Chairman Johnson and Members of the Committee:

I am honored to appear before this Committee today.

As I have described in several public statements, the FCC's current interpretation of universal service is not consistent with Section 254 of the Communications Act, the claimed statutory authority for the e-rate program, and I fear that this program is an illegal tax.⁽¹⁾ The divergence between Commission interpretation and the statute is not minor and cannot be corrected with small and technical changes in existing Orders. Rather, the Commission's understanding of its authority in this area represents a broad expansion of power beyond that which Congress actually gave it in section 254.

Below, I focus on just one of the problems created by the Commission's interpretation of the Act -- namely, that the agency's implementation of section 254 has transformed the e-rate program from what should essentially have been a discount program into an illegal tax. My concern is that in enacting a sweeping new welfare program for schools and libraries that went well beyond the more modest discount program authorized by Congress, this agency exceeded the scope of its authority and thereby enacted a new tax, engendering thorny constitutional problems.

Specifically, the Commission's overbroad reading of the provisions of the Act relating to schools and libraries begs two kinds of constitutional questions. First, by setting up what is basically a taxation scheme, the Commission creates a problem relating to the separation of powers between the three coordinate branches of the federal government. The Supreme Court has stated that, in our constitutional structure, Congress is the only branch that may levy taxes.⁽²⁾ When this independent administrative agency, which is imbued not only with legislative functions but also with quasi-executive and quasi-judicial duties, engages in taxation, that undermines the general principle of separation of power. I am troubled by the possibility that this agency has trenched on exclusively Congressional turf in establishing the e-rate program.

Second, with respect to the distribution of power within the legislative branch, under the Origination Clause of the Constitution it is the House of Representatives -- and specifically the Ways and Means Committee -- that possesses the sole authority to initiate tax legislation. I agree with the concerns recently expressed by several members of the House Judiciary Committee that the House must retain "direct authority over and responsibility for any tax burden on the public."⁽³⁾ I am concerned that the Federal Communications Commission has infringed on this prerogative of the House of Representatives in establishing the e-rate program.

Separation of Powers and The Origination Clause

Article I, section 8, of the Constitution provides that "Congress shall have Power To lay and collect Taxes," and Article I, section, 1, states that "[a]ll legislative Powers herein granted shall be vested in a Congress of the United States." In other words, Congress has the legislative power to tax, and "all" such power -- not just some of it -- is vested in Congress. No other branch possesses the power to tax.

This separation of powers among the legislative, executive, and judicial branch is one of the great structural principles of our Constitution. The Supreme Court has emphasized that "the Constitution diffuses power the better to secure liberty."⁽⁴⁾ Indeed, as Justice Scalia has explained, "[t]he Framers of the Federal Constitution . . . viewed the principle of separation of powers as the absolutely central guarantee of a just Government. In No. 47 of The Federalist, Madison wrote that '[n]o political truth is certainly of greater intrinsic value, or is stamped with the authority of more enlightened patrons of liberty.'" ⁽⁵⁾ By diffusing governmental power, the Framers sought to ensure that such power would be checked and balanced and the people's freedom safeguarded.

In addition to allocating powers among branches, the Constitution divides power within the legislative branch. Article I, section 7, provides that: "All Bills for raising Revenue shall originate in the House of Representatives." The Origination Clause is essential to democratic accountability. At the time the Constitution was drafted, the members of the United States Senate were appointed by the state legislatures, not voted directly into office by the public, as were the members of the House of Representatives. By requiring that any taxation be passed by the elected body of Congress, the Framers aimed to preserve direct, political accountability for the creation of any new taxes. Thus, in the Federalist Papers, the Framers "defend[ed] the decision to give the origination power to the House on the ground that the Chamber that is more accountable to the people should have the primary role in raising revenue."⁽⁶⁾ More fundamentally, as the Supreme Court has explained:

"the Framers' purpose was to protect individual rights. As James Madison said in defense of that Clause: "This power over the purse may, in fact, be regarded as the most complete and effectual weapon with which any constitution can arm the immediate representatives of the people, for obtaining a redress of every grievance, and for carrying into effect every just and salutary measure."⁽⁷⁾

Even today, although members of the Senate are now elected pursuant to the Seventeenth Amendment, the House, due to its apportionment of seats based on state population and the shorter, two-year terms of its members, is still thought to be the chamber of Congress tied more closely to the people. Its responsibility for "[a]ll Bills for raising Revenue" is a critical one in our system of constitutional government.

