It's Become a Bad Year to Fight Taxes

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The post-Sept. 11 recession has sent state finances into a tailspin, and legislatures throughout the nation are looking to raise taxes and abolish exemptions as a way to eliminate the shortfalls.

The budgetary scramble may dash the hopes of some cable lobbyists who had hoped to fight for tax breaks this year.

A bill exempting late fees from sales tax is still clinging to life before a subcommittee of the South Carolina Legislature. And in other states, telecommunications providers learned that lawmakers intend to add to their tax burden through means such as the 5 percent state levy on telecommunications gross receipts proposed in Minnesota.

New Jersey officials have put an increase in the corporation tax on the table, but industry doesn't expect details of the proposal to be ironed out until May.

"We're worried that the basis will be gross sales — a 1 percent tax, capped at $5 million," said New Jersey Cable Telecommunications Association director of public affairs Cathy Traz.

HARD TIMES TO FIGHT

The anti-tax fight will be a tough one for operators. State governments are making deep cuts, even to such sympathetic targets as education. That makes it hard for business to argue that its ox should not be gored.

But that doesn't mean cable operators have been unsuccessful in pointing out alternative tax targets. In Arizona, direct-broadcast satellite service is exempt from sales tax, but a bill to lift that protection (SB1062) passed the state Senate this month on a 17-11 vote.

Financial analysts project an approximate $1 billion shortfall in revenue in Arizona through 2003.

With that crunch, it makes sense for DBS customers to take part in a tax remedy, said Arizona Cable Telecommunications Association executive director Susan Bitter Smith.

"We've obviously had some receptivity to the argument that cable subscribers are still disproportionately taxed," she said.

The cable association estimates a DBS sales tax would add $12 million per year to state coffers.

Lobbyists for DirecTV Inc. and EchoStar Communications Corp. argue that DBS providers pay fees that cable operators don't, such as federal fees for orbital slots. They also question the constitutionality of a tax extension, noting that two-thirds of Arizona voters must approve any new taxes.

And the Senate bill was sent to a House committee where it's likely to face a tough fight, as the lower chamber's Republican majority has taken a "no new taxes" pledge, said Bitter Smith.

Radical solutions are being analyzed in Tennessee. On April 17, the House Democratic Caucus announced a plan to introduce a 4.5 percent flat income-tax proposal, a scheme described as very regressive by Tennessee Cable Telecommunications Association executive director Stacey Briggs.

The alternative is not much better: a plan for a 9.75 percent sales tax, up from the current 8.75 percent. Both cable and DBS services are subject to sales tax.

Also, there is talk of eliminating the sales-tax exemption granted to the first $15 of a cable bill, which was instituted to give a price break to the most basic cable subscribers.

FLAT TAX PLANS

Creative solutions are not limited to how much tax is collected, but also how it is collected.

Proposals are afloat in Virginia and Louisiana that would follow Florida's model by instituting a flat telecommunications tax to replace local levies, including franchise fees.

The bill, enacted by Florida two years ago, was designed to ease service providers' accounting burden without affecting the revenue that flowed to cities and counties. It has allowed cable operators and other providers to pay the tax to a single state agency charged with redistributing the funds among localities.

A cable-industry backed study has been approved in Virginia and should be completed by August, said Virginia Cable Telecommunications Association president Kathryn Falk. The Virginia measure's goal isn't to keep taxes level, though.

Virginia — at 27.5 percent — has the highest telecommunications taxes in the U.S., at twice the national average, Falk noted. Most of those levies are local.

In testimony before the Virginia General Assembly, Falk advocated that legislators examine a possible tax on DBS service. She estimated that industry, which has an estimated 23 percent penetration rate, takes in about $260 million in annual revenue without paying the same local taxes and fees as cable operators.

But talk of tax-collection reform hasn't diverted regulators' attention from coming up with immediate sources of new revenue, though.

Virginia recently released a list of all groups subject to tax exemptions. It noted that cable operators and broadcasters receive a personal property tax exemption on equipment, designed to speed digital-TV deployment. Falk said the document indicates that cutting such breaks might net the government $30 million.

In Louisiana, BellSouth Corp. has promoted a simplified telecommunications tax that would encompass wired and wireless telephone services, as well as cable products.

