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Press Release

    E-Rate: Prepared Statement of Kent Lassman before the Committee on the Judiciary, U.S. House of Representatives

    11/03/1999

    "It is my … hope and aspiration that all of us … may eventually be gathered together in a heaven of everlasting rest and peace and bliss - except the inventor of the telephone."

    - Mark Twain, circa 1878

    Introduction

    After more than 120 years, if a single improvement could be made to Twain’s curmudgeonly comment it would be the word "taxation." Let us all gather together … except for the inventor of telephone taxation.

    Mr. Chairman, and members of the Committee, thank you for the opportunity to share my views on the E-Rate and mechanisms to publicly subsidize telecommunications services. I present these views on behalf of the members of Citizens for a Sound Economy (CSE), a consumer education organization that promotes free market solutions to public policy problems. At CSE, I am the deputy director for technology and communications policy.1

    More than a quarter of a million strong, CSE’s members are in every congressional district of America. Our members distinguish themselves as policy activists. They constantly remind us that decisions made in Washington, D.C., are felt in places far away from here. And that is where CSE is found. We fight at the grassroots level for lower taxes and less economic regulation.

    The proposed H.R. 2636, "The Taxpayer Defense Act," is of keen interest to CSE. The Act would ameliorate some of the negative effects of administrative taxation by requiring legislative action to institute a new tax. It would not, however, solve the broader problem of federal tax policy that is out of control.

    Under the U.S. Constitution, only legislation that originates in the House, is passed by the House and the Senate, and is signed by the President can legitimately obligate citizens to financially support federal activity. Yet recently, federal agencies have been issuing regulations that impose taxes to cover the costs of the programs they administer. The remedy proposed by H.R. 2636 for the current practice of regulatory taxation is to make the process more difficult. However, the practice of taxation through regulation should be eliminated, not simply hampered.

    Complexity and Commonsense

    The E-Rate program, which provides discounts for telecommunications services to schools, libraries and rural health care providers, is a subset of the federal universal service quagmire that takes resources from some consumers to subsidize the activities of other consumers. If telecommunications - an integral part of our daily lives - should be taxed or regulated, common sense suggests that it be done in the least offensive and least intrusive manner. The E-Rate tax does not meet this minimal standard.

    The current means to collect and distribute government subsidies is the worthwhile object of H.R. 2636. The proposed legislation would improve the process through which the tax is determined and collected. However, the size, efficiency, efficacy, necessity, administration, and future role of the E-Rate tax are not addressed by the proposed legislation.2

    H.R. 2636 does attempt to limit the cumbersome regulatory tax system by creating a new process, or series of hurdles, for any tax that originates and is implemented by an administrative or executive branch body. However, the nature of regulatory bodies is to regulate and to direct - and eventually acquire - economic resources. While procedural hurdles may slow this inevitable slide, they are not likely to change the fundamental nature of a regulatory agency.

    Indeed, the experiment with a legislative veto and the resulting Chadha decision suggest that procedural remedies to excessive administrative power suffer from two great handicaps. First, the same bureaucratic pressures that created the excessive power will continue to exist. Second, the contemporary separation of powers doctrine retains a healthy skepticism toward significant changes.

    The most powerful means to eliminate regulatory taxation like the E-Rate tax is already at the disposal of Congress. Namely, legislation must be crafted with an eye toward clarity so that bureaucratic discretion is limited. Vague, general, and politically popular goals - such as the goals found in the Telecommunications Act of 1996 - are a recipe for an aggressive and overreaching regulatory regime. Rather than allow such a regime to interpret congressional intent, Congress should make its intent explicit in the original legislation.

    Delegation

    The Telecommunications Act of 1996 did not give the Federal Communications Commission (FCC) the power to tax. In fact, had the Act attempted to delegate that power, it would have been clearly unconstitutional.

    The current administration of the E-Rate is similar to a limited entitlement. It is like an entitlement because certain classes of consumers - schools, libraries, and rural health care providers - are promised an economic good, in the form of discounted telecommunications services. The FCC limited the amount of funds available to $2.25 billion annually.

