No. 113 Taxes and Fees on Communication Services
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). In the past, each service relied on a different technology, allowing it to be purchased, regulated, and taxed separately. Today, all three can be delivered via all three technological platforms and are often offered in packages combining several different services using one or more platforms.
Cable television and telephone subscribers pay hefty taxes and fees on these services, while Internet access is largely untaxed. The burden on telephone and cable subscribers in 59 cities for which complete data are available is 13.40 percent. This is more than twice the average general sales tax paid on other goods (6.61 percent). This report documents taxes and fees on communication services, describes their destructive consequences, and calls for tax and regulatory reform.
Taxes and fees on communication services also vary greatly from city to city, from one communication service to another, and depending on the technology used to deliver otherwise-similar services. These variations make little sense and often are the legacy of tax and regulatory decisions made before the advent of modern communication technologies.
Some taxes and fees are imposed only on communication services. Most states and cities also impose general sales taxes and other taxes and fees on voice and video communication services, but not on broadband Internet access.
This study did not take into account corporate income or property taxes, even though communication companies pay those as well. Also excluded are nonprice concessions, such as non-repeating capital grants paid by cable companies and the cost of radio spectrum licenses paid by wireless companies. The 3 percent federal excise tax is excluded from wireless phone bills entirely and from the long distance portion of wireline phone bills. Part 2 of this report summarizes these and other methodological issues.
Parts 3 - 6 of this report documents the taxes and fees paid by communication service subscribers for each of 59 cities for which data were available. The entire database is available on two Web sites, www.heartland.org and www.beaconhill.org. Some highlights include:
- Cable television subscribers pay, on average, $6.12 a month in taxes and fees, or 11.69 percent of the average monthly subscription cost. 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 a month in taxes and fees, or 16.87 percent of the average monthly telephone bill. Subscribers in Billings, Montana pay the least in taxes and fees while those in Los Angeles, California pay the highest rates.
- Wireless telephone subscribers pay, on average, $5.89 a month in taxes and fees, or 11.78 percent of the average monthly bill. 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) or $0.23 a month if they use a cable modem to access the Internet, for an imputed rate of 0.71 percent for both types of service. State and local taxes on Internet access are banned by the Internet Tax Freedom Act in all but eight states and some cities in Colorado, where preexisting Internet access taxes were “grandfathered.”
- The total average monthly cost of taxes and fees paid by household with cable TV, wireline and wireless phone, and Internet access is $20.59, or 10.94 percent of the average monthly bill. The burden 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. Because broadband Internet access is rarely taxed, removing it from our calculations lowers the average monthly burden only slightly, to $20.33, but raises the effective rate to 13.40 percent.
Part 7 shows how taxes and fees on communication services vary considerably by type of service and choice of electronic device used to receive the service. For example, average taxes and fees on wireline voice service are twenty times higher than taxes and fees paid on Voice over Internet Protocol (VoIP) service. Taxes and fees on video service from a cable company are likely to be more than double the taxes and fees on the same video service offered by telephone companies over their new fiber-optic and IP video networks.
Part 7 also finds communication taxes and fees are very high compared with general sales taxes imposed on other goods. The average general sales tax on other products is 6.61 percent, less than half the 13.40 percent paid on cable television and phone calls. The average household would save $123.60 a year if taxes and fees on cable television and phone calls were the same as average general sales taxes on clothing, sporting goods, and household products.
Taxes and fees on telephone calls and cable TV often approach and even exceed taxes on liquor and tobacco. For example, taxes and fees paid by the average wireline telephone subscriber in a sample of 11 cities is higher than the average tax on beer.
Part 8 examines the negative impact of high and discriminatory communication taxes and fees, and finds they pose a heavy burden on consumers and distort consumer choices and investment decisions. Consumers pay approximately $37 billion a year in communication taxes and fees. Low-income families pay ten times as much as upper-income families do as a percentage of their annual incomes.
Part 9 discusses what policymakers can do to improve the situation. Local and state governments can repeal, reform, or replace cable franchise laws that restrict competition and consumer choice; states can reduce and streamline taxes on communication services; and the national government can preempt state and local franchising authority, ban discriminatory taxes on communication services, and reform the Federal Universal Service Fund to reduce its cost.
Part 10 contains brief concluding remarks. Appendix 1 presents more detail on methodology, and Appendix 2 contains data used to calculate the national average general sales tax rate. Finally, at the end of the study are biographies of the authors, acknowledgment of persons who participated in the peer review process, and descriptions of the sponsoring organizations.