                             122
       1     at this meeting.

       2               You have had the operating rules

       3     for some time in order to review them, but

       4     there are a couple of technical amendments

       5     that Tom Griffith, the Commission counsel,

       6     would like to review with you.  Then if we

       7     are in agreement I would move that we pass

       8     the rules, but first of all, Tom Griffith,

       9     tell us your thoughts about technicalities.

      10               MR. GRIFFITH:  Thank you, Governor.

      11     There are two technical amendments that were

      12     suggested at the Williamsburg meeting.  The

      13     first has to do with the process by which the

      14     Commission closes its deliberations, and

      15     language was suggested based on our

      16     experience in Williamsburg to clarify that

      17     process, and that's before you.

      18               The second technical amendment that

      19     was suggested was to make clear that

      20     subcommittees have the power to conduct their

      21     business by telephone, and so there's

      22     language that gives the subcommittees that









                                                             123
       1     power as well.

       2               Finally, you've just been handed a

       3     sheet of paper that came back in response to

       4     those two prior suggestions that we made

       5     before, and that is to make clear again that

       6     when the Commission is going to go into a

       7     closed meeting, the motion to go into a

       8     closed meeting identifies the reason for

       9     that.

      10               So, those are the technical

      11     amendments that you have in front of you.

      12     There was a memo that was sent to you on

      13     August 17th that contained a suggestion that

      14     the Commission might want to create the power

      15     to conduct business through polling through

      16     telephone polling conducted by the chairman

      17     of noncontroversial matters.  As we put that

      18     suggestion out, it didn't seem to have much

      19     currency, and so I don't believe that is in

      20     front of me at the Commission at this time.

      21     So, the polling issue is not here, but the

      22     opening and closing meetings and the power of









                                                             124
       1     the subcommittee to conduct its business by

       2     telephone --

       3               MR. NORQUIST:  Can we ask those

       4     people who are attending take their

       5     conversations outside so we can hear the

       6     presenter, if people want to have side

       7     conversations?

       8               CHAIRMAN GILMORE:  Ladies and gentlemen,

       9     order in the room, please.  If you're

      10     conducting any conversations at the back of

      11     the room, we request that you depart so that

      12     we can just pay attention to the matters that

      13     we have before us.

      14               The rule changes that are before

      15     you -- I don't think they're intended to be

      16     substitute, but if anyone has a different

      17     opinion as to whether they are, please state

      18     your opinion as to your thoughts about the

      19     rule changes.

      20               Is there discussion on the rule

      21     changes?  I think they're fairly technical.

      22     No?  Is there a motion to adopt the









                                                             125
       1     amendments?  It's a motion to adopt the

       2     amendments; seconded.  All in favor of the

       3     motion to adopt the amendments, please say

       4     "aye."  Motion to adopt the operating

       5     rules -- is there a motion to adopt the

       6     operating rules of the Commission?

       7     Mr. Lebrun, seconded by Mr. Sidgmore.  All in

       8     favor of adoption of the operating rules,

       9     please say "aye."  All oppose, "nay."  The

      10     rules are adopted.

      11                    Motion carried

      12               The second matter on our list is

      13     the final approval of the charter in the

      14     document that we made -- the document, we

      15     made only changes for consistency.  Tom, do

      16     you have any need to review the charter?  I

      17     believe it's been widely discussed, but you

      18     may, if you wish, present anything you wish

      19     regarding the charter.

      20               MR. GRIFFITH:  I don't think so.

      21     The only changes to the charter were

      22     stylistic and editorial changes.









                                                             126
       1               CHAIRMAN GILMORE:  Andal moves to

       2     approve; Delna second.  Is there -- all in

       3     favor of the approval of the charter, please

       4     say "aye."  All oppose, "nay."

       5                    Motion carried.

       6               Next on the agenda is the -- the

       7     charter is adopted.  Next on our agenda is

       8     the approval of the Commission's budget,

       9     which is in tab 4.  First I want to take a

      10     moment to thank Mike Armstrong, Delna Jones,

      11     John Sidgmore, and Grover Norquist for

      12     serving on the funding subcommittee.

      13               This is dealing with perhaps our

      14     most difficult administrative issue.  We have

      15     an ambitious desire to meet in different

      16     parts of the country to bring together some

      17     of the most distinguished leaders in

      18     telecommunications and government and the

      19     nation.

      20               It has not been an easy task in

      21     light of the fact that the Congress did not

      22     initially authorize us any money.  But I









                                                             127
       1     believe that some progress has been made on

       2     this, and I would call upon Mike Armstrong to

       3     give us an update on where we are with

       4     respect to the Congress and the budget

       5     generally, and you may -- and we also may

       6     have Heather go in through any part of the

       7     budget necessary.  Mike.

       8               MR. ARMSTRONG:  Thank you,

       9     Mr. Chairman.  As you all may recall from our

      10     meeting in Williamsburg, the Funding

      11     Subcommittee was tasked with securing interim

      12     financing, approaching Congress for an

      13     appropriation sufficient to conduct the

      14     Commission's business, and preparing a budget

      15     for the Commission.

      16               A budget has been completed.  First

      17     interim financing has been secured in the sum

      18     of $450,000 in cash from the Commonwealth of

      19     Virginia, and the industry represented is on

      20     the Commission.

      21               Second, the Funding Subcommittee

      22     has submitted a letter to Congress requesting









                                                             128
       1     a federal appropriation, and I believe a copy

       2     of this letter has been provided to each one

       3     of us.  We anticipate that Congress will

       4     provide us funds.  A letter from Senator

       5     Locke acknowledging our funding request has

       6     been circulated.

       7               Third, the subcommittee has

       8     approved a budget.  The budget proposed to

       9     you by the Funding Subcommittee reflects

      10     a 13-month budget beginning in May of 1999

      11     and ending June of 2000.  You will note that

      12     the budget calls for nine employees.  To

      13     date, the Commission has employed four

      14     full-time employees.

      15               The Commonwealth of Virginia has

      16     detailed two additional part-time employees

      17     to assist with our meeting and event

      18     planning.  While I think it would be good,

      19     Mr. Chairman, if Heather would walk through

      20     some of the budget details, I would comment

      21     that Bob Novick has informed me that there

      22     are some exceptions that the Administration









                                                             129
       1     or government has with the approach that

       2     we're taking and would request a discussion

       3     with the subcommittee of those exceptions,

       4     and so I think it would be wise for our

       5     discussions here, unless we want to go all

       6     night on budget matters, to be limited to the

       7     Commission discussing with Heather details of

       8     that budget, and then respectfully the

       9     Commission would authorize the subcommittee

      10     to deal with the reimbursables and the

      11     reasonableness with the people in government

      12     who would like to further discuss and

      13     negotiate that.

      14               CHAIRMAN GILMORE:  Heather, would you

      15     like to go through some portions of the

      16     budget for us, please, in response to Mike's

      17     suggestion?