Why The E-Rate Is A Tax, Not A Fee

I am convinced that the e-rate fund contributions, at least to the extent that they provide support for non-telecommunications services, and to non-telecommunications carriers, may not be fairly characterized as mere "fees." In so far as the contributions required by the Commission are more in the nature of a "tax," both Separation of Powers and Origination Clause issues are implicated. For, as explained above, no branch other than Congress may tax, and no chamber of Congress other than the House may initiate a tax.

In general, taxes can be distinguished from administrative fees by determining the recipient of the ultimate benefit: a tax "confers no special benefit on the payee," "is intended to raise general revenue," or is "imposed for some public purpose."⁽⁸⁾ In contrast, a "fee" is a "payment for a voluntary act, such as obtaining a permit."⁽⁹⁾ As the Supreme Court has held, and the D.C. Circuit further explained, a "fee" is a payment "incident to a voluntary act, e.g., a request that a public agency permit an applicant to practice law or medicine or construct a house or run a broadcast station. The public agency performing those services normally may exact a fee for a grant which, presumably, bestows a benefit on the applicant, not shared by other members of society."⁽¹⁰⁾ Here, all these factors point toward the category of a tax: the fund, which creates internet access for schools and libraries, confers no particular advantages upon telecommunications carriers in exchange for their contributions, such as a license or permit; the funds have not, as far as I can tell, been segregated from other government monies, see infra; the purpose of the fund is a broad, social one, purportedly to improve education for all Americans; and the payment requirement is not triggered by a voluntary act on the part of telecommunications carriers, such as the filing of an application, but is a flat mandate.

In Thomas v. Network Solutions, the District of Columbia District Court recently found a similar mandatory contribution to be an illegal tax, not ratified by Congress.⁽¹¹⁾ The payment in that case -- known as the "Preservation Assessment" and destined for the "Intellectual Infrastructure Fund" --

was collected from registerers of internet domain names. Money from that fund was then used for the "Next Generation Project," a "program aimed primarily at upgrading the Internet infrastructure, improving the speed and accuracy of information delivery, and increasing access for schools."⁽¹²⁾ The court held that the Preservation Assessment was "clearly a tax" as it was "involuntary"; "automatically charged to every domain registration"; and collected "for the government's use on public goals, and not in any way to defray regulatory costs."⁽¹³⁾

The Commission's e-rate program suffers from the same legal infirmities. First, it cannot be disputed that the contributions to the e-rate program are involuntary. Indeed, all telecommunications providers are required to pay based on revenue, and there is no way for them to opt out or to decline participation. Second, the FCC's e-rate program does not use the funds to help "defray [any] regulatory costs," but instead furthers the legitimate public goal of connecting schools and libraries to the Internet. While this may be a worthy social cause, it is neither directly related to the regulation of the telecommunications network nor necessary to the regulation of interstate telecommunication rates.

