Vermont's Telecom Future

Lt. Governor Doug Racine offered a very useful idea earlier this month: repeal the new Act 60 sales tax on telecommunications. It is useful because Vermont has a potentially bright future as a global telecommunications base - unless government steps in with high taxes and regulations to prevent it.

The beauty of the telecom business is that, in the age of the satellite and the internet, it can be anywhere. It will go where it can prosper, and where its executives prefer to live and raise their children. It will not go where government taxes and regulates it so that it cannot compete, or where government taxes too large a bite of its employee's salaries.

Telecom expert Steve Shepard, an organizer of the Telecommunications Resource Center in Colchester, explained how Vermont could capitalize on the emerging telecom revolution in his 1996 Aiken Lectures at UVM. All Vermont needs to do is what such diverse countries as Mexico, Ireland and Botswana are doing - build a strong technical infrastructure and an attractive economic climate that invites industry growth.

But what is Vermont doing? In 1997 the leaders of Lt. Gov. Racine's party in the Senate, notably Finance chair Cheryl Rivers (D-Windsor) and Majority Leader Peter Shumlin (D-Windham), concocted a cute little game that eventually got out of control, and produced the tax that Racine now wants to repeal.

Although they had plenty of votes to pass the bill that became Act 60, Rivers and Shumlin wanted to be able to claim that it had bipartisan support. Their target was Republican Minority Leader Robert Ide (R-Caledonia-Orange). Rivers and Shumlin baited Ide with a proposal to raise $3.2 million by ending the sales tax exemption on feed, seed, and fertilizer purchased by non-farmers.

Ide runs a feed, seed and fertilizer business. To protect his family business (at the expense of his constituents), Ide agreed to vote for the bill, and Rivers and Shumlin took back the bait.

But giving up the $3.2 million that the "Ide Amendment" would have produced meant that Rivers and Shumlin had to find something else to tax. They hit upon increasing the small tax on the business property of telecommunications firms. Before they could push that through, however, Public Service Board chair Richard Cowart weighed in strongly against an increased telecom company tax, on the sound grounds that it would be a major discouragement to telecom businesses locating and expanding in Vermont.

Cowart's protest caused Rivers and Shumlin to create a completely new tax: a retail sales tax on everybody's phone bills. Their new amendment started out at 3.27%. This spurred a protest from one of Vermont's leading phone marketing firms, so Shumlin agreed to cap any one customer's tax at $10,000 a year.

When you cap the tax bill of the big fish, the small fish have to make it up. So Shumlin increased the rate to 3.29%. Now somebody noted that ordinary households, including those of the poor, would have to pay the new sales tax on their basic monthly service. Rivers and Shumlin then agreed to exempt the first $20/month of your phone bill from the tax. Replacing the revenues lost from that exemption drove the rate up to 4.36%. That is the rate of the new sales tax that Vermonters have been paying on their phone service for the past year.

The pitiful, indeed disgusting, part is that this new sales tax on your phone bill sprang from a deliberate move by Rivers and Shumlin to buy Ide's vote, not to get enough votes to pass the bill (it passed 21-9), but simply so they could crow about Act 60 being "bipartisan."

This political game in Montpelier came at a real-world price. The telecom tax is burdening hundreds of thousands of Vermont households and small businesses, and threatening the growth of the clean, high-wage telecom industry in Vermont.

Senate President Doug Racine is right. The telecom tax ought to be repealed. If he had only felt so strongly about it when his fellow Democrats were playing political games on Act 60 last year, he might not have to be calling for repeal now, and the state's economy would be a lot more promising. As it is, we may yet be beaten out by Botswana.

October 1998