By Pamela M. Prah
Stateline.org
Prospects are good that Congress will send more transportation dollars to states this election year in a bid to woo voters back home. But there’s a risk that state coffers will be raided if federal lawmakers change the rules on how Internet services are taxed.

States hope Congress will act on their wish lists in a session abbreviated by breaks for both political conventions this summer and overshadowed by election-year politics.

Fortunately for states, a transportation bill that would give them more federal dollars for highway and transit projects is a top priority for both Republican and Democratic congressional leaders.

The multi-billion-dollar package, which is the blueprint for road construction over the next six years, is packed with projects that U.S. senators and representatives can tout when stumping for reelection. Among the projects are expansion of trucking lanes on Interstate 710 in Long Beach Calif., completion of the North American trade corridor on Interstate 69 that runs from Laredo, Texas, to Montreal, Canada, and easing of traffic in downtown Chicago.

Unfortunately for states, they could end up losing big in a tax debate over Internet and telecommunications services. Lawmakers in the nation’s capital are eyeing legislation (S 150/ H.R. 49) that the Council of State Governments said could cost states between $4 billion and $9 billion in revenue by 2006.

Rather than seeing the tax rules rewritten under those bills, states say they would prefer that Congress stick to the current moratorium that prevents states from collecting a tax on the fees people pay when they go online and access the Internet.

States say the Internet access bills are written so broadly that telecommunication companies that provide Internet access also would be exempted from other taxes, including business, income and property taxes.

“We’re obviously concerned about these bills,” said Amy Scott, CSG’s senior legislative policy analyst. The CSG, which is working with the National Governors Association and National Conference of State Legislature and other groups on this issue, wants Congress to simply extend the current moratorium for two years.

The Internet access proposal is separate from efforts to make it easier for states to collect sales taxes on Internet purchases. States desperately want Congress to approve it. “We will put all of our effort into that,” said Michael Bird, senior federal affairs counsel for NCSL. But passage is a long-shot.

“I don’t know if Congress, in the middle of an election-cycle, is going to want to spend a lot of time raising taxes that go to politicians in a different level of government,” Grover Norquist, president of Americans for Tax Reform, an anti-tax group, told Stateline.org.

Congress began 2004 finally wrapping up the mega-spending bill for the current fiscal year, a boon for states. The $328 billion package that Congress sent to President Bush last week includes something for every state, said Taxpayers for Common Sense, a group that describes itself as a watchdog for taxpayers. California, for example, has 509 “earmarked” projects, the group said in a January report that lists each state’s projects.

With the current spending bill out of the way, Congress can begin work on the federal 2005 budget and its top legislative items, which don’t always top the list of states and governors. In the Senate, GOP priorities are class-action litigation reform, medical malpractice and pension reform. The House GOP will set its sights on making permanent Bush’s tax cuts and will consider such controversial issues as recognizing unborn victims of violence and a Constitutional amendment to ban same-sex marriages. Democrats will continue to focus on health care, worker training and jobs.

Congress has plenty of other work to do that states will be closely watching. A heap of existing laws that technically “expire” will need to be renewed or revised: welfare reform, Amtrak, Head Start, special education, job training and higher education.
All are important because states have a huge role in administering the programs. “How many major reauthorizations can [Congress] do in an election year? I think two,” said NCSL’s Bird.
Sources on and off Capitol Hill say it is unlikely Congress will get to all these laws, making extensions a good bet for several of them.

Revising the Bush administration’s sweeping No Child Left Behind education law is a “major priority” for the National Conference of State Legislatures, but Carl Tubbesing, deputy executive director of state and federal relations for NCSL, concedes action is “not likely” this year. The council is working on recommendations to give to Congress to rework the federal education law in 2005.

Given the federal government’s track record over the past few years, “the states would probably be happy if Congress did nothing at all,” said Nick Johnson, director of the State Fiscal Project at the Center on Budget and Policy Priorities, a group that focuses on policies affecting the poor.

He noted that Congress passed new mandates concerning education and election reform, but states were left to pick up most of the new costs. States would probably prefer “no more tax cuts and no more unfunded mandates,” Johnson said.

Tubbesing said NCSL will launch a campaign to bring more attention to federal laws that ask the states to pick up most of the costs. “(State) legislators are angry,” he said.