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Presidential veto puts
repeal of telephone tax on hold

Congress thought its battle to do away with a century-old telephone tax was over in mid-October. That's when legislation phasing out the fee went to the White House for a presidential signature.

But the effort to eliminate the 3 percent excise tax became an unexpected casualty of the escalating budget war on Capitol Hill.

The phone tax provision was part of the larger Treasury Department appropriations bill. The president said he had no problem with the bill itself and had even voiced his approval of the phone tax provision. But Clinton used his veto pen just before midnight Oct. 30 to send a message to Congress. He had wanted money for education programs in the bill, too. When it wasn't added, he axed the entire measure, leaving the phone tax intact.

Opponents of the tax, created in 1898 to help pay for the Spanish-American War, plan to rejoin the tax fight when Congress returns for a lame-duck session after the general election. Then they'll look to add the phone tax provision to a bill that's more acceptable to the White House.

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The tenacity of the tax, however, is no surprise to those who know its history. Over the last century, the tax has been abolished and reinstated numerous times.

 The Federal Telephone
Excise Tax Timeline
1898
Temporary tax on telephone services adopted to help fund the Spanish-American War.
1914
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.
1916
Tax is repealed.
1917
Tax is reinstated at a rate of 5 cents per call once the United States enters the war.
1918
Tax is expanded to cover additional telephone services.
1924
Telephone excise tax is repealed.
1932
Tax is reinstated at per-call rates ranging from 10 cents to 20 cents, depending on the call's cost.
1942
Tax rate is changed to a flat 20 percent rate.
1943
Tax rate is increased to 25 percent.
1954
Tax rate is reduced to 10 percent.
1959
Tax rate is slated to expire in 1960.
1960 to 1964
Expiration schedule is delayed annually.
1965
As part of the excise tax reform project, the 10 percent communications excise tax is scheduled to be phased out over three years.
1966
Phase-out delayed for one year.
1968
Phase-out restructured to conclude in 1973.
1969
Phase-out delayed for one year.
1970
Schedule replaced by a 10-year plan beginning in 1973.
1973
Phase-out begins.
1981
Excise tax down to 1 percent but elimination is deferred. 1 percent is extended through 1984.
1982
Tax rate is increased to 3 percent with elimination in 1985.
1984
3 percent rate is extended through 1987.
1987
3 percent rate is extended through 1990.
1990
3 percent excise tax made permanent in 1990

Phased in phone relief
When -- or if -- this latest move to kill the phone tax succeeds, the charge will begin fading from telephone bills across the country.

Thirty days after the bill becomes law, the tax will 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.

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, consumer activists and communication industry representatives note that it can add up. The tax can be applied to myriad phone options 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.

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.

But it's the telephone tax's contribution to the current budget surplus that allowed Democrats and Republicans to agree on ending the charge.

Tax repeal linked to tax-free Internet efforts
One of the legislation's original sponsors also hailed elimination of the phone tax as critical to the continued growth of communications technology.

"Today, this tax is paid by everyone who uses a telephone, makes a call on a cell phone or uses a phone line to access the Internet," said Rep. Rob Portman (R-Ohio). And with the rapid pace of technological change, he noted, the differences between traditional telecommunications, the Internet and other technologies is increasingly blurred.

"For example, 96 percent of households with Internet access use telephone lines to go online," Portman said. "If the federal phone tax remains on the books, it would jeopardize recent efforts to keep the Internet tax-free."

Nothing lasts -- or disappears -- forever
A word of historical warning, however. Over the last century, the tax has been abolished and reinstated numerous times.

It started out in 1898 as a penny addition to long-distance calls of 15 cents or more and was supposed to be only temporary. But it has 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.

So consumers would be well advised to take full advantage of this latest phone tax repeal, if it makes it into law. You just never know when Congress might decide a "temporary" excise tax on calls is necessary again.

--Posted Nov. 3, 2000

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See Also
Internet taxes banned
Congress tried to untangle wireless communications taxes

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