3. State and local governments impose excise taxes on tobacco products. Increasing the Federal tax rates could preempt possible tax increases at the State and local levels at a time when other Federal assistance to such governments is being reduced due to Federal deficit problems.

4. The tobacco excise taxes represent a burden on one industry. Excessive deficits are a broad-based problem; deficit reduction should be accomplished by measures that spread the burden across all segments of the economy rather than unduly burdening a single industry.

1 All proposals except indexing would be effective on October 1, 1987, with appropriate floor stocks taxes being imposed. Indexing would be effective on January 1, 1989.

A 3-percent excise tax is imposed on amounts paid for local and toll (long-distance) telephone service and teletypewriter exchange service. The tax is collected by the provider of the service from the consumer (business and personal service). The tax is scheduled to expire after December 31, 1987. (The telephone excise tax was last extended for two years (1986 and 1987) in the Deficit Reduction Act of 1984 (P.L. 98-369).)

Exemptions from the telephone excise tax are provided for installation charges, certain coin-operated service, news services (except local service), international organizations, the American Red Cross, servicemen in combat zones, nonprofit hospitals and educational organizations, State and local governments, and for toll telephone service paid by a common carrier, telephone or telegraph company, or radio broadcasting company in the conduct of its business. In addition, an exemption is provided for private communications systems (e.g., certain dedicated lines leased to a single business user). Treasury study of exemptions

The Omnibus Budget Reconciliation Act of 1986 (P.L. 99-509) requires the Treasury Department to study the effects of the current exemption for private communications systems and the increasing incidence of so-called "by-pass" systems in which private businesses own and operate their own internal telephone systems rather than accessing the taxable systems operated by common carriers. Treasury also is to report on the appropriateness of other specific present-law exemptions from the telephone excise tax.

The Treasury Department study is to include revenue effects of all present-law telephone tax exemptions and descriptions of types of persons benefiting from such exemptions. The report is to be submitted to the House Committee on Ways and Means and the Senate Committee on Finance by June 30, 1987.

Possible Proposals

1. The existing three-percent telephone excise tax could be extended for three years (through 1990).

2. The three-percent telephone tax rate could be extended for three years, with the rate being increased to 5 percent for cellular and other mobile telephone usage.

3. The telephone excise tax could be increased to four percent for three years.

4. After a one-year extension at the present rate, the telephone tax could be phased out by 0.5 percentage points per year.

5. The present exemptions from the telephone tax could be repealed.

6. To limit avoidance of tax through private, by-pass telephone systems, a 10-percent excise tax could be imposed on all telephone equipment (including fiber optic links) and communications satellites sold to persons for use in a manner not subject to the telephone excise tax.

Pros and Cons

Arguments for the proposals

1. At the relatively low tax rate in effect in recent years, the telephone excise tax is not a heavy burden on individual or business taxpayers, yet taxpayers are accustomed to it and the tax provides needed Federal revenues.

2. The telephone excise tax does not disproportionately burden any regions of the country, and it is easily administered and collected.

3. The present exemptions from the telephone excise tax may no longer be appropriate, as they erode the potential telephone tax base and foster inequitable treatment of communications service

users.

4. Imposing an excise tax on the sale of telephone equipment to persons other than telephone companies for taxable use would help eliminate tax-avoidance by private by-pass systems in which no common carrier is used.

Arguments against the proposals

1. There is no rationale, other than Federal revenue needs, for imposition of the telephone excise tax.

2. Recent FCC decisions have increased monthly access charges for all local telephone service. Allowing the tax to expire would partially offset those increases.

3. The cost of telephone service, particularly local service, is a necessary expenditure in today's society. As such, it may be inappropriate to impose an excise tax on such expenditures.

4. Consumer expenditures on telephone service are a relatively higher percentage of income for lower income families than for higher income families; thus, the tax has a regressive impact according to income levels.

1 All proposals would be effective October 1, 1987, and would include floor stocks taxes in the case of the excise tax on certain equipment.

4. Luxury Excise Taxes

Present and Prior Law

Federal excise taxes have not been levied on a broad range of consumer items, whether or not such items could be called luxury items, since enactment of the Excise Tax Reduction Act of 1965.

Before enactment of the 1965 Act, retail, wholesale, and manufacturers taxes covered many consumer items without any exemption of items priced below threshold levels. Examples of the excise taxes, which were repealed in 1965 or later legislation, are listed below.

Manufacturers excise taxes

1. 10-percent tax on automobiles; 8-percent tax on automobile parts and accessories.

2. 10-percent tax on radio sets, television sets, phonographs, records, and other analogous items. (The same tax rate also applied to self-contained air-conditioning units, cameras, lenses and film, and business machines.)

3. 5-percent tax on film projectors.

Retail excise taxes

1. 10-percent tax on jewelry, various precious and semi-precious stones, watches, clocks, sterling silver, silver-plated, gold, or goldplated holloware and flatware, and other items.

2. 10-percent tax on articles made of fur on the hide or pelt, and on articles with fur as the most valuable component.

3. 10-percent tax on toilet preparations (which included cosmetics as well as perfumes), handbags, and luggage.

Possible Proposals

1. Ad valorem excise taxes could be reimposed on the articles that were subject to excise taxes under prior law.

2. In addition to the prior-law taxes, taxes could be imposed at a 10-percent rate on the following articles:

a. Boats and yachts;

b. China and crystal;

c. Airplanes, other than those used for the commercial transportation of passengers or cargo for hire;

d. Electronic entertainment and recreational devices (e.g., VCRs, video cameras, recording tape and other accessories, etc.);

e. Electronic or mechanical coin-operated amusement devices; and

f. Social club dues.