      18               MS. ROSENKER:  I'd be delighted

      19     to, Mr. Chairman and commissioners.  Would it

      20     be more beneficial for me to go through the

      21     questions that were raised after the budget

      22     had been presented to everyone from the









                                                             130
       1     subcommittee?

       2               These are questions that you all

       3     received answers to -- I believe it was on

       4     Friday -- and I'd be more than happy to go

       5     through those.  Or would you like me to go

       6     line by line through the budget?  I don't

       7     want to take loads and loads of time.  It's

       8     up to you all.

       9               MR. ANDAL:  Heather, can I ask you

      10     a question?

      11			MS. ROSENKER:  Yes.

      12               MR. ANDAL:  I saw the various

      13     e-mails from commissioners on various

      14     portions and the responses back.

      15               MS. ROSENKER:  Yes.

      16               MR. ANDAL:  Have all those

      17     suggestions been accommodated?

      18               MS. ROSENKER:  They certainly

      19     will be when we submit the next budget

      20     report.  Absolutely.

      21               MR. ANDAL:  Okay.  I don't -- I'm

      22     not sure what's to be gained by running









                                                             131
       1     through that whole argument again if it's

       2     already going to be fixed.

       3               MS. ROSENKER:  Are there any

       4     direct questions from anyone?

       5               CHAIRMAN GILMORE:  Okay.  Any other

       6     questions regarding this?  I want to take up

       7     one amendment, and then we'll turn to

       8     Mr. Novick.  I want to make a suggested

       9     amendment in the budget to reduce some of the

      10     projected costs that the Commission might be

      11     able to save some money with.  On page 3,

      12     item #74, the budget provides funding for a

      13     virtual office, and that is intended to

      14     better facilitate communication between

      15     commissioners and staff as we move toward

      16     this final work product.

      17               The Commonwealth of Virginia has

      18     used similar software programs internally on

      19     a variety of these occasions, and the

      20     software program is called Cold Fusion.  Cold

      21     Fusion allows for the user to create, review,

      22     and edit documents as well as to provide









                                                             132
       1     commentary on specific documents, and will

       2     allow the Commission to post comments and

       3     documents on an interactive basis, which I

       4     think may be extremely valuable to us as we

       5     work through the process that we have

       6     discussed in the work plan of moving ahead

       7     toward our final reporting.

       8               So, rather than contracting for

       9     these services from a private vendor, I

      10     propose that the Commission accept an in-kind

      11     contribution of the Commonwealth for this

      12     Cold Fusion software.  That amendment will

      13     save the Commission about $105,000.

      14               Dick Parsons moves that we accept

      15     this Commonwealth gift.  Delna agrees also.

      16     Is there any objection to the Commonwealth

      17     giving in-kind donation to this Commission --

      18     additional gift to the Commission?  There is

      19     a motion adopt the amendment.  All in favor,

      20     please say "aye."  All oppose, say "no."

      21     Thank you very much.

      22                    Motion carried.









                                                             133
       1               MAYOR KIRK:  This is not a

       2     correction.  A number of us don't have that

       3     document and sort of flipping furiously,

       4     but --

       5               CHAIRMAN GILMORE:  The budget?

       6               MAYOR KIRK:  A number of us don't

       7     have that document so we don't have the

       8     faintest idea of what we're talking about.

       9               CHAIRMAN GILMORE:  You mean the budget

      10     document?

      11               MAYOR KIRK:  Yeah.

      12               CHAIRMAN GILMORE:  Oh, it's item 74 in

      13     the budget.  The budget should be behind your

      14     tab.

      15               MAYOR KIRK:  Our tab 4 is empty.

      16               CHAIRMAN GILMORE:  Your tab 4 is empty.

      17     It shouldn't be empty.

      18               MS. ROSENKER:  How convenient --

      19     no.

      20               MAYOR KIRK:  There you go, we agree

      21     on something else.

      22               MS. ROSENKER:  No.  Mayor Kirk,









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       1     the budget was provided on Friday because I

       2     needed to finish the questions, and we're

       3     going to go get you copies right now.  So, if

       4     you can just bear with me for about a moment,

       5     we'll get that to you.  The budget had been

       6     previously sent out in the middle of August.

       7     We re-sent it out to everyone with the

       8     questions, so you've had it since the middle

       9     of August.

      10               MR. PARSONS:  While we're waiting,

      11     can I ask a question to Mike?

      12               CHAIRMAN GILMORE:  Go ahead, Dick.

      13               MR. PARSONS:  Do we get any timing

      14     in terms of the Feds antiing up?  I mean, you

      15     know -- these are great guys.  They send us

      16     off on a mission and give us no money.

      17               MALE SPEAKER:  You got an

      18     "atta-boy."

      19               MR. PARSONS:  Yeah, a $50,000

      20     "atta-boy."  No, seriously, is there any

      21     timing?

      22               MR. ARMSTRONG:  Yeah, we gave --









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       1     I'm sorry, Dick, I don't understand the

       2     seriousness of what you're -- you and I and

       3     the rest of the industry members gave $50,000

       4     a piece; the Commonwealth of Virginia gave

       5     the rest.

       6               MR. PARSONS:  No, is there any

       7     timing on the part of the federal government

       8     in terms of antiing up --

       9               MR. ARMSTRONG:  Oh, the

      10     Appropriations Bill?

      11               MR. PARSONS:  Correct.

      12               MR. ARMSTRONG:  Well, I guess we're

      13     all hopeful that the Appropriations Bill will

      14     carry this through.  You tell me on timing of

      15     the Congress.  I would assume that before the

      16     end of the year we're going to get this thing

      17     in or out of the budget, or this subcommittee

      18     is going to be very active in raising

      19     alternative funds.

      20               So, I don't have any insight, and

      21     I'll look around the table to any other

      22     subcommittee members who have any insight









                                                             136
       1     that it's going to get tagged at any specific

       2     date that it's going to go through the

       3     Congress.  I would hope that in this session

       4     of Congress this year we would get a rider

       5     and Appropriations Bill that would fund us.

       6               CHAIRMAN GILMORE:  Just to sum up again,

       7     the Commission started with zero money.  We

       8     proposed initially some substantial funds to

       9     come in through private and in-kind sources.

      10     The Commonwealth, of course, put some seed

      11     money in because of the commitment that we

      12     have to the industry and to the issue in the

      13     Commonwealth -- their business people.

      14               Then there was a subcommittee that

      15     met that suggested that we should make a

      16     minimal contribution from each of the private

      17     donors just to keep going until the Congress

      18     was contacted.  The Congress has been

      19     contacted.

      20               They have indicated that there will

      21     be an appropriation forthcoming, and we think

      22     that's correct; it's just a matter of









                                                             137
       1     propriety.  But, let's be clear.  If the

       2     Congress does not put the money in, we either

       3     begin to meet on the street someplace, which

       4     is alright with me if that's what we want to

       5     do, or we seek some alternatives, and I will

       6     be in touch with good Mike Armstrong and the

       7     members of his commission like a flash if

       8     that should come to pass and we'll make some

       9     decisions.  But that's where we are up to

      10     this point.

