S.D. Voters Will Decide Fate of Cell Phone Tax

Published November 1, 2006

South Dakota voters have the chance this month to repeal a 4 percent gross receipts tax on their wireless phone services–an opportunity granted by the state’s supreme court, which ruled in August that a referendum to repeal the tax could appear on the ballot.

At least one large carrier, Verizon Wireless, and CTIA-The Wireless Association, an industry trade group, hope the South Dakota referendum is the first of many grassroots efforts to cut taxes on wireless services.

“The tax burden on wireless users has just risen to indefensible levels,” said Joe Farren, director of public affairs for CTIA. He said most wireless users pay 15 percent in taxes each month, with South Dakota’s wireless tax rates the 11th highest in the nation.

South Dakota state legislators tried to repeal the tax earlier in the year but were defeated.

A similar measure in Pennsylvania, which would have repealed gradually a 5 percent gross receipts tax on wireless services, passed the state house and a senate subcommittee this spring, but has since been delayed.

Referenda May Succeed

The wireless industry’s hope is that users will start circumventing the often time-consuming legislative process and directly oppose wireless service taxes at the ballot box. In industry press reports, Verizon Wireless officials indicated a repeal of the South Dakota tax might lead it to look for popular vote opportunities in other states with ballot initiative processes, such as California.

Such efforts could bear fruit. “Users and voters now start vocalizing opposition to these taxes when they’re first proposed,” said CTIA’s Farren. “The next step is repealing them.”

South Dakota legislators opposed to the repeal have warned property tax increases or service cuts in law enforcement and road work will be necessary if the gross receipts tax is lost. The tax generates almost $10 million a year for South Dakota’s state and county governments, according to the Rapid City Journal.

Such threats may not resonate with cell phone users who vote, however. In late September, voters in Corvallis, Oregon rejected by a 2 to 1 margin a 5 percent tax on wireless services that city council members said would pay for $2.5 million of new fire equipment.

Ballot initiatives to relieve or eliminate cell phone taxes may appeal to a wide swath of voters, given the ubiquity of wireless phones and devices. Cell phones are popular across a wide range of income brackets, so such taxes conceivably are a heavier burden on lower-income individuals and households.

Better than Federal Preemption

Despite the risks of allowing voters to decide on taxes, the National Association of Regulatory Utility Commissioners (NARUC) prefers that to federal preemption of state laws. That’s what would happen under the Communications Opportunity, Promotion and Enhancement Act of 2006 (H.R. 5252), which passed earlier this year. It likely will be merged with a pending Senate telecom reform bill should that bill pass.

H.R. 5252 would impose a three-year moratorium on certain new state and local taxes and fees applying to mobile phone service. In its September report on the bill’s costs, the Congressional Budget Office estimated the moratorium could cost states $100 million to $150 million in tax revenues each year, assuming states have plans to raise cell phone taxes to cover revenues lost as landline phone use decreases.

South Dakota’s voters may soon show whether those best-laid tax plans oft go astray.

Sharon J. Watson ([email protected]) is a freelance writer.