On several occasions, the FCC has defended its conclusion that the universal service contributions generally involve fees, not taxes, by pointing out that "all telecommunications carriers benefit from a ubiquitous telecommunications network."⁽¹⁴⁾ In response to Thomas v. Network Solutions, the Commission specifically argued that universal service contributions in general and e-rate contributions in particular are not taxes because "[1] universal service contributions are not intended to raise general revenues as they are placed in a segregated fund dedicated for a specific regulatory purpose, and . . . [2] all telecommunication carriers required to contribute benefit from the ubiquitous telecommunications network that universal service makes possible."⁽¹⁵⁾ The Commission even argued -- erroneously, I believe -- that if the e-rate program is an unlawful tax, then the entire universal service subsidy must be illegal.⁽¹⁶⁾

These attempts to distinguish Thomas v. Network Solutions are not persuasive, however. First, the fact that e-rate money does not go into general revenue does not save the program from invalidation under Thomas. In that case, the government, as co-defendant, attempted to defend the payment on the ground that the collected money was in a separate fund and thus did not constitute general revenue. As the court noted, however, the regulated company "deposits these funds and maintains the account, but it does so only as a proxy for [the National Science Foundation]," an independent agency.⁽¹⁷⁾ The government admitted that "[f]und is the government's money, and that the government alone can choose how and when to spend it," and "Congress seems to treat the [fund] as government money."⁽¹⁸⁾ The court squarely rejected the "segregation" argument:

Defendants assert that the assessment is not designed to raise revenue because it is not deposited into the federal treasury, but into a separate fund. However, this argument rests on mere semantics -- the assessment is income designed for a public purpose, which is essentially unrelated to the persons paying the fee. Where it is kept while awaiting that purpose is irrelevant. As such, it must be considered revenue for the government, whatever name defendants wish to attach to it.⁽¹⁹⁾

Similarly, e-rate fund contributions may be administered by the Schools and Libraries Corporation, but only at the direction of the FCC. Moreover, the Congressional Budget Office and the Office of Management and Budget have determined that all universal service contributions should be treated as federal revenues and universal service payments as federal outlays. Thus, as in Thomas, the fact that the money is placed in a designated fund does not preclude it from being classed as federal revenue.

Second, I do not dispute that there is a benefit to carriers from the maintenance of a ubiquitous nationwide telecommunications network. To the extent that the public switched telephone network can be considered a single telecommunications system, all users benefit when that system is capable of serving others. What good is it to be able to make calls if no one can receive them? Thus, to the extent that a fee is levied against telecommunications carriers and that money is used to ensure adequate support for the telephone network, the carriers would in return receive a benefit. The charge therefore would not be a tax.

But that is not the case here. There are no direct benefits to telecommunications carriers from the provision of Internet services to, and the inside wiring of, schools and libraries. With respect to the schools and libraries program, the funds raised are used to support other goods and services that are not classified as telecommunications services. Given the lack of any correlation between those paying into the fund (telecommunications service providers) and the beneficiaries of the program (schools and libraries), there is not a "sufficient nexus between the agency service for which the fee is charged and the individuals who are assessed" for the contribution to be typed as a mere fee.⁽²⁰⁾

The D.C. Circuit has in fact determined that establishing a universal service fund to make telecommunications service available to all Americans at reasonable charges is within the Commission's authority. In Rural Telephone Coalition v. FCC, the court held that the allocation of 25% of local phone costs to the interstate jurisdiction was not a tax because its primary purpose was not raising federal revenues but allocating costs.⁽²¹⁾ The court also expressly upheld the establishment of a federal "Universal Service Fund" to subsidize telephone rates in high-cost areas as under the Commission's authority.⁽²²⁾ With special significance to the e-rate program, however, the court concluded that

"[h]ad the Commission proposed the Universal Service Fund for the purpose of subsidizing the incomes of impoverished telephone users, it would have exceeded its authority under section 154(i), as the provision of public welfare is not among its functions. Instead the Commission explicitly (and properly) rejected "solv[ing] the problems of the poor" as an appropriate objective of the Fund, and restricted its use to the more limited purpose of ensuring that telephone rates are within the means of the average subscriber."⁽²³⁾

In contrast, here the e-rate fund was established as a welfare scheme for schools and libraries.