      11               Does everyone have a copy of the

      12     budget at this point?  Okay?  Let's see,

      13     Mr. Novick.

      14               MR. NOVICK:  Thank you.  We greatly

      15     appreciate the hard work the Funding

      16     Subcommittee and Commission staff put into

      17     presenting the budget that we're reviewing

      18     today.  As the Administration articulated in

      19     Williamsburg, our overriding objective is to

      20     ensure that this Commission operates in a

      21     transparent fashion and avoids any public

      22     scrutiny of its activities, or withstand any









                                                             138
       1     public scrutiny in the United States.  The

       2     substantive task of the Commission is hard

       3     enough.

       4               By requesting the $2 million

       5     appropriation from Congress, we assume that

       6     all of the line items in the budget that

       7     refer to in-kind contributions, as well as

       8     advances made to fund the Commission so far,

       9     would be reimbursed in light of the fact that

      10     the budget is a $2 million budget.  In that

      11     sense, all of our activities are going to be

      12     funded from taxpayer money.

      13               In that light, we need to review

      14     the budget maybe differently than we did

      15     before.  For example, we worked on the

      16     assumption that office space, that legal

      17     services, that other necessities for

      18     operation of the Commission were going to be

      19     provided on an in-kind basis.  The budget

      20     implies that those are going to be reimbursed

      21     should Congress appropriate the funds.

      22               If that's the case, we ought to









                                                             139
       1     look at alternatives to minimize the cost to

       2     the taxpayer.  The federal government, as is

       3     explicitly contemplated in the statute, is

       4     able to make office space available, is able

       5     to make research assistance available.  It

       6     can make legal services available.

       7               I think we ought to look at ways to

       8     minimize the expenditure to the taxpayers.

       9     In fact, this is going to be fully paid for

      10     by taxpayer money.

      11               We have one specific line item

      12     that's of concern, and that is the salary for

      13     the position of the executive director.  Let

      14     me be clear -- this has nothing to do with

      15     the person who's in the position, nor with

      16     the performance to date, which has been quite

      17     competent, and I think this meeting already

      18     demonstrates that.  However, the salary level

      19     is comparable to that paid to the Secretary

      20     of State, the Secretary of Treasury, the

      21     Secretary of Commerce.

      22               It is higher than that made by









                                                             140
       1     members of Congress, by the head of the CIA,

       2     by the head of the Navy, the Army, and out of

       3     line with the most recent Congressional

       4     Advisory Commission position for -- a

       5     comparable position for an executive

       6     director.

       7               As the Executive Branch

       8     representatives, we simply can't support that

       9     level of salary.  Our goal is not to delay

      10     the activities of the Commission.  We want to

      11     move forward as we have with the funding

      12     request from Congress, but what we are

      13     recommending in the interim is that Funding

      14     Subcommittee review the line items in the

      15     budget with a view to see whether we can

      16     reduce the expenditures such that we minimize

      17     the burden on the taxpayer for completing the

      18     Commission's important work.

      19               I concur with Mike Armstrong's

      20     suggestion that we get together with the

      21     Funding Subcommittee and review the budget

      22     with that goal in mind.









                                                             141
       1               CHAIRMAN GILMORE:  Mr. Parsons.

       2               MR. PARSONS:  I'm just curious.  Is

       3     the Administration's position, or --

       4               MR. NOVICK:  It is indeed.

       5               CHAIRMAN GILMORE:  Mr. Sokul, I think

       6     there's -- Mr. Andal, you've got a motion to

       7     approve the budget?

       8               MR. SOKUL:  I have a motion to

       9     approve the budget as recommended.

      10               CHAIRMAN GILMORE:  Well, I'll go to

      11     Mr. Sokul on discussion.  Anyone else for

      12     discussion, too?  Is there a second on

      13     approval of the budget?  Mr. Parson's seconds

      14     the approval of the budget.  We're open for

      15     discussion now on Mr. Novick's matter or any

      16     other matter.  Mr. Sokul.

      17               MR. SOKUL:  Is Heather a federal

      18     employee?

      19               CHAIRMAN GILMORE:  No.  I don't -- I

      20     hope not.

      21               MR. GRIFFITH:  That's a legal issue

      22     (inaudible).  As you know, she's an employee









                                                             142
       1     of the George Mason Foundation for Services

       2     (inaudible) donated in-kind.  She's not a

       3     federal employee, nor any of the staff.

       4               MR. SOKUL:  The reason I ask is the

       5     Administration, which apparently is going to

       6     oppose the budget unless the salary issue is

       7     addressed or changed or lowered -- the major

       8     premise of its argument is comparing

       9     Heather's position to federal employees and

      10     what they're being paid.  But she's not a

      11     federal employee.

      12               Indeed, you know, Governor Gilmore,

      13     you'll remember this, when the Commission was

      14     first formed I suggested to you that one of

      15     the options for funding is to follow the

      16     example of the Entitlement Commission that

      17     was created and chaired by Senator Dansforth

      18     and Senator Kerry.  In that case, the Clinton

      19     Administration -- the President, through an

      20     Executive Order, traded the Commission on an

      21     issue he though was important and found the

      22     money.  He funded a -- I believe its budget









                                                             143
       1     was in the range of $1.5 million, and so my

       2     point to you was, in another instance, on

       3     another important Commission, the Clinton

       4     Administration found the money to fund the

       5     Commission out of thin air, if you will, and

       6     your response to me after looking into it was

       7     the Administration came back to you and said,

       8     "We can't do that because this is not an

       9     Executive Branch commission."  So, in

      10     essence, at least from my perspective, for

      11     them to come back and make this argument

      12     today based upon her -- comparing her to a

      13     federal executive employee is a little bit --

      14     rings a little bit hollow to my ears.

      15               CHAIRMAN GILMORE:  Mr. Lebrun.

      16               MR. SOKUL:  One final point.

      17               CHAIRMAN GILMORE:  Yes, sir.

      18               MR. SOKUL:  We have a request

      19     before Congress to approve our budget, to

      20     fund us.  It seems to me if they grant our

      21     request, they've answered all these questions

      22     as well.









                                                             144
       1               CHAIRMAN GILMORE:  Mr. Lebrun.

       2               MR. LEBRUN:  Mr. Chairman, I look

       3     around this table and there's 19 of us, three

       4     of which are employees or directly government

       5     employees related.  The rest of us are

       6     private individuals.  I happen to be a

       7     practicing lawyer in western South Dakota.  I

       8     suspect that my hourly fee is lower than

       9     anybody else's at this table.  I would

      10     suggest that the taxpayer is getting a good

      11     deal.

