No. 113 Taxes and Fees on Communication Services (executive summary html)

A new study by David Tuerck, Paul Bachman, Steven Titch, and John Rutledge finds taxes and fees imposed on cable TV and phone services in 59 U.S. cities cost the average household approximately $250 a year. Communication services are taxed at twice the average rate of other products and impose a major burden on consumers and low-income households in particular. Taxes also vary considerably from state to state, from service to service, and according to the technology used to deliver otherwise-similar services. Local, state, and national governments can take actions to make communication taxes lower and more uniform.

1. Communication services are heavily taxed.

Communication services today consist of voice, video, and Internet access services delivered over telephone wires, cable TV lines, or wirelessly (via point-to-point signal transmission or satellite). Consumers of voice and video services pay substantial taxes and fees. This study found:

• The total average monthly cost of taxes and fees on cable TV and phone calls (wireline and wireless) for the 59 cities studied for this report is $20.59, an effective rate of 10.94 percent. The burden on all communication services (including Internet access) ranges from a low of $10.93 (5.81 percent) in Lansing, Michigan to a high of $30.22 (16.06 percent) in Tallahassee, Florida.

• Cable video subscribers pay, on average, $6.12 a month in taxes and fees, an effective rate of 11.69 percent. Lansing, Michigan and Carson City, Nevada impose the lowest burdens while cable subscribers in Charlotte, North Carolina and Tallahassee, Florida pay the highest rates.

• Wireline telephone subscribers pay, on average, $8.32 per month in taxes and fees, or 16.87 percent. Subscribers in Billings, Montana experience the lowest burdens while those in Los Angeles, California pay the highest rates.

• Wireless telephone subscribers pay, on average, $5.89 per month in taxes and fees, a rate of 11.78 percent. The lowest burdens are in Carson City, Nevada and the highest are in Omaha, Nebraska.

• Broadband Internet subscribers pay, on average, $0.29 a month in taxes and fees if they use a Digital Subscriber Line (DSL) and $0.23 a month if they use a cable modem to access the Internet, for an effective tax rate of 0.71 percent on both types of service.

2. The methodology used for this study.

The Heartland Institute contracted with the Beacon Hill Institute (BHI) at Suffolk University in Boston, Massachusetts to collect data for the 50 largest cities in the U.S., measured by population, and the nation’s 50 state capital cities. BHI was able to collect complete data for 59 of these cities. BHI identified the taxes and fees, calculated the dollar value and effective tax rates for each, and summed the values by service (video, voice, and Internet access) and technological platform (cable, wireline, and wireless). Data on prices and monthly bills for cable, wireline, and wireless phone services came from Federal Communications Commission reports. Data regarding cable video services were collected by BHI from local officials and franchise agreements.

BHI’s data source for taxes and fees applied to wireline telephone services was a 2004 study by the Council on State Taxation (COST) updated using proprietary information provided by the Coalition to Reform and Reduce Excessive Communication Taxes (CORRECT), a group of major companies from the wireline, wireless, and cable communication industries.

3. Taxes and fees on communication services vary considerably.

Taxes and fees on communication services vary greatly from city to city, from one communication service to another, and depending on the technology used to deliver otherwise-similar services. A typical phone call placed with a wireline phone is taxed at 16.87 percent, while a call placed over a cell phone and billed at the same rate is taxed at 11.78 percent. If placed using a Voice over Internet Protocol (VoIP) service like Vonage (the “digital phone” services increasingly offered by cable companies), the call in most states isn’t taxed at all.

A typical pay-per-view movie ordered through a cable TV box is taxed at 11.69 percent, while the same movie downloaded over the Internet using a service such as Vongo is not taxed. The new video services being offered by wireline phone companies will probably be taxed at 5 or 6 percent.

Time spent on the Internet using a broadband connection is not taxed, except in the eight states with grandfathered taxes, but the same amount of time spent on the Internet using a wireline dial-up connection is taxed as heavily as a wireline phone call, an average of 16.87 percent.

The seeming absurdity of the current tax and fee regime is growing worse over time as people increasingly watch videos on their cell phones, place calls using their cable modems, and connect to the Internet with devices ranging from personal computers to cell phones to iPods.

4. Communication taxes are twice as high as taxes on other goods.

According to the Tax Foundation, the national average retail sales tax rate (local, county, and state sales taxes, weighted by personal income) is 6.61 percent. Taxes and fees on cable TV and telephone subscribers average 13.40 percent, twice as high. In other words, phone calls and cable services are taxed at two times the rate as clothing, sporting goods, and other household products.

The average household in the U.S. pays $20.33 per month ($243.96 a year) in taxes and fees on cable TV and telephone services. If communication taxes and fees were no higher than the general sales tax applied to other goods, the average household would pay only $10.03 per month ($120.30 a year) in communication taxes and fees, for a savings of $10.30 a month ($123.60 a year).

