INSIDE WASHINGTON/Virtual revenue

City and county leaders are urging Congress to reject a House bill that would place a permanent moratorium on Internet access taxes in favor of Senate legislation that would only temporarily prevent local governments from taxing it. The Senate measure extends the current Internet access tax moratorium for four years, while the House bill forbids local governments from levying Internet access taxes, eliminating a potential stream of revenue needed to help pay for essential services, including police and fire protection, local officials argue.

“The House bill is unacceptable to state and local governments,” says Jackson, Miss., Mayor Harvey Johnson Jr., chair of the United States Conference of Mayors (USCM) economic policy committee. Johnson suggests that local governments could “lose billions in revenues,” if the House legislation is passed. The National League of Cities and USCM, both based in Washington, D.C., estimate that local governments would lose between $9 billion and $11 billion each year if the House bill were approved. Congress is expected to reach an agreement on the Internet legislation this year, and those involved in the negotiations between the two factions predict the Senate version will win the day. President Bush says he will sign the bill into law.

The Internet tax issue has been one of the top priorities for cities and counties for the past six years, even though only a handful of states currently tax the service. Congress approved a temporary Internet access tax moratorium in 1998, as proponents and opponents of the ban sought to find a compromise. The moratorium expired late last year, and Congress has been struggling ever since to resolve the conflict.

The Senate bill, which passed on April 29, allows both local governments and anti-tax lawmakers to claim victory. It imposes a four-year ban on Internet access taxes but offers several concessions to local governments, such as allowing the seven states that tax dial-up access to continue doing so during the moratorium; and giving the 17 states taxing high-speed connections two more years to tax the service. In addition, local governments could collect taxes on Internet-based telephone service. “We prevented enactment of a permanent ban on Internet taxes, which would have been bad news for cities and towns, and we preserved exemptions for taxes already in place,” says Clarksburg, W.Va., Council Member Jim Hunt.

Story County, Iowa, Supervisor Jane Halliburton says because technology is changing rapidly, elected officials need to assess taxing Internet access every few years, but a permanent moratorium would prevent that, she says. She endorses the Senate bill because, “It tends to leave in place those things that remain in place, but not expanding that further.”

Even if Congress approves the Senate bill, the battle is not over, warns Sen. Lamar Alexander, R-Tenn., a former governor who sides with local officials on the issue. A bill authored by Sen. John Sununu, R-N.H., would give sole jurisdiction of Internet-based telephone services to the federal government, preventing local governments from taxing them. “Local governments better wake up to this [legislation] as a great big problem,” Alexander says.

The author is Washington correspondent for American City & County.