But the Louisiana Cable & Telecommunications Association doesn't want in. "Not the way it's drafted," said executive director Cheryl McCormick.

There's too much confusion about how local government would treat Internet services, she indicated.

Many cable operators have stopped paying franchise fees on revenues derived from high-speed data delivery since the Federal Communications Commission issued a declaratory ruling calling the service an interstate information service. Some executives fear that a new telecommunications tax structure would address Internet services as part of the reformatted tax base.

Executives also question whether the Florida plan has met its stated goal of easing tax collection and keeping tax amounts level. The state doesn't know, either, according to Florida Telecommunications Association chief counsel Charles Dudley.

The tax-simplification bill, signed by Gov. Jeb Bush in May of 2001, took effect that October. It replaced a 9.18 percent sales tax and local levies ranging from 1 to 15 percent with a single state tax payment of the same amount.

In theory, telcos save money because they don't have to compute multiple payments and cut checks to 472 local regulators.

"We're only six months in," said Dudley. "Next February, there will be a study to see if this actually was revenue-neutral."

The details of implementing the tax are still being finalized. A bill recently signed by the governor created some preliminary rules, which specify how the state would certify the accuracy of telecommunications companies' databases.

Florida's budget crisis is sure to extend into the next year.

RAIDING TOBACCO FUNDS

Some states will resolve their budget gaps this year by raiding funds netted in court settlements with major tobacco producers. Two years ago, more than 40 states sued the leading tobacco companies, seeking compensation for the cost of health care for patients with smoking-related diseases.

The negotiated settlement called for a 30-year payment schedule, but some states, such as Wisconsin, agreed to cash out at current value to resolve some of the present-day budget shortfall.

But even with that $1.3 million, Wisconsin's budget problem isn't eliminated.

"There's a determined effort by both parties not to raise taxes," said Wisconsin Cable Communications Association executive director Tom Hanson. But lawmakers may meet that goal by deferring spending until 2003.

"Next year could be a very dangerous year," he said. The biggest threat to the state's operators is posed by a tax on advertising revenues. There is some talk of extending sales taxes to that revenue pot, said Hanson.

Legislators also look askance at new tax-exemption proposals painted as vehicles for job creation.

"On the whole, there have been numerous programs over the years on tax incentives touted as job creators, and they just didn't pan out," said West Virginia Telecommunications Association executive director Mark Polen. As a result, they eye business-tax incentive proposals suspiciously.

MISSED DEADLINES ABOUND

Across the country, legislatures are convening in special session, having missed constitutional balanced-budget deadlines as they grapple with the revenue challenges.

The Kentucky legislature adjourned April 15 without resolving its budget, then returned a week later for a special session.

Operators in that state want relief from the state tax on intangibles, such as the value of a franchise.

Kentucky Cable Telecommunications Association executive director Patsy Judd said cable's intangibles are taxed at a higher rate than those of other businesses.

"We don't know how they're going to deal with it," she said of the tax issue.

Some industry lobbyists are trying to turn the slow progress on budget reconciliation to their advantage. For instance, the Texas Legislature won't meet until next year to deal with a multi-billion dollar shortfall.

The Texas Cable Telecommunications Association is using the interim to collect tax-fighting data from its members.

"This holding pattern is beneficial. We've gotten tax consultants comparing our payments to other industry's obligations, and we have our members gathering hard data on each of the taxes they pay," said Kathy Grant, director of government relations.

That ammunition will help cable fight against new taxes if the legislature opts to reform education funding — or implements a statewide property tax that's already been suggested by the state's lieutenant governor.

Operators in Maryland, Delaware and Washington, D.C. — who've already dodged a tax bullet this year — are also collecting information for 2003 battles, said Cable Telecommunications Association of Maryland, Delaware and the District of Columbia president Wayne O'Dell.

The only telecommunications tax was levied in Maryland and was specific to Prince Georges County. A new 5 percent telecom tax will help fund the local school system but will minimally affect Comcast Corp., which has not broadly introduced telephone service, O'Dell said.

Companies such as Verizon Communications will bear the brunt of the new tax.

But a task force has been formed in Maryland to consider broader sales taxes in anticipation of a $700 million shortfall next year.

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