Are You Paying Too Much in Telephone Taxes?

Published May 25, 2007

Did you know the taxes you pay on a typical phone call are more than twice as high as the taxes you pay on most other goods? Depending on where you live, your phone taxes could even be higher than taxes on alcohol and tobacco products!

Several taxes and fees charged by the national government and states apply to landline phone services, including the Federal Universal Service Fund fee, state sales taxes, and 911 fees. Local taxes include 911 fees, general sales taxes, excise taxes, and public utility taxes.

A 3 percent national excise tax on long-distance calls, adopted a century ago, was finally phased out last year. But even so, taxes and fees paid by the average landline and cable PSTN (public switched telephone network) voice service customer remain very high.

With several coauthors, I recently examined taxes on landline phone services in 59 cities. The average for all cities studied is $8.50 a month, or 17 percent of the average monthly bill of about $49. This is more than twice as high as the average sales tax imposed on other goods, which according to the Tax Foundation is about 6.6 percent.

Landline phone customers in Lansing, Michigan, Billings, Montana, Augusta, Maine, and Dover and Wilmington, Delaware experienced the lightest tax/fee burdens, between $4.32 (8.76 percent) in Billings and $4.82 (9.77 percent) in Wilmington.

Customers in Kansas City, Missouri, Dallas, Texas, and Los Angeles, California fare the worst. Their telephone bills carry taxes and fees ranging from 29.10 percent to 33.24 percent, with burdens ranging from $14.35 to $16.39 a month.

Communication services generate no known negative effects on users and nonusers, and indeed are generally recognized to produce positive effects on the daily lives of users and nonusers. Consequently, one might expect their tax rates to more closely resemble those on medicine and food than those on alcohol, beer, and tobacco. But that is not the case.

Average taxes and fees on telephone services in 11 cities we studied were 164 times as high as taxes on medicine and 13 times as high as taxes on food. The average tax rate on landline phone service was higher than the average tax on beer.

In several cities, so-called “sin taxes” are lower than communication taxes and fees. In Chicago and Los Angeles, taxes and fees on landline phone users also are higher than taxes on beer and liquor, though not tobacco products.

Many cities and states still tax landline phone service as if it were provided by Ma Bell, but technological change has made the days of monopoly phone companies a distant memory. We can place a call using our traditional landline phone, a cell phone, or using a Voice over Internet Protocol (VoIP) service like Vonage or the “digital phone” services increasingly offered by cable companies.

Taxes on landline phones have remained high while competing voice services often operate under different tax regimes, creating a very uneven playing field. A typical phone call placed with a landline phone is subject to taxes and fees of 17 percent, while a call billed at the same rate but placed over a cell phone is subject to taxes and fees of just 12 percent.

If placed using a VoIP or digital phone service, the call in most states won’t be subject to any taxes or fees.

High taxes on landline phone service also affect Internet access. Time spent on the Internet using a broadband connection is not subject to taxes or fees, except in the eight states with grandfathered taxes, but the same amount of time spent on the Internet using a landline dial-up connection is subject to the same taxes and fees as a landline phone call, 17 percent.

Why do we pay too much in taxes on telephone service? Is it because state and local governments have failed to keep up with recent technological changes? Or because taxes embedded in phone bills are difficult to decipher?

Either way, this tax injustice ought to be corrected.

Paul Bachman ([email protected]) is research director for the Beacon Hill Institute, a nonprofit research organization based at Suffolk University in Boston, Massachusetts. This essay is derived from a new study published by The Heartland Institute and the Beacon Hill Institute.