IT'S NO SURPRISE that a raft of companies -- start-ups, telephone companies, cable companies and Internet access providers -- are scrambling to introduce an Internet-based version of phone service. It promises to be a cheap alternative to traditional circuit-based phone service, and it already has won converts -- from long-distance callers who are saving hundreds of dollars at home to huge corporations such as Boeing Co. The Congressional Budget Office predicts that up to one-third of telephone service will migrate to the Internet in the next five years. This is not, in other words, a frail new technology in need of government protection. But that isn't stopping some members of Congress from pushing to forbid states to tax Internet phone service. That would put government in the position of illogically favoring one technology over another. It also would threaten billions of dollars that states collect annually in taxes on telephone services.
Governors, mayors and other municipal leaders rightly worry that such legislation would usurp their traditional authority. Without the ability to continue taxing telephone service as it moves to the Internet, states stand to see a traditional tax base worth $10 billion to $20 billion jeopardized. This revenue, which can provide as much as 5 to 15 percent of revenue to some local government budgets, are used to pay for 911 call centers, to bring phone service to poor and rural residents, and to meet other public needs. Sen. Lamar Alexander (R-Tenn.), a former governor of his state, appropriately called the idea "the worst kind of unfunded federal mandate," one that sticks the states with the bill.
Sen. John E. Sununu (R-N.H.), wanted to ban states from taxing Internet phone service, but the Senate Commerce Committee wisely voted last month to strip that provision from a bill setting regulatory guidelines for Internet-based telephone service. The House should do the same when it considers its version of the legislation; there, Rep. Charles W. "Chip" Pickering Jr. (R-Miss.) is sponsoring a version of the same misguided idea. Congress eventually will have to craft guidelines on how to regulate voice-over-Internet protocol technology, but it shouldn't do so by, in essence, forcing state governments to subsidize an industry that is ready to compete on its own.