State Telecom Taxes Stay High

Published July 1, 2006

Even as the U.S. Treasury ends the century-old federal excise tax on phone service, the states continue to single out telecom services as a cash cow.

Down in the Lone Star State, Texans have been focused on reducing school property taxes, and rightly so–as a percentage of income, the per-capita property tax burden in Texas ranked us 11th worst among the states in 2004.

However, there is at least one area of taxation where Texas ranks even worse: telecommunications. Texans pays a total of 29.29 percent in taxes on the average phone bill. This means Texans face the third highest tax burden in the country. Only in Virginia and Maryland are telecom levies higher.

Another problem with the telecommunications tax system today is that, in a world where voice, video, and data communications are merging into almost indistinguishable packets of electrons, taxes still discriminate based on the type of telecommunications service being provided, with traditional telephone service the most heavily taxed.

Though Texas clearly has an inequitable and excessive telecom tax burden, changing the system will not be easy, because these taxes supply significant revenue streams to state and local governments. And they are reluctant to part with the money.

Time Right for Reform

However, the current period of sustained growth in the Texas economy provides a great opportunity for policymakers to reduce telecom taxes.

At the state level, even after the property tax reduction, Texas has a budget surplus of at least $4.2 billion that could be used to reduce telecom taxes–two of which are especially deserving of elimination.

The first is the Texas Infrastructure Fund (TIF) tax, originally levied on phone bills to fund the installation of Internet and other communications infrastructure at a variety of public institutions. Once this task was completed, the Texas legislature decided to keep the $200 million the tax generates every year and divert the funds to general revenue.

The second is the sales tax, which is not simply levied on fees for phone service, but also factors in other telecom taxes, including the TIF, utility gross receipts, and municipal franchise fees. This tax-on-a-tax costs consumers about $90 million a year.

The biennial cost of eliminating these two taxes would be about $600 million; chump change compared to the current budget surplus.

Cities Won’t Miss the Revenue

At the local level, cities levy municipal franchise fees averaging more than 6 percent on telephone and cable/video services purchased by consumers. Though this fee is often described as “rent” to compensate cities for the use of the public right-of-way, it has become just another revenue stream. Houston generates almost $50 million annually from its telephone franchise fee alone, while Dallas and Austin generate $20 million and $15 million, respectively.

In order to reduce the burden of municipal franchise fees, the Texas legislature should treat this fee simply as compensation for the use of the right-of-way, not as a tax on video and voice communications. Cities should charge the fee on lines that are physically present in the right-of-way, not on every service that uses the lines.

Over time, this would save Texas consumers tens of millions of dollars per year. Cities can afford this loss of revenue from telecommunications franchise fees, as revenues from other franchise fees and general fund sources have shown healthy increases the past couple of years.

In a time of increased business efficiencies and technological innovation, consumers are benefiting from declining prices on a wide variety of telecommunications products and services. Government at all levels should similarly adopt innovative tax policies that will bring much-needed relief to Texas taxpayers.

Bill Peacock ([email protected]) is director of the Center for Economic Freedom at the Texas Public Policy Foundation.