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Capitol Comment 197 – Al Gore’s Hidden Phone Tax: Bad Economics, Bad Politics

If you haven’t heard of the “Gore tax,” you’re probably missing an important battle over the nature of American democracy and the American economy. The battle has two fronts and the public is losing on both. On one front, the methodical centralization of power in the hands of unelected bureaucrats moves forward. On the other, the burdening of our economy continues.

Here are the details of the current skirmish:

For decades, Congress mandated that telecommunications companies ensure universal telephone service to the poor and to high-cost rural areas. In 1996, Congress passed the Telecommunications Act, which included a provision championed by Al Gore to expand the definition of “universal service” to include high-tech services, and endow the Federal Communications Commission (FCC) with a broad mandate to furnish schools, libraries, and health-care providers with affordable service.

Since then, the FCC has filled in the details. Every telecommunications company must pay large sums of money into the Universal Service Fund. School districts and libraries then receive discounts ranging from 20 to 90% on all available communications services, based on the proportion of area students that qualify for the federal lunch aid program. The discounts are funded by the Universal Service Fund, and the entire program is run by the Schools and Libraries Corporation, the Universal Service Administration Corporation, and the Rural Health Care Corporation.

No one should be fooled. Consumers are being taxed to fund a large government program. We’re taxed once with noticeably higher phone bills to pay for the $3.3 billion-a-year fund. We’re taxed again through increased prices for Internet connections, wireless communications, etc. And we’re taxed yet again when we pay higher income taxes to support the bureaucratic administration of the program. As though this level of taxation wasn’t high enough, the Universal Service budget is projected to grow to over $10 billion a year by 2003.

That’s a lot of taxes to pay, especially since our congressional representatives didn’t really have a say in the matter. The FCC, a regulatory commission staffed entirely by unelected bureaucrats with enormous power, expanded its jurisdiction — perhaps unconstitutionally — by reading the right to tax into the vagueness of the Telecommunications Act. Regardless of how the government uses revenue, taxes should be levied only after public deliberation by elected officials accountable to constituents.

This is not merely bureaucratic empire-building. It is also a shameful example of why regulatory bureaucracies are nefarious. Regulation such as the Gore tax purposefully hides the cost of government. When AT&T started itemizing the government-mandated additional cost on phone bills, people noticed and complained. The FCC’s initial reaction was to pressure AT&T not to itemize the cost, supposedly even threatening regulatory favoritism toward AT&T’s competitors. The FCC’s solution to consumer complaints was to try to trick the consumer.

Unfortunately, this behavior is not new. The entrenched federal bureaucracy saddles virtually every aspect of the economy with hidden surcharges (taxes) and complex rules and restrictions. It is a bureaucracy that invariably seeks to expand its influence and mandate. Industry knows this all too well. Public utilities commissions exercise broad control over private utility companies, forcing them to collect user fees, line charges, and other taxes, while controlling the rates the companies can charge.

Invariably, when consumers realize they are being taxed, as in the case of the Gore tax, they get angry, because there is a lot at stake. Deregulating the electricity industry alone could mean consumer benefits of more than a hundred billion dollars a year. But efforts to deregulate the industry are spoiled by special interests scrambling for all sorts of pet projects funded by rate-payers. It all results in bad economics, and everyone except the bureaucrats suffers. The cost of government is hidden as companies are forced to divert resources into the business of tax collection, work the government should be doing. And consumers can’t get what they want. They should not have to pay any cost above and beyond the actual price of a commodity. Adding miscellaneous charges to any good disturbs the market so that it denies consumers the quantity and quality they desire.

The Gore tax is symptomatic of a serious, self-imposed problem facing America. The federal bureaucracy has resorted to trickery to reap a hoard of cash from the American people for a huge program of questionable worth and certain waste. And that is the norm, not the exception. Bureaucratic regulation harms us in many ways, from the momentous to the minuscule, surreptitiously robbing us of our self-government and our hard-earned money. Congress should reverse this decades-old trend, making all tax-collecting activities transparent to the public, debating all major initiatives, and controlling the activist bureaucracy.