October 2001

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Cal-Tax Commentary 

Larry McCarthy is president of the California Taxpayers' Association.

Attempting to alter many decades of well-reasoned public policy, pending legislation would allow cities and counties to impose new regulations and new taxes on telecommunications and information technology companies by eliminating a franchise provided to these companies by the state.

Assembly Bill 1150 (Florez) runs counter to the important public purpose of encouraging a seamless telecommunications network from border to border in California.

Under Section 7901 of the Public Utilities Code, telephone companies may construct lines along public rights of way in such manner and at such points as not to disturb public use of the road or highway or interrupt navigation of the waters. It has been the consistent view of policy-makers and the courts that telephone lines are a matter of statewide concern, not a municipal affair, and that no additional franchise from the local government was necessary.

The statewide preemption under Section 7901 continues to be critically important to the development of the next generation of this state’s telecommunications and information systems.

Here are reasons why the Legislature should reject AB 1150 when it reconvenes the second half of the two-year session in January:

•  AB 1150 provides for new utility taxes for California consumers. This bill authorizes the imposition of new local taxes on telecommunications utilities’ customers.  The current state preemption through Section 7901 protects Californians from franchise taxes imposed by cities and counties on telephone bills. Because of utility user taxes and other local taxes imposed by cities and counties on telecommunications, Californians who use these services are already heavily taxed.

Taxation on telecommunications and energy has become sensitive in recent years. The trend in California is for utility taxes to be reduced – not increased – by voters and local elected officials.  Under Proposition 218, which was approved by state voters in 1996, it is clear that all local taxes imposed under AB 1150 would require a popular vote for approval. 

• AB 1150 violates the spirit, if not the letter, of federal and state statutes. The California Legislature and the federal Congress are exercising caution with taxation and telecommunications infrastructure planning.  The California Internet Tax Freedom Act, the 1996 Federal Telecommunications Act, state-level efforts to examine strategies for meeting this state’s future infrastructure needs, and strategies for electronic commerce taxation are actions taken by legislative bodies to find rational public policies that will facilitate communications technology in our state and nation.  AB 1150 moves in the reverse direction with a change that will have a dramatic negative effect on telecommunications.

•  Taxing the Internet. Growth in Internet access and consumer online services is creating an important marketplace with immense economic potential for the state of California.  Actions by local governments to impose new taxes would have a serious chilling effect on growth and deployment of this technology.  We need to avoid new taxes in this area.

California enjoys a world leadership position in high technology and faces an historic opportunity to be a world leader in high-speed communications and Internet information. It is critical that policy-makers proactively work to prevent tax problems in this area and enable California to attract this new commerce, investment and related jobs.

Precipitous action of local governments to tax the use of right-of-way easements will do serious damage to the California economy by discouraging competition and investment in the pursuit of advanced telecommunications services.  Assembly Bill 1150 is ill-advised policy change for California.

Larry McCarthy is president of the California Taxpayers’ Association. This commentary is adapted from Mr. McCarthy’s testimony at a September 28 informational hearing on AB 1150 before the Assembly Committee on Business and Professions in Santa Ana.