      12               Congress has seen fit to ask this

      13     Commission to do its work, and you have

      14     around this table people who are very

      15     qualified donating their time.  They're not

      16     getting paid for their work.  I would, again,

      17     suggest that this budget is very reasonable

      18     when you look at the type of talent that is

      19     volunteering their time and efforts and

      20     resources to bring this issue before the

      21     public and to make recommendations back to

      22     the Congress.  I think it's a good deal for









                                                             145
       1     the taxpayer and I suggest we support the

       2     budget.

       3               CHAIRMAN GILMORE:  Delna.

       4               MS. JONES:  I don't know if you

       5     have a second.  Do you have a second?

       6               CHAIRMAN GILMORE:  I have a second,

       7     thank you.

       8               MS. JONES:  I think there are some

       9     issues here that as a member of the committee

      10     that dealt with this budget I'd like to

      11     raise.

      12               The first one is that we ask this

      13     executive director to come on board with no

      14     budget, no staff, and no determination as to

      15     the length of her employment, to leave

      16     another job to be able to take on this maybe-

      17     it'll-be-there-maybe-it-won't kind of job,

      18     and I think if we are to adjust this budget,

      19     I would suggest that the time that it would

      20     be appropriate we would adjust the number of

      21     staff people that we might have, and with

      22     that we're looking at in-kind staff from









                                                             146
       1     other organizations, which I know she has

       2     already approached in relationship to our

       3     further work to reduce the staff.

       4               Also, if you ask an executive

       5     director to take a position like this with so

       6     many unknowns, and then you ask her to take a

       7     lesser salary than would be commiserate with

       8     her responsibilities, I think that is a slap

       9     in the face.  I wouldn't even expect her to

      10     take anything less than this.  I can't

      11     imagine approving the budget any less.

      12               CHAIRMAN GILMORE:  Mike, did you -- your

      13     hand?

      14               GOVERNOR LEAVITT:  I have a question on

      15     a matter different than the salary, if we

      16     want to complete this discussion.

      17               CHAIRMAN GILMORE:  Okay.  Mr. Parsons.

      18               MR. PARSONS:  Just a question,

      19     Mr. Novick.  You indicated that this was the

      20     Administration's position.  I heard someone,

      21     but not you say, that the Administration

      22     would oppose any bill that contained the









                                                             147
       1     budget that was based on this premise.  Is

       2     that accurate?

       3               MR. NOVICK:  Let me first respond

       4     to Mr. Sokul's remarks, if I may, and that is

       5     what we looked at was the last advisory

       6     commission established by Congress, the

       7     National Gambling Impact Study Commission, in

       8     which Congress indicated the level of salary

       9     appropriate for an executive director to an

      10     advisory commission to advise Congress.

      11               So, we're not talking about whether

      12     someone's a federal employee or not.  The

      13     reference to the Secretary of State,

      14     Secretary of Treasury is just by way of

      15     indication what we as Executive Branch

      16     officials look at when we look at a budget

      17     like this.

      18               MALE SPEAKER:  So, you sent that --

      19               MR. PARSONS:  What in fact the

      20     Administration opposed -- let's assume that

      21     the budget passed as submitted.  Would that

      22     cause the Administration to either register









                                                             148
       1     with the Congress or at the time any

       2     legislation came before them a negative view?

       3               MR. NOVICK:  We would vote against

       4     this budget as submitted.

       5               MR. PARSONS:  No, no, that's as far

       6     as -- this budget is submitted is when we

       7     would have to vote against.  We're happy to

       8     work with the subcommittee to see if we can

       9     find ways, as Ms. Jones suggested, to

      10     minimize the burden on the taxpayer

      11     associated with the work of this Commission.

      12               MR. NORQUIST:  Mr. Parson's

      13     question is whether you'd talk to the

      14     President about whether he would veto the

      15     bill.

      16               MR. NOVICK:  No.

      17               CHAIRMAN GILMORE:  Okay.  I'm going to

      18     say this.  We'd been through a lot of this

      19     debate in Williamsburg.  We took up a great

      20     deal of the issue.  It certainly diverted our

      21     attentions from the underlying tax issues

      22     that we were trying to deal with, which we so









                                                             149
       1     far dealt with I think very well today.  So,

       2     what I think we ought to -- point has been

       3     well taken, and the Commission I think has

       4     certainly had some debate on this matter and

       5     we will take the votes as called for.  Mike?

       6     Mike Leavitt?

       7               GOVERNOR LEAVITT:  With respect to the

       8     appropriation from the Congress, recognizing

       9     some uncertainty in its finality, did the

      10     Budget Committee give any thought as to where

      11     the trigger points are?  I mean, at some

      12     point did we start committing ourselves on

      13     this one point, on the $2 million level, or

      14     is there a point at which you would like to

      15     have some trigger points if they don't show

      16     up?  You know, are we confident we can do

      17     this, or should we have some trigger points

      18     where we operate on one budget for a while

      19     and then if in fact it doesn't look like this

      20     is going to happen we'd have a different

      21     arrangement?

      22               CHAIRMAN GILMORE:  Either Mike or









                                                             150
       1     Heather would feel comfortable responding to

       2     that?

       3               MR. ARMSTRONG:  Honesty being the

       4     best policy, I didn't know the Administration

       5     had objections until about two minutes before

       6     the Governor convened our Commission, but

       7     having spent too much of my life in

       8     Washington and understanding that everything,

       9     Mike, is a negotiation.  In the few minutes

      10     we had to discuss the differences, I believe

      11     that there are means in which the differences

      12     can be reconciled so that Senator Locke can

      13     submit something that the Administration will

      14     not raise hell about, and we can get the

      15     right level to fund this place and that

      16     differences of in-kind reimbursement and

      17     executive director-levels salaries -- you

      18     ought to give us a chance on the subcommittee

      19     to work out with Bob to see if we can make

      20     any progress.

      21               I cancelled my 5:45 meeting after

      22     this meeting in hopes that Bob had some time









                                                             151
       1     before our 7 o'clock dinner so that we could

       2     start immediately if it was in the interest

       3     of the Commission for us to begin that

       4     discussion.

       5               CHAIRMAN GILMORE:  Heather, did you wish

       6     to comment on this?  In short --

       7               MS. ROSENKER:  No, I think

       8     Mr. Armstrong did a fabulous job.

       9               CHAIRMAN GILMORE:  Mike, I certainly we

      10     intend to spend $2 million until we know we

      11     have it.  That would be perhaps the answer

      12     directly to your question, and as of this

      13     point the contributions to the Commonwealth

      14     and the private interim financing that was

      15     resolved we think keeps us going until the

      16     Congress is reasonable to act, and if they

      17     don't, then you're right, we should not move

      18     into a higher budget until we know we've got

      19     it.