Finally, these contributions do not meet the traditional definition of a fee because they are premised not on the use of some identifiable government service but purely on ability to pay. According to the Supreme Court, taxation is marked by the calculation of liability "solely on ability to pay, based on property or income."⁽²⁴⁾ Here, of course, the contribution amounts are based entirely on revenues and are not triggered by any voluntary act undertaken by the payors but rather purely on their status as telecommunications service providers. As such, they carry the Commission "far from its customary orbit and puts it in search of revenue in the manner of an Appropriations Committee of the House."⁽²⁵⁾

In sum, to the extent that the universal service program requires contributions based on telecommunications service revenues but uses the funds raised to provide support for non-telecommunications services (i.e. inside wiring and internet services) to non-telecommunications carriers, the Commission has established a mandatory exaction in order to promote the general welfare. In levying this tax, the Commission has created such difficult constitutional problems as the propriety of taxation by non-legislative bodies, based on legislation that did not originate in the House of Representatives.

As explained above, only Congress has the power to tax.⁽²⁶⁾ I fear that when a government agency that possesses non-legislative features engages in taxation, we run the risk of upsetting "the equilibrium the Constitution sought to establish--so that 'a gradual concentration of the several powers in the same department,' Federalist No. 51, p. 321 (J. Madison), can effectively be resisted."⁽²⁷⁾ In addition, assuming that the Congressional power to tax is delegable, in order for even a intended delegation of such power to be judicially sustainable, Congress must provide the agency with clear standards by which its compliance with the delegation can be measured.⁽²⁸⁾ The Commission, however, has disregarded the numerous limitations that Congress carefully included in section 254: that there would be a single federal universal service fund based on interstate revenue; that discounts be provided to schools and libraries; that only telecommunications carriers may receive credit; and that support may only be used for telecommunications services.

Moreover, the Commission has argued that the e-rate program does not violate the Origination Clause because "Congress does not exercise its taxing powers when funds are raised for specific government programs."⁽²⁹⁾ In that case, however, the Supreme Court also made clear that:

A different case might be presented if the program funded were entirely unrelated to the persons paying for the program. Here, [the program] targets people convicted of federal crimes, a group to which some part of the expenses associated with compensating and assisting victims of crime can fairly be attributed. Whether a bill would be "for raising Revenue" where the connection between payor and program was more attenuated is not now before us.⁽³⁰⁾

I remain concerned-- again, to the extent that telecommunications carriers alone are being assessed to pay for a computer network and Internet access program -- that the agency has created a program "entirely unrelated to the persons paying" for it.

Why the FCC's E-Rate Program Goes Far Beyond The Requirements of The Telecommunications Act

The Commission could have avoided the above-described issues by reading section 254 less broadly and reading the statute more narrowly.⁽³¹⁾ That is, the Commission should have read section 254 to authorize only what it says, and no more -- a discount for services, not a guaranteed entitlement to free goods as well as free services. The FCC's expanded e-rate program, however, goes far beyond what was required by Section 254 of the Telecommunications Act.

Neither Section 254(h)(1)(B) nor Section 254(h)(2)(A) provides the type of clear and precise guidance to the Commission that could justify the adoption of a redistribution program to non-telecommunications carriers, for non-telecommunications services. Moreover, contrary to the Commission's assertions, section 254 does not mandate the creation of a "specific government program" that redistributes revenues from telecommunications carriers to other providers of non-telecommunications services.

Specifically, section 254 by its plain terms directs the Commission to establish a discount program for services provided to schools and libraries by "telecommunications carriers."⁽³²⁾

In its original Universal Service Order, however, the Commission rejected the argument that construing the statute to allow non-telecommunications carriers to receive support would "convert this valid statute into a revenue raising measure within the meaning of the Origination Clause."⁽³³⁾ The Commission concluded that the general directive in section 254(h)(2)(A) that the Commission "establish competitively neutral rules to enhance" schools and libraries access to advanced services, along with the Commission's necessary and proper clause in section 4(i),⁽³⁴⁾ provide it sufficient statutory authority to allow non-telecommunications carriers to receive funds.

