Excessive, Discriminatory Taxes on Wireless Hurt Consumers, Business, and U.S. Economy

Published April 1, 2008

Just as road and railroad building were critical to the economic viability of towns, cities, and states in the 1800s and 1900s, the data rates and carrying capacities of telecommunications links are equally critical to a community’s being and remaining competitive in a global digital economy today.

In the articles and tables in this special report, Scott Mackey identifies local problems, already becoming handicaps in competition, which will only become more serious in trying to build the necessary 50-fold increase in future broadband infrastructure discussed in “U.S. Internet Traffic Projected to Grow Fifty-Fold by 2015,” on page1 of this issue.

Wireless consumers are subject to a growing number of industry-specific discriminatory taxes and fees on their service. Overall, state and local taxes on wireless service are rising more rapidly than taxes on other goods and services.

Some states and localities are looking to further expand these taxes, many of which originated during a time when the telecommunications industry was characterized by regulated monopolies, even though the wireless marketplace is highly competitive and characterized by intense price competition and innovative new products and services that have led to dramatic declines in per-minute prices and rapid growth in both the number of wireless subscribers and the number of minutes used.

Tax Burden Still Heavy

The overall burden of taxes and fees on wireless consumers has eased slightly since 2003, after the elimination of the 3 percent federal excise tax (FET) on wireless service. (See table 1.) However, the elimination of the FET has been partially offset by a significant increase in the Federal Communications Commission’s Universal Service Fund charge (USF) borne by wireless consumers as a surcharge on their wireless bills.

Growing Burdens

Between 2003 and 2007, the FET dropped from 3 percent to zero, while the federal USF charge increased from 2.07 percent to 4.19 percent, producing a net reduction in consumer burdens from 5.07 percent to 4.19 percent.

The net reduction in the federal tax burden on wireless consumers has been offset in large part by increases in state and local taxes and fees. The latter increased from 10.20 percent to 11.00 percent between 2003 and 2007–four times faster than the increase in overall sales and use taxes imposed on sales of other competitive goods and services.

Overall, wireless consumers received a slight reduction in their overall tax and fee burden between 2003 and 2007, from 15.68 percent to 15.19 percent.

Consumers Concerned

The wireless industry and its consumers contend their tax burdens should be no greater than those imposed on other competitive businesses through the sales and use tax, with the exception of fees used directly for the 911 emergency communications system.

There is some evidence wireless consumers are becoming more politically active in preventing new discriminatory taxes on their bills. Proposals for significant wireless tax increases in Michigan, Cook County (Illinois), and several Oregon cities were defeated largely because of political pressure from wireless subscribers. Federal legislation is pending that would place a moratorium on new discriminatory taxes on wireless services.

Wireless Services Targeted

For the first time in five years, the state-local burden on wireless service fell slightly between July 2006 and July 2007–from 11.14 percent to 11.00 percent. Table 1 summarizes the trend over the past five years.

Our analysis uses the methodology developed by the Council on State Taxation (COST) in its landmark 1999 study, 50-State Study and Report on Telecommunications Taxation. It assigns each state a state-local tax rate that represents the average rate imposed in the most populated city and the capital city. It includes taxes and fees legally imposed on the customer or imposed on the company if they are measured by gross revenues or receipts from wireless service.

Table 1 shows the weighted average state-local tax and fee burden trends since January 2003. Burdens steadily increased between 2003 and 2006 before dropping slightly in 2007. These rates reflect the burden on the “typical” U.S. wireless consumer who spends the industry average of $49.94 per line per month on wireless service.

Between 2003 and 2007, taxes and fees on wireless service increased four times faster than taxes on other goods and services. Burdens on wireless consumers rose from 10.20 percent to 11.00 percent, while those on competitive goods and services increased from 6.87 percent to 7.07 percent. By any measure, wireless service was targeted for a disproportionate share of tax increases when compared to broad-based consumption taxes.

Table 2 ranks state-local tax and fee burdens from highest to lowest. Nebraska and Washington have displaced Florida and New York from the top two spots, shifting those states to third and fourth highest, respectively. Missouri moved up to 5th from 13th due to recent court settlements that require wireless companies to levy city business license taxes that are borne by wireless consumers.

USF Reductions, Tax Cuts

Consumers in eight states benefited from reductions in state USF charges, including significant reductions in California and Texas that had a national impact on “typical” wireless consumer tax rates. Others states with USF reductions include Arkansas, Colorado, Kansas, Maine, New Mexico, and Oklahoma. (The state USF is levied on intrastate calls, while the federal USF is levied on interstate calls.)

Wireless Service

These state-level reductions have been offset by higher federal USF charges. The federal effective USF rate for a wireless company electing to use the Federal Communications Commission’s safe harbor percentage has increased from 2.48 percent in 2004 to 4.19 percent in 2007.

The good news for wireless consumers is that for the first time since 2003, no state imposed a new industry-specific tax or increased the rate of an existing discriminatory wireless tax.

Virginia eliminated a telecommunications-specific tax, approving a sweeping telecommunications tax reform bill that reduced wireless consumer taxes from a maximum of $3.00 per month per consumer to 5 percent, the same rate as the combined state and local sales tax rate. Wireless consumers in Virginia now pay the same tax rates on their service as for purchases of other competitive goods and services subject to the sales tax.

In Utah, the legislature lowered the maximum local wireless tax from 4 percent to 3.5 percent. Texas eliminated its 1.25 percent telecommunications infrastructure fund tax, a move that took effect in 2008 and thus is not reflected in the 2007 data.

911 Fee Hikes

Alaska, Connecticut, Idaho, Montana, and Wisconsin increased 911 fees between July 2006 and July 2007. The increases in Connecticut (up $.03 per month) and Wisconsin (up $.09 per month) were relatively modest. Montana, however, doubled the statewide 911 fee from $.50 to $1.00 per month, and Alaska raised its 911 fee from $.75 to $1.90 per month. Idaho raised its 911 fee from $.75 to $1.00 per month.

Three states lowered their 911 fees. Arizona lowered its fee from $.28 to $.20 per month; Indiana lowered its fee from $.65 per month to $.50 per month; and Utah lowered both the state 911 fee (from $.13 to $.08 per month) and the maximum permissible local 911 fee (from $.65 to $.61 per month).

Scott Mackey ([email protected]) is a partner and economist at the firm of Kimbell Sherman Ellis LLP in Montpelier, Vermont. This article originally appeared in State Tax Notes, February 18, 2008, and is reprinted with permission.