      20               Okay.  There is a move to call the

      21     question on the budget.  All in favor of --

      22               MR. ARMSTRONG:  I'm sorry,









                                                             152
       1     Mr. Chairman, I think that in response to

       2     both the concern expressed by Bob and the

       3     comment that was made by Mike and the reality

       4     that we would be better served by a

       5     supportable budget, that, if I may, I would

       6     offer that we support this budget but

       7     authorize the subcommittee to negotiate with

       8     the Administration and potentially the

       9     Congress for an acceptable level of funding.

      10               CHAIRMAN GILMORE:  Well, we have a

      11     motion on the table.  I believe that the

      12     substitute motion is that the subcommittee

      13     continue to discuss some of the interim

      14     financing matters -- is that right -- to

      15     negotiate that.

      16               MR. ARMSTRONG:  I'm sorry.  I think

      17     that this Commission --

      18               CHAIRMAN GILMORE:  Should support the

      19     budget.

      20               MR. ARMSTRONG:  Should support the

      21     budget pending the negotiation with both

      22     Senator Locke's staff, who we've talked to,









                                                             153
       1     and with the Administration, and if you'll

       2     authorize the subcommittee to do that, we'll

       3     go do that, and if that means that the

       4     spending level is going to be X versus Y, the

       5     subcommittee will come back and report that

       6     to the full commission.

       7               GOVERNOR LEAVITT:  Mr. Chairman, can I

       8     just clarify -- I'm not raising issues

       9     related to the budget.  I have confidence

      10     that the subcommittee has done its work.  I

      11     would only suggest that empower the

      12     subcommittee adequately, that they manage

      13     this budget on an ongoing basis.

      14               We ought not to be deploying

      15     contracts based on a $2 million budget until

      16     we figure that we've got one.  I'm not going

      17     to be the one out raising it if we don't.  I

      18     suspect those on the Budget Committee will

      19     and therefore will have a higher level of

      20     sensitivity than I will, but I've been -- I

      21     don't pretend to have the influence with the

      22     Congress that you have, but I've been there









                                                             154
       1     plenty of times when I expected to get an

       2     appropriation and didn't, that we should at

       3     least have some trigger points in which we

       4     are prepared to bail out if we have to.

       5               CHAIRMAN GILMORE:  I think it's very

       6     clear we're not going to spend money that we

       7     don't have.  Now, we have an amendment on the

       8     acceptance of the Cold Fusion gift from the

       9     Commonwealth, and we have a motion and a

      10     second to approve the budget.  All in favor

      11     of the budget, please say "aye."  All

      12     opposed, please say "no."  We have three, I

      13     believe, "no," and those are the members of

      14     the Administration.  Otherwise, the budget

      15     passes.

      16                    Motion carried.

      17               MAYOR KIRK:  Just for

      18     clarification, governor, did that include

      19     Mr. Armstrong's recommendation that we

      20     empower the Committee to continue to work

      21     with the Majority Leader's staff and

      22     Administration to come up with something









                                                             155
       1     that's successful and bring that --

       2               CHAIRMAN GILMORE:  We have a budget

       3     adopted, but I believe that it is always

       4     contemplated that the subcommittee would

       5     discuss this would Senator Locke and the

       6     Congress and any other affected parties.

       7               MR. ARMSTRONG:  Yeah, I don't know

       8     if it takes a motion or not, Mr. Chairman,

       9     but if we're going to get support from

      10     Washington to fund this budget, then I think

      11     that this subcommittee stands authorized -- I

      12     don't know that I need a new motion -- to

      13     negotiate with objections to the budget we

      14     just passed.  If you don't give me that

      15     authorization, then I think we can hang out

      16     and figure out how to spend to the level

      17     of $450,000.

      18               CHAIRMAN GILMORE:  That's about where we

      19     are.

      20               MR. ANDAL:  Mr. Chairman?

      21               CHAIRMAN GILMORE:  Go ahead, Dean.

      22               MR. ANDAL:  If I could offer this,









                                                             156
       1     I don't see any reason why I shouldn't second

       2     Mr. Armstrong's motion, which is to work with

       3     Congress to negotiate an appropriate

       4     appropriation, and basically what he did was

       5     spell out the obvious.  In order for us to

       6     get appropriation, according to my Civics

       7     class -- and I, too, went to public school --

       8     you have to have both the Congress and the

       9     President's signature on such an

      10     appropriation, so it's going to be that way

      11     whether we like it or not, and if you need a

      12     specific authorization to deal with the

      13     Administration, that's fine with me.  I don't

      14     see any point to argue over it.

      15               CHAIRMAN GILMORE:  I think it's

      16     contemplated that Mr. Armstrong has the

      17     authority to go forward.

      18               MR. ANDAL:  So I'll second

      19     Mr. Armstrong's motion to do that?

      20               CHAIRMAN GILMORE:  Is there a need for a

      21     motion on this?  I don't believe that there

      22     is.  You may proceed, Mike.









                                                             157
       1               Finally, we need to

       2     approve the work plan.  I want to thank all

       3     of the commissioners who served on the Work

       4     Plan subcommittee, and particularly Dave

       5     Pottruck for chairing that subcommittee.  His

       6     leadership was really terrific on this.

       7               He's moved forward I think

       8     dramatically and got us here, I think,

       9     focused on the right issues, and we're going

      10     to have, I think, a great day tomorrow

      11     dealing with these issues.  The Commission

      12     has had the opportunity to review the work

      13     plan, and most of us have heard David Pottruck

      14     provide a rundown on it, the major provision

      15     during our teleconferences that we had last

      16     week, during which there were no objections

      17     to the work plan and under which we are

      18     operating today.

      19               I'm looking forward to working with

      20     every commissioner in implementing this work

      21     plan -- every one.  They've approached it --

      22     I've taken as Chairman as to have an open and









                                                             158
       1     total access to the workings of the

       2     Commission and any of its portions, and I

       3     think that we have achieved that so far, and

       4     as a result that's why we're all so warm and

       5     fuzzy on this Commission.

       6               I have heard some interest in a

       7     drafting committee in order to begin to move

       8     ahead as was suggested toward our final

       9     report, and I think that's right.

      10               Rather than simply asking a staff

      11     to begin to put it together and then

      12     circulating it totally, we have worked

      13     successfully so far with our subcommittee,

      14     with Mike Armstrong, our subcommittee with

      15     David Pottruck, and I think that we ought to

      16     have Commission people and their staffs

      17     putting pencil to paper in order to proceed

      18     with the drafting.  So, I want to appoint a

      19     subcommittee to move ahead on the drafting

      20     issues.

      21               The rules are clear that there is a

      22     certain division that needs to be done in









                                                             159
       1     terms of government members, business

       2     members, and federal members.  I would

       3     propose that we -- and I've had some of the

       4     business people talk to me about being a part

       5     of this -- I would propose a five-person

       6     committee, but I don't think that we should

       7     do anything except have all 19 people fully

       8     engaged with our staffs and interacting with

       9     the members of the subcommittee, but we want

      10     to get something down on paper and move in

      11     that direction and have somebody working with

      12     the staff to do that.

      13               I'm going to propose that we have a

      14     committee of five, starting with Mr. Parsons.

