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Talk likely to be cheaper with
repeal of telephone excise tax

May 26, 2000 -- Forget 10-10. The hot telephone number on Capitol Hill now is three, as in the 3 percent federal telephone excise tax.

Congress is about to repeal the 102-year-old charge, which started as a way to raise money for the Spanish-American War. That penny addition to long-distance calls of 15 cents or more was supposed to be temporary.

But throughout the century, the tax never disappeared for long, and at one point climbed to 25 percent. Federal lawmakers designated the tax as "permanent" in 1990 when they set its current 3 percent rate.

Monthly taxes for many phone options
The charge shows up on every phone bill that goes to the 99 million American telephone service subscribers, often designated as FET for federal excise tax.

And while 3 percent might not sound like much, it can add up when you consider the various phone options to which it can be applied each month: local subscriber line charges, specialty features like Call Waiting and Caller ID, local toll charges, long-distance calls, wireless service and directory assistance.

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The phone tax money has been a windfall to the U.S. Treasury because it is not designated for specific government programs like other excise taxes, such as gas taxes that are funneled to the federal highway trust fund.

 The Federal Telephone
Excise Tax Timeline
Temporary tax on telephone services adopted to help fund the Spanish-American War.
Long distance "luxury" telephone tax is imposed at a rate of 1 cent per call to help pay for some of the costs of World War I.
Tax is repealed.
Tax is reinstated at a rate of 5 cents per call once the United States enters the war.
Tax is expanded to cover additional telephone services.
Telephone excise tax is repealed.
Tax is reinstated at per-call rates ranging from 10 cents to 20 cents, depending on the call's cost.
Tax rate is changed to a flat 20 percent rate.
Tax rate is increased to 25 percent.
Tax rate is reduced to 10 percent.
Tax rate is slated to expire in 1960.
1960 to 1964
Expiration schedule is delayed annually.
As part of the excise tax reform project, the 10 percent communications excise tax is scheduled to be phased out over three years.
Phase-out delayed for one year.
Phase-out restructured to conclude in 1973.
Phase-out delayed for one year.
Schedule replaced by a 10-year plan beginning in 1973.
Phase-out begins.
Excise tax down to 1 percent but elimination is deferred. 1 percent is extended through 1984.
Tax rate is increased to 3 percent with elimination in 1985.
3 percent rate is extended through 1987.
3 percent rate is extended through 1990.
3 percent excise tax made permanent in 1990

It's the telephone tax's contribution to the current budget surplus that's allowing Democrats and Republicans to agree on ending the charge.

Phased in phone relief
But the House decided against immediate elimination of the tax. Instead, Representatives opted for an amended H.R. 3916 that would phase out the charge over the next two years.

Beginning 30 days after the legislation is signed into law, phone customers would see the tax drop to 2 percent. It would remain there through Sept. 30, 2001.

On Oct. 1, 2001, the rate would go to 1 percent and stay there through Sept. 30, 2002.

Full repeal of the tax would be on Oct. 1, 2002.

Now holding for the Senate
In an election year, lawmakers are usually quite enthusiastic about ending taxes. But this slower pace of repeal was accepted because there's been little public outcry over the phone excise tax, which the Congressional Research Service says produced almost $5 billion in 1998.

And by reducing the immediate hit to the treasury from losing the tax revenue, lawmakers give themselves some maneuverability when it comes negotiating other tax and budget issues later in the session.

Senate Majority Leader Trent Lott, R-Miss., says that although the Senate has no definite plans about when that body would take up the legislation, "We'll try to get it done."

The most appealing alternative in the Senate is for the bill to be considered on its own, rather than attached to other, possibly controversial, measures.

White House support likely
While the White House would prefer that the phone tax repeal -- and all pieces of tax legislation -- be part of an overall budget framework to establish a context for tax and spending measures, the bill probably will get President Clinton's support even if it arrives on his desk alone.

Treasury Secretary Lawrence Summers, in a letter to the Ways and Means Committee, called elimination of the excise tax a "worthy policy objective."

And earlier this year when Clinton received, as a piece of solo legislation, the popular bill eliminating the Social Security earnings limit for retirees, he quickly signed it into law. Telephone tax repeal advocates believe their single measure will be welcomed, too.

So consumers probably will see smaller phone bills in a couple of years. When it happens, they might be well advised to take full advantage. You just never know when Congress might decide a temporary excise tax on calls is necessary again.


--Posted May 26, 2000

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