There are two flaws in this reasoning. First, the argument is built upon a misreading of section 254(h)(2)(a). That provision permits the Commission to establish competitively neutral rules "to enhance, to the extent technically feasible and economically reasonable, access to advanced telecommunications and information services."⁽³⁵⁾ It does not provide for an explicit discount program like the one envisioned in section 254(h)(1)(B). Indeed, if both provisions were meant to establish a single discount program for both telecommunications and non-telecommunications providers for telecommunications and non-telecommunications services, Congress would not have needed to enact both sections. Instead, Congress specifically provided in section 254(h)(2)(A) for something less than a discount program in so far as non-telecommunications carriers are concerned -- namely, competitively neutral rules for enhanced access.

To rely on the rule regarding programs explicitly authorized by Congress, as described in the United States v. Munoz-Flores line of cases,⁽³⁶⁾ an agency must of course narrowly implement the program within the express mandate of the relevant statute -- in other words, the program must actually be expressly authorized. In this case, however, as described above, neither Section 254(h)(2)(A) nor section 4(i) directs the Commission to implement a redistribution program to benefit non-telecommunication carriers. The language in section 254(h)(2)(A) simply directs the Commission "to establish competitively neutral rules to enhance." A Congressional directive merely "to enhance" access to specific services seems much too general to justify the establishment of a revenue redistribution scheme. Moreover, similar general directives are repeated several times throughout the Act,⁽³⁷⁾ and if sufficient to justify a tax scheme here would theoretically justify further collection and disbursement of revenue to promote those goals as well. I do not think this is what Congress intended the Commission to do.

Second, even if the Act clearly authorized the establishment of a redistribution scheme for advanced services, section 254(h)(2)(A) does not authorize the FCC to distribute funds to any non-telecommunication carriers. The Commission has argued that the competitive neutrality demand of 254(h)(2), along with section 4(i), requires the Commission to allow non-telecommunications carriers to receive support. Traditional rules of statutory construction, however, require that specific directions in a statute trump any general admonitions. Section 254(h)(1)(B) unambiguously limits recipients of the schools and libraries fund to "telecommunications carrier[s] providing service under this paragraph;"⁽³⁸⁾ as this express limitation is more specific than 254(h)(2), it should take precedence here.

In addition, the provisions of section 254(e) -- which provide that only eligible telecommunications carriers may receive federal universal service support -- apply fully to section 254(h)(2)(A). In fact, in the context of the rural health care program, the Commission has acknowledged that Section 254(e)'s explicit requirement that only "eligible telecommunications carriers" receive support applies to Section 254(h)(1)(A).⁽³⁹⁾ If that is so, and I think it is, then I do not see how one could conclude that this requirement does not also apply to Section 254(h)(2), which the Commission relies upon to justify allowing non-telecommunication carriers to receive support for inside wiring. Thus, the requirements for receiving funds in conjunction with section 254(h)(2) are actually stricter than under section 254(h)(1)(B) -- that is, a recipient must be an "eligible telecommunications carrier."⁽⁴⁰⁾

Conclusion

To the extent that mandatory universal service contributions from telecommunications carriers are providing support for non-telecommunications services, and to non-telecommunications carriers, these contributions may not be fairly characterized as mere "fees." Rather, such mandated contributions to the e-rate fund is a general "welfare scheme," and as such "the Commission [has] exceeded its authority."⁽⁴¹⁾ By this excess of authority, the Commission has put itself in a position where it is exercising classic legislative power -- the power to lay and collect taxes -- without any clear evidence that this is what Congress intended. Worse, the Commission has claimed as its source of authority legislation that did not originate in the constitutionally proper chamber of Congress, a fact that only provides further evidence that Congress never intended the schools and libraries provision to be a tax law.

41. Rural Telephone Coalition v. FCC, 838 F.2d 1307, 1316 (1988).