      15     Mr. Pottruck, who has vigorously requested to

      16     be on this and should be, considering his

      17     success; Governor Locke, Mr. Andal, and

      18     Mr. Pinkus I would suggest.

      19               That keeps our balance that is

      20     required under the rules and gets us started.

      21     With that in mind, and in Mr. Pottruck's

      22     absence and Governor Locke's absence, I make









                                                             160
       1     a motion that we adopt the work plan that has

       2     been previously put forward that we're moving

       3     ahead on with a knowledge that that is

       4     exactly the way that we're going to go to

       5     begin to develop our draft.  I would move

       6     that we adopt our work plan.

       7               Mr. Parsons has

       8     seconded that.  Is there discussion on the

       9     work plan?  We have had, of course, two

      10     subcommittee meetings on this, which everyone

      11     was entitled to attend, and also a full

      12     Commission member meeting on the work plan as

      13     well, and I think that we come to it with

      14     very little controversy but there's always

      15     room for discussion.  Is there any discussion

      16     on adoption of the work plan?

      17               MR. NORQUIST:  Governor.

      18               CHAIRMAN GILMORE:  Mr. Norquist first.

      19               MR. NORQUIST:  Yes, I just want to

      20     commend David Pottruck for the work he did.  I

      21     was on each of the conference calls, and

      22     conference calls are often sort of tough to









                                                             161
       1     work on and he got us the stuff and the staff

       2     got us material ahead of time and they were

       3     well prepared, and I thought everybody got a

       4     chance to chat on them and I certainly felt I

       5     did, so I just wanted to commend Mr. Pottruck

       6     for organizing us.  It's not easy to do, to

       7     get everybody on the phone at the same time.

       8               CHAIRMAN GILMORE:  Okay.  Thank you.

       9     Mike Leavitt.

      10               GOVERNOR LEAVITT:  Mr. Chairman, my

      11     comment is not on the work plan but on your

      12     suggestion of the writing committee.  There

      13     are three parts of the work plan, each of

      14     which has different elements, and my guess is

      15     that there will be people with different

      16     levels of interest on the Commission.  I'm

      17     wondering if you would consider appointing

      18     committees to write the report on each of the

      19     three areas as opposed to just one to do all.

      20     That would allow for the involvement of more

      21     commissioners, and it would allow for some

      22     involvement in the areas of expertise and









                                                             162
       1     interest.

       2               CHAIRMAN GILMORE:  Certainly I have

       3     thought about that as well because I've heard

       4     it mentioned as an alternative.  Certainly my

       5     sense as the chairman is that we ought to

       6     have a balanced report in which everyone has

       7     an opportunity to fully participate with all

       8     the issues.

       9               We don't want to look like, I

      10     think, three different reports stapled

      11     together with different kinds of levels of

      12     interest and expertise, and I am concerned

      13     that if we begin to engage 15 or so members,

      14     we may never get to a draft, but I do intend

      15     to see that everyone is working together with

      16     the staff.  I believe, after thinking about

      17     it, that the best answer is one subcommittee,

      18     but naturally the Commission will make that

      19     decision.  Are there are suggestions or

      20     discussion?  Delna?

      21               MS. JONES:  Yes.  I'm wondering if

      22     we would be wise to have a co-chair which









                                                             163
       1     would give both the private sector and the

       2     public sector an opportunity to be sure that

       3     that chairmanship is shared?

       4               CHAIRMAN GILMORE:  Talking about a

       5     chairman and a vice chairman?  I would agree

       6     with that.

       7               MS. JONES:  I would also -- as I

       8     look at the list I don't believe that local

       9     government is adequately represented.

      10               CHAIRMAN GILMORE:  It's hard to get

      11     everybody represented on this.  This is why

      12     we have to have to everybody involved with

      13     it.  But still we could -- well, I don't know

      14     how we'd do it, frankly.  Delna, I would

      15     certainly hope that everybody will have an

      16     opportunity to participate in the Committee.

      17               MR. NOVICK:  May I raise a

      18     question?  Was Governor Leavitt's comment a

      19     motion or simply an observation?

      20               GOVERNOR LEAVITT:  Well, it was a

      21     suggestion that I'd welcome others to weigh

      22     in on.









                                                             164
       1               MR. NOVICK:  I think I can speak

       2     for the Administration.  We fully concur with

       3     that suggestion.  If it's not a motion, I

       4     would move that we set up three subcommittees

       5     to deal with each of the three areas,

       6     assuming the work plan is approved as

       7     presented.

       8               MR. SOKUL:  Mr. Governor?

       9               CHAIRMAN GILMORE:  Mr. Sokul.  Is it

      10     Mr. Sokul?

      11               MR. SOKUL:  I want to make clear --

      12     I was going to say this before Mr. Novick

      13     spoke -- I'm not just saying (inaudible).  I

      14     have taken up Governor Leavitt's suggestion

      15     to weigh in.  I'm not sure what I think about

      16     subcommittees.

      17               But my thought is that particularly

      18     as it relates to international issues, it

      19     would be a mistake to have an international

      20     subcommittee and a, you know, a domestic

      21     subcommittee because electronic commerce is

      22     instantly global, and how lower levels of









                                                             165
       1     government are regulating the internet has

       2     international implications, and that's an

       3     unavoidable fact and I would hope that our

       4     recommendation to Congress could be an

       5     integrated policy, scalable internationally,

       6     if you will, and I don't know if that could

       7     occur given our time constraints if we went

       8     off in two different directions and then

       9     later tried to merge them.

      10               I mean, one example is -- this is

      11     outside the tax arena, but it makes the point

      12     that there's a county in Florida that tried

      13     to shut down the Princess Diana Web site in

      14     London, England, because it didn't register

      15     with the county.

      16               You know, this is my opinion, but

      17     the local parochial regulatory mind set has

      18     to sort of evolve, if you will, given the

      19     nature of electronic commerce and, you know,

      20     that's hopefully one of the most important

      21     things we can say in our report.  I don't

      22     know if having two subcommittees for that









                                                             166
       1     reason is the way to go.

       2               CHAIRMAN GILMORE:  Well, I think three

       3     what's been proposed.  We certainly need to

       4     try to accommodate all the interests that are

       5     on the Commission in terms of being on a

       6     drafting committee, but I want to make it

       7     clear that we hope all 19 will be circulated

       8     drafts and will be able to have input with

       9     the Committee as nothing more than a vehicle

      10     to move ahead on it.  I do notice that what

      11     we have done is business people,

      12     state-elected official -- well, Mr. Andal, I

      13     guess you're -- I don't know what you are,

      14     whether you're local, state -- state or

      15     local -- or -- Mr. Pinkus, of course, is

      16     federal.  We certainly need -- we could add a

      17     private and a local but putting Delna on and

      18     then also perhaps Mr. Norquist on to

      19     represent private people, and then I think

      20     we've got all the interests involved.