    Imagine if the Department of Health and Human Services and the Social Security Administration determined Medicare and Social Security benefits without the benefit of careful, considered statutory instruction that contemplates the entire set of federal priorities. Working in a void that does not incorporate all of the other issues and programs that are important determinants of fiscal policy, the agencies might easily misallocate resources. That is precisely where we are today with the E-Rate. And it is also a reason why the Founding Fathers established specific procedures and responsibilities in the Constitution to guide tax policy.

    A power delegated in the Constitution cannot be re-delegated. This is the starting point of a legal theory called the non-delegation doctrine. The non-delegation doctrine is not a musty relic from history. On May 14th, 1999 the 10th Circuit struck down air quality regulations promulgated by the Environmental Protection Agency (EPA) on the basis that the agency was implementing regulations not expressly approved by Congress. In American Trucking Association v. United States Environmental Protection Agency3 the court held that without a clear standard from Congress, the EPA could not constitutionally create and mandate rules and regulations. And, just recently, the Supreme Court denied the EPA’s appeal.

    The need for a clear statutory standard is consistent with Supreme Court decisions such as Industrial Union Department v. American Petroleum Institute4 and J.W. Hampton v. United States.5 As in these cases, there is no clear statutory standard by which the FCC can create or increase taxes to fund the E-Rate program. It is imperative that a clear statutory standard is established to provide guidance to, and legal authority for, the implementation and administration of the E-Rate.

    Ideally, federal statutes provide the standard to guide agency actions. Central to the recent American Trucking ruling is the idea that the regulatory body must provide an "intelligible principle by which to identify a stopping point," to the extent of the delegated power. Presumably, an agency could cite statutory language for this principle or, create its own.

    One might reasonably wonder if there should be a "Citizens" Defense Act to require that legislation to delegate authority include a clear standard for the cut-off point for the delegation. However, currently an agency is granted the discretion to determine this standard. In fact, an agency must determine such a standard or be subject to legal challenge well founded in precedent.

    While the Supreme Court has not ruled on the question of a clear statutory standard for the E-Rate, a hint of the Court's opinion might be gleaned from the opinion in AT&T Corp. v. Iowa Utilities Board.6 Justice Scalia, writing for the majority, declared that: "It would be gross understatement to say that the Telecommunications Act of 1996 is not a model of clarity. It is in many important respects a model of ambiguity or indeed even self-contradiction."

    Conclusion

    Taxes, to the extent that they are necessary, should be levied only in a fair, honest, easy-to-understand manner by elected officials. Telecommunications taxes imposed by unelected bureaucrats in the form of extra charges or tolls on certain services, or on certain providers, are a hidden tax on consumers that does little to promote additional telecommunications availability - the goal of universal service and the E-Rate.

    If the E-Rate program is justified, then there is no reason for the Congress - or the FCC - to hide its funding mechanisms behind complicated subsidies. Funds for the E-Rate should go through the annual budget and appropriations process like other federal programs.

    H.R. 2636 is an adequate and welcome improvement to the present situation, where the E-Rate program is funded by arbitrary and hidden taxes on telecommunications services. However, more enthusiastic support is reserved for a proposal that would address the more fundamental problem of an E-Rate tax that is imposed by unelected officials rather than through the appropriate process established by the U.S. Constitution.

    Thank you.

    1CSE does not receive any funds from the U.S. Government.

    2Please see also Kent Lassman, "Statement on H.R. 1746, the Schools and Libraries Internet Access Act," U.S. House of Representatives, Subcommittee on Telecommunications, Trade, and Consumer Protection, September 30, 1999; James C. Miller III, Statement before the Subcommittee on Commercial and Administrative Law, U.S. House of Representatives, July 29, 1999; Kent Lassman, "Taxpayer Double Whammy: ‘Gore-Tax’ Expands Government, Ignores Constitution," Capitol Comment No. 240, Citizens for a Sound Economy Foundation, June 15, 1999; and also, Kent Lassman, "Universal Service Reform: Benchmarks for Success," Capitol Comment No. 192, Citizens for a Sound Economy Foundation, June 16, 1998; James C. Miller III, Statement before the Subcommittee on Commercial and Administrative Law, U.S. House of Representatives, February 26, 1998.

    31999 WL 300 618 (D.C. Cir. 1999).

    4448 U.S. 607 (1981).

    5276 U.S. 394 (1928).

    6119 S.Ct. 721 (1999).