WASHINGTON (AP) – A five-year ban on taxing services that connect consumers to the Internet runs out Saturday while a bid to make the prohibition permanent moves slowly through Congress.

The permanent ban’s most ardent backers expected quick passage, but the bill has bogged down in a debate over the future of technology and the right of the federal government to tell states what to tax.

“This should have been a slam dunk for everyone interested in maintaining Internet fairness,” said Pete Sepp, vice president of the National Taxpayers Union, a group that advocates for lower taxes and less government spending.

The ban has lapsed once already – for 38 days in 2001 – without a sudden explosion of taxes on e-mail and dial-up connections. Few expect this year’s delay to end in new levies.

“I don’t think states would rush out to say we’re going to tax Internet access,” said Scott Corley, manager of government relations at the Information Technology Industry Council.

What worries lawmakers, technology companies and state and local governments on all sides of the issue are taxes on technologies in their infancies.

State and local governments see the Internet becoming the platform for new telecommunications technologies that might replace the old-fashioned ones, which state and local governments now tax.

They also worry that the industry’s practice of bundling Internet access with other telecommunications services into one package for consumers will make everything in the bundle tax-free.

“The future of telecommunications is Internet access,” said David Quam, director of state-federal relations at the National Governors Association. “We have a grave concern.”

Technology groups, however, said the concept of Internet access needs to be considered broadly to nurture new technologies. One such new technology blurring the lines is known as “voice over Internet protocol,” which transmits voices over the Internet in real time, just like a telephone.

Corley said state and local governments are essentially saying, “I’m going to tax the future of the Internet.”

The senators who will debate the bill next week are also concerned about the federal government’s role in dictating policies that the state must carry out and pay for.

The Congressional Budget Office, which estimates the cost of proposed legislation for members of Congress, said the bill would cost state and local governments $80 million to $120 million per year by eliminating taxes already in place.

The CBO, like state and local governments, said more tax revenue may be lost under changes meant to expand the definition of Internet access to services like DSL, cable modems and satellite.

Sen. George Voinovich, R-Ohio, in a memo to editorial writers in his state, said, “This represents an unprecedented federal taking of an existing state and local right, existing state and local revenue streams and existing state and local services which citizens have decided to provide for themselves.”

To others, the imposition on states is outweighed by the federal government’s duty to regulate economic activity among the states.

“Federalism is an important consideration of fiscally conservative philosophy, but then so is the regulation of interstate commerce,” Sepp said.

AP-ES-10-31-03 1908EST

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