      21               Mr. Lebrun.

      22               MR. LEBRUN:  Mr. Chairman, I come









                                                             167
       1     with some experience having served as

       2     president of the Uniform Laws Conference for

       3     the last three years, and I've been on the

       4     Conference for some 20 years.  The risk, as

       5     you've indicated, when you get three

       6     committees rather than one is that they may

       7     go different directions.

       8               We've seen that on the UCC drafting

       9     committees in the Uniform Laws Conference.

      10     Let me suggest an alternative.  With your one

      11     basic drafting committee that you've

      12     identified, but give that drafting committee

      13     authority to appoint a task force which can

      14     include members of the Commission that are

      15     not on that particular committee, so that

      16     there may be a task force within this

      17     subcommittee that would report back to this

      18     subcommittee, and that task force could

      19     include other commissioners and even people

      20     outside the Commission if they felt they

      21     needed that type of resource.

      22               We have found in our experience









                                                             168
       1     that it helps to concentrate the efforts of

       2     the central committee and yet to get the

       3     resource and the expertise of people who may

       4     not serve on it.  I would just make that as a

       5     suggestion.

       6               CHAIRMAN GILMORE:  That's another

       7     motion, is that correct?  Or decided to be a

       8     motion.  Let's do it this way.  Let me get it

       9     in proper order here.  We have two potentials

      10     motions.  One is to go to three entirely

      11     different subcommittees to begin to draft on

      12     three entirely different areas; my proposal,

      13     which is one committee, including perhaps two

      14     additional members -- Delna Jones for local

      15     and Grover Norquist for private; and a third

      16     suggestion that's on the table, which is to

      17     have the one drafting committee but to

      18     empower it to do a task force on any specific

      19     areas that it may wish to do.

      20               My motion, I think, has been made

      21     and it is seconded.  Let's go -- Mr. Novick,

      22     you have made a motion.  Is there a second to









                                                             169
       1     Mr. Novick's three- committee structure?

       2               GOVERNOR LEAVITT:  Mr. Chairman, could I

       3     ask you a question?

       4               CHAIRMAN GILMORE:  Yes, sir.

       5               GOVERNOR LEAVITT:  We're talking about

       6     the Drafting Committee here.

       7               CHAIRMAN GILMORE:  We sure are.  It's

       8     just the Drafting Committee.

       9               GOVERNOR LEAVITT:  Do you intend in the

      10     work plan to have subcommittees who will be

      11     working on various areas in addition to

      12     drafting, or do you intend that this group

      13     will operate in the whole all of the time?

      14               CHAIRMAN GILMORE:  I'm sorry -- as a --

      15     do you mean in cutting across the different

      16     lines?  I mean, I think the discussion has

      17     been, as Mr. Lebrun has said, that if they go

      18     in different directions it creates some

      19     difficulty, so I had hoped that they could

      20     take up all the issues but, in fact, it's a

      21     very appealing idea to empower them to do

      22     some additional work by way of subgroups or









                                                             170
       1     task forces to deal in some of the areas.

       2               GOVERNOR LEAVITT:  What I'm trying to

       3     clarify in my mind is -- I agree this is just

       4     the drafting.  Will there be subcommittee

       5     work on the substance within this Commission,

       6     or do you intend that to be done essentially

       7     by the Drafting Committee?

       8               CHAIRMAN GILMORE:  Well, there are two

       9     separate questions.  One is drafting a final

      10     document, and then the other is the question

      11     of a subcommittee.  I don't believe the work

      12     plan calls for -- that's an entirely

      13     different area.  I don't think it calls

      14     for -- correct me if I'm wrong, Mr. Pottruck's

      15     not here -- but I don't believe the work plan

      16     calls for separate subcommittees to continue

      17     on with these three areas.

      18               In fact, it was intended that we

      19     address those areas for the New York meeting,

      20     and frankly I think it may be necessary that

      21     these three areas do have additional hearings

      22     in the next meeting and we may need to have









                                                             171
       1     some additional people working on them

       2     separately.

       3               Mr. Novick.

       4               MR. NOVICK:  Embedded in my motion

       5     is the notion that we would have a

       6     subcommittee for each of the three areas that

       7     would look at each of those areas

       8     substantively and therefore logically be the

       9     drafting committee for that area.  That's

      10     maybe the leap that I took without explaining

      11     it, but it seems to me that the drafting task

      12     is going to be an enormous one.

      13               The substance of each of these

      14     issues is going to be challenging to get

      15     one's arms around, and it strikes me that if

      16     we form three separate subcommittees, that

      17     burden could be shared more equally, have

      18     full input from all the Commission members,

      19     and then at the end of the day those three

      20     subcommittees are going to have to come

      21     together to put one report together that the

      22     Commission votes on.  It strikes me as an









                                                             172
       1     efficient way of proceeding and an inclusive

       2     way of proceeding.

       3               MALE SPEAKER:  Do you have a

       4     second?

       5               GOVERNOR LEAVITT:  If the motion is to

       6     have three separate subcommittees working,

       7     including the drafting, I would second that.

       8               MR. NOVICK:  That is the motion.

       9               CHAIRMAN GILMORE:  Okay, now there is a

      10     motion for three separate drafting committees

      11     on each of the individual areas.  Now,

      12     Mr. Lebrun, you have made a motion that, in

      13     fact -- it's a substitute motion -- that in

      14     fact we have one but that it have the ability

      15     to work with task forces, as I think was

      16     contemplated by Governor Leavitt.  Is that

      17     your motion?

      18               MR. LEBRUN:  Mr. Chairman, I would

      19     withdraw my motion, pending the result of the

      20     vote on Bob's motion, and if that fails that

      21     I would renew my motion when it goes back to

      22     it, just one committee.  So I withdraw my









                                                             173
       1     motion at this time.

       2               CHAIRMAN GILMORE:  You would renew it in

       3     the event that it becomes necessary.  Is that

       4     correct?

       5               MR. LEBRUN:  That's correct.

       6               CHAIRMAN GILMORE:  Okay.  I certainly

       7     don't share the idea that three separate

       8     committees are an efficient way to proceed or

       9     I certainly think that one commission to go

      10     forward -- one committee to go forward on the

      11     drafting is a more effective way, but it must

      12     be case the drafts are circulated among

      13     all 19 and not any members of any subgroups

      14     or task forces or anything else.  There is

      15     further discussion on Mr. Novick's

      16     three-committee proposal.

      17               Governor Leavitt.

      18               GOVERNOR LEAVITT:  Mr. Chairman, I'd

      19     just like to clarify that my -- the support

      20     of the proposal really is that we have two

      21     meetings left and three very substantial

      22     subjects, and it would seem to me -- this









                                                             174
       1     is -- my concern is not so much the drafting

       2     as it is that we would have the opportunity

       3     to sufficiently hear the issues and have

       4     sufficient opportunity to process the

       5     subjects in the two meetings that are left,

       6     and I would argue that it is efficient for us

       7     to break this Commission down into small

       8     enough groups that we could take on all three

       9     of those issues in their entirety.

