Telecom Taxes and Fees Inhibit Competition and Choