CITIES LOBBY AGAINST EXTENSION ACT CLOSING LOOPHOLE ON INTERNET ACCESS FEES COULD HIT LOCAL COFFERS.

Byline: Lisa Friedman Washington Bureau

Citing the possible loss of millions of dollars in revenue from already tight budgets, Southern California cities have launched an intense lobbying effort to block the U.S. Senate from expanding a federal ban on Internet sales taxes.

Mayors across California and the country are blitzing senators with letters and phone calls, asking them to oppose the Internet Tax Non-Discrimination Act.

The high-tech industry has warned that allowing the six-year federal ban on Internet access taxes to expire could threaten free use of the Internet.

Local officials, however, argue that the proposed moratorium creates a blanket ban on all Internet taxes and fees - a measure the city of Los Angeles says would threaten the $223 million it collects each year in utility user fees.

``If this bill's definition of `telecommunication services' is interpreted in an overly broad way, as many of us think it may, it would decimate local budgets,'' said Sen. Dianne Feinstein, D-Calif.

Feinstein was among a bipartisan handful, led by Republican Sen. Lamar Alexander of Tennessee, who made a last-minute, end-of-session move to stymie the moratorium.

While the bill passed the House in September, it now is stalled in the Senate.

Southern California mayors say that's fine with them, and are supporting a two-year extension of the current ban. That, local officials say, will give them time to negotiate a way to protect the franchise fees they collect for utility rights of way from cable and telephone companies. About 150 California cities collect the fee, known as the utility users tax.

``It hits at a bad time,'' Jim Seeley, D.C. lobbyist for the city of Los Angeles, said of the moratorium, noting that municipalities are struggling with the rollback of the state car tax in California. He said cities can ill afford to lose more revenue.

Just how much is at stake is unclear.

The city of Burbank says it collects $16.5 million annually from the utility users tax - a sum that makes up about 15 percent of its general revenues. The city of Calabasas takes in about $1.3 million each year from the tax, about 9 percent of its general revenues.

Compton says it has $2.4 million at stake; El Monte, $2.9 million; Hawthorne, $6.5 million; La Verne, $500,000; Long Beach, $18.6 million; Pomona, $5.6 million; Pasadena, $11 million; Redondo Beach, $2.5 million; San Bernardino, $840,000; Whittier, $2.9 million.

The Internet tax ban would impact only part of the amount cities now collect. Yet in lobbying Feinstein and others against the bill, most municipalities have cited the entire annual utility-tax revenue as their potential loss.

Only the city of Los Angeles has specified that about $4 million of the $223 million total it collects in annual utility user taxes will be lost.

Bartlett Cleland, associate general counsel for the Information Technology Association of America, said most cities inflate their figures, and he called them ``hogwash.''

``This is all a fantasy of the tax administrators trying to drive up a huge number,'' said Cleland, whose organization is a trade association for Internet and online services, telecommunications, software and other companies.

Cleland acknowledged that cities and counties will lose ``a few bucks, and it might even be a couple million bucks, and I'm not unsympathetic to that.'' But he argued that cities have been operating on a loophole since the original Internet tax moratorium passed in 1998.

That legislation prevented taxation of Internet access as well as discriminatory taxes that single out Internet sales or use.

The House version sponsored by Rep. Chris Cox, R-Newport Beach, which passed without dissent, made the ban permanent and added language to ensure that all forms of Internet access, including digital subscriber lines (DSL), cable, satellite and wireless connections would remain free in addition to dial-up connections.

Proponents of the tax ban like Cleland argue that if the ban goes away, Internet taxes will ``basically be left to the devices of the most creative tax administrators out there.''

Feinstein maintains that despite her opposition to the Senate bill, she does support a permanent extension of the Internet access tax moratorium.

But, she said, ``I want to make sure that maintaining tax-free access to the Internet does not inadvertently destroy the budgets of cities and counties throughout my state and the nation.''

Lisa Friedman, [phone]

lisa.friedman(at)langnews.com

CAPTION(S):

box

Box:

E-TAX REVENUE