A closer examination of taxes and fees in 11 major cities confirms the disparity: Taxes and fees on cable TV and telephone calls in those cities average 14.77 percent while sales taxes imposed on most goods and services averaged only 7.58 percent, about half as high. Communication taxes and fees in those cities are 164 times as high as taxes on medicine and about 13 times as high as taxes on food.

In several cities, even so-called “sin taxes” are lower than communication taxes and fees. In Chicago and Los Angeles, for example, taxes and fees on wireline phone service are higher than taxes on beer and liquor.

5. Communication taxes and fees impose a heavy burden on consumers.

Taxes and fees on communication services impose a heavy burden on consumers and distort consumer choices and investment decisions, resulting in large and unnecessary social costs. In addition, excessive taxes and fees reduce capital spending on the country’s communications network, which reduces productivity, output, and employment.

• A $37 billion annual burden: The national annual burden on cable TV and telephone customers (estimated by multiplying average monthly taxes by 12 and then by the numbers of franchise cable, wireline, and wireless customers in the U.S.) is approximately $37 billion. This is a massive redistribution of wealth from consumers to government treasuries.

• The poor pay more: Communication taxes and fees are regressive with respect to income: Their rate as a percent of household income declines as household income rises. Taxes and fees on cable TV and telephone services consume about 1 percent of the annual income of low-income households, 0.5 percent of median-income households, and only 0.1 percent of incomes of households in the top income quintile.

• Distortion of consumer choices and investment decisions: Taxes and fees on cable television services reduce consumer demand for cable television by between 17.5 percent and 35 percent. Taxes and fees on wireless telephone services reduce the number of wireless phone customers by between 5.1 and 8.4 percent and the number of minutes used by between 13.3 and 15.3 percent. Taxes and fees cause an annual “deadweight loss” to society of more than $11 billion.

6. Policymakers can act to protect consumers.

Policymakers at the local, state, and national levels have opportunities to reduce taxes and fees on communication services and make them more uniform.

• Local reforms: Repealing local cable franchise rules would benefit consumers. According to the Government Accountability Office, basic service cable fees “were approximately 16 percent lower in areas where a second cable company – known as an overbuilder – provides service.” The net annual social benefit of competition in cable markets nationwide would total $2.9 billion

• State reforms: States can replace, reform, or eliminate video franchise laws, following the example of such states as Texas, which in August 2005 became the first state to pass legislation creating statewide franchising. Since then, nine more states (Arizona, California, Indiana, Kansas, Michigan, New Jersey, North Carolina, South Carolina, and Virginia) have passed similar legislation. States also can follow the lead of Virginia and Ohio by adopting legislation that lowers and streamlines communication taxes.

• National reforms: In March 2007, the FCC issued an order requiring local governments to decide on video franchise applications within 90 days and prohibiting build-out requirements and other nonprice concessions that may block or delay entry by competitors. This is a good start. Bills to federally preempt local franchising authority have been introduced in Congress. The national government can adopt legislation prohibiting discriminatory sales, use, or business taxes on communication services and can reform the Federal Universal Service Fund, which unnecessarily costs consumers billions of dollars a year.

7. Conclusion

Taxes and fees imposed on cable television and telephone subscribers in the U.S. are twice as high as general sales taxes on other goods and they vary significantly from city to city, by type of service, and by the type of technology used to access otherwise-similar services. These taxes impose a heavy burden on consumers both directly – $37 billion a year in taxes collected – and also indirectly – a “deadweight loss” to society of more than $11 billion a year.

High and discriminatory taxes and fees are legacies of earlier technology and public policy choices. Policymakers should bring public policy up-to-date with the changes that have transformed the communication arena. To reflect today’s technological and market realities, communication taxes ought to be cut, simplified, and made uniform across different technology platforms. Some states have already taken the lead in enacting needed reforms; other states should follow.

The national government has started to act in this arena, with the FCC ruling that local cable franchise policies should not discourage entry by new competitors in the video marketplace. But it also could do more. It could preempt local and/or state video franchising authority and forbid national, state, and local governments from imposing taxes on communication services higher than they impose on other goods and services.

Based on David Tuerck, Paul Bachman, Steven Titch, and John Rutledge, “Taxes and Fees on Communication Services,” Heartland Policy Study #113 (Chicago, IL: The Heartland Institute, May 2007 rev. June 2007). Copies of the 45-page study are available for $20 each. Permission is granted to reprint or quote from this Executive Summary, provided appropriate credit is given.

© 2007 The Heartland Institute. Nothing in this Heartland Executive Summary should be construed as reflecting the views of The Heartland Institute, nor as an attempt to aid or hinder the passage of legislation. Questions? Contact The Heartland Institute, 19 South LaSalle Street #903, Chicago, IL 60603; phone 312/377-4000; fax 312/377-5000; email think@heartland.org; Web http://www.heartland.org.