Senate Panels Vote Against Taxing Local Calls, Internet Connections

Federal taxes on local telephone calls would disappear, and new state and local taxes on Internet connections and cell phones could not appear, under bills that advanced in the Senate Wednesday.

Ending the tax on local telephone calls would save consumers, individuals and businesses, more than $7 billion over the next decade.

"The savings will apply to anyone with a land line telephone," said Senate Finance Committee Charles Grassley, R-Iowa. His panel approved a bill that would eliminate the tax and would also create tax incentives for companies to expand broadband Internet access to rural areas.

Consumers can already expect a refund for three years of taxes paid on long-distance calls. The Treasury Department agreed to stop levying those telephone services at the end of July and to return as much as $13 billion to consumers.

The tax dates to 1898, when telephones were a luxury and lawmakers needed money to fight the Spanish-American War. Businesses have challenged the tax in court and won, arguing successfully that the tax doesn't apply to modern long-distance bills.

In two committees, senators voted to forever block state and local governments from taxing connections that link consumers to the Internet. A temporary ban on such taxes expires in 2007.

Sen. Ron Wyden, D-Ore., who won approval of the ban in the Senate Finance Committee, said he didn't want the Internet to fall victim to taxes like the telephone tax enacted for the Spanish-American War.

"That war ended two centuries ago, and Congress is just now getting around to getting rid of the tax," Wyden said.

The Senate Commerce Committee also included the prohibition in a bill designed to create more competition in cable television markets. Sen. George Allen, R-Va., said new taxes would impede the growth of high-speed Internet infrastructure.

Some lawmakers from states that had started taxing Internet access before the first ban, enacted in 1998, have fought to leave the decision about taxation to states.

Four senators said they would work to get the ban out of the communications bill because it could mean a several billion dollar loss to state and local governments.

Sen. John McCain, R-Ariz., won approval of a similar ban on new cell phone taxes for three years. McCain said consumers already pay about 17 percent of their cell phone bills to the government. The amendment would not affect current taxes.