      10               MR. ARMSTRONG:  Mr. Chairman.

      11               CHAIRMAN GILMORE:  Who is --

      12               MR. ARMSTRONG:  Mike.  I think that

      13     both points of view have tremendous merit,

      14     that we're talking about international taxes,

      15     tariffs, and duties; we're talking about

      16     local taxes and federal taxation issues;

      17     we're talking about internet access and

      18     telecommunications issues.

      19               There's a common thread --doggone

      20     it, let's admit it -- of taxation.  If we

      21     have three separate bodies who are operating

      22     independent of each other, I guarantee you









                                                             175
       1     they will cook up and conclude on different

       2     assumptions and have conflicting views for

       3     this Commission in total, and yet I was so

       4     delighted not to be asked to be one of the

       5     five members on a drafting committee that had

       6     that awesome responsibility for those three

       7     separate areas, and so could I offer a

       8     compromise?

       9               MALE SPEAKER:  Uh-oh.

      10               MR. ARMSTRONG:  I think that five's

      11     too few, and I think that something like nine

      12     with a chairman is about right, and I think

      13     that we'll get more representation, and then

      14     the subdivision of responsibilities on these

      15     three issues with both the subcommittee

      16     members and any other members who would like

      17     to either volunteer their time or should be

      18     asked to respond, given their expertise and

      19     obligation to this Commission, might be an

      20     efficient way that we can operate with a

      21     common accountability, a common set of

      22     assumptions, and hopefully a common









                                                             176
       1     recommendation rather than three different

       2     sets of assumptions and three different sets

       3     of outputs.

       4               It would give us broader

       5     representation, and I think achieve what

       6     Governor Leavitt was getting at, which is

       7     absolutely right on the money, is that we

       8     really need to be debating the substance of

       9     these issues with enough people on this

      10     Commission so that the drafting job, which is

      11     one tough job on one of these commissions,

      12     can be done as thoughtfully and

      13     representative of all us as possible.

      14               CHAIRMAN GILMORE:  Mike Leavitt has

      15     suggested -- you know, I have proposed that

      16     we be at seven at this point.  I initially

      17     wanted a small group to draft so that we

      18     could stay organized, but upon the suggestion

      19     that not enough groups were not represented

      20     we've added two more -- we're now at seven.

      21     Mike Armstrong's suggestion is perhaps we go

      22     to nine.  That is a proposal.  I'd like to









                                                             177
       1     hear further talk about that among the

       2     Committee members.  Does everybody believe

       3     nine is not unwieldily?  That we can do that?

       4               MR. WAITT:  Yes.  Just a few

       5     comments, governor.  I mean, I think it's

       6     really important, first of all, that we have

       7     as much participation on some order of what

       8     Mike said, particularly on a volunteer basis,

       9     in the drafting of these documents.

      10               I mean, we have a lot of work to do

      11     with a short period of time to get it done,

      12     and whether it be the three-committee

      13     approach or expanded committee I think it's

      14     just extremely important that everybody that

      15     wants to be involved in the drafting process

      16     is involved in the drafting process, whether

      17     we divide the work up or get more people

      18     involved.  We just need to get it done.

      19               CHAIRMAN GILMORE:  Okay, what is before

      20     us is either three separate committees based

      21     upon discussion of the issues, or one

      22     expanded committee with more participation.









                                                             178
       1     If you believe that we have to have three

       2     separate committees, you will vote "yes" on

       3     Mr. Novick's proposal.

       4               All in favor of Mr. Novick's

       5     proposal to go to three separate committees

       6     will please respond to a roll call, because I

       7     think that the rules require that.  You will

       8     respond "yes" if you are for three separate

       9     committees; if you want one committee, you

      10     will vote "no."

      11               Those of you who have counted with

      12     me, I believe it is six "yes" and ten "no."

      13     We now have a motion to adopt the work plan

      14     with an expanded nine-person drafting

      15     committee to deal with all of the issues.

      16     All in favor of that will answer "yes."  All

      17     opposed to that will say "no."  By the way,

      18     the committee -- the chairman would enter his

      19     vote "no" in the previous one, so it's 11

      20     to 6.

      21               Now, on the other motion to adopt

      22     the work plan with the expanded nine-person









                                                             179
       1     committee, please answer "yes" to that if you

       2     are for it and "no" if you are against it.

       3               MR. SIDGMORE:  Mr. Chairman, is it

       4     if you're are against it does that mean there

       5     will be seven or five.  There were three

       6     different proposals.  I now need a database

       7     of the proposals.

       8               CHAIRMAN GILMORE:  But you know, this is

       9     the way a committee goes through its work.

      10     It's okay.  But I have agreed that -- I

      11     certainly have accepted it as a friendly

      12     amendment that we go to nine.  I think that

      13     structure works fine.  So, if you vote "yes,"

      14     you're adopting the work plan and we'll go to

      15     a nine-person committee.  If you vote "no," I

      16     don't know what we'll do -- we'll figure that

      17     out.

      18               Then that is a unanimous vote to

      19     proceed in that way, and the work plan is

      20     adopted, and this is democracy at work.

      21               Okay.  Let's see now.

      22               MAYOR KIRK:  Would it be too









                                                             180
       1     ambitious, governor, to find out who those

       2     other members -- with some hope that there

       3     would be an equal balance -- maintain the

       4     balance in teams of --

       5               MALE SPEAKER:  I think Mayor Kirk's

       6     volunteering.

       7               CHAIRMAN GILMORE:  Well, since we're

       8     expanding this on the fly, I think it would

       9     be better to talk that over with the members

      10     of the Commission.  I don't have a firm plan

      11     in mind.

      12               MAYOR KIRK:  Well, we didn't talk

      13     over those first five on the fly, so I

      14     would -- since we're volunteering -- since

      15     we're on the fly, then I would be (inaudible)

      16     to offer my services as one of those expanded

      17     members, since we're on the fly.

      18               MALE SPEAKER:  I would be happy to

      19     volunteer my services as well.

      20               MR. SOKUL:  As the only

      21     representative of small business e-merchants,

      22     which is statutory --









                                                             181
       1               CHAIRMAN GILMORE:  I'm glad everybody

       2     wants to draft this document.

       3               MR. SOKUL:  And as one who has the

       4     time.

       5               CHAIRMAN GILMORE:  Why don't we work

       6     this out and then announce it tomorrow -- I

       7     think it will be fine -- instead of to make

       8     the decision now and making people unhappy

       9     and -- let's just announce it tomorrow and I

      10     think it'll be fine and we can all make sure

      11     that we've got people included in some

      12     rational approach.

      13               Let's see, I think that concludes

      14     everything that's on the agenda for the

      15     administrative details.  Is there a motion to

      16     adjourn until tomorrow morning?

      17                    Motion was made and seconded.

      18                    (Whereupon, at 5:30 p.m., the

      19                    PROCEEDINGS were adjourned.)

      20                     *  *  *  *  *

      21

      22

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