 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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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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
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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.
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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,
134
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 --
135
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.
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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 --
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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.)
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On this page: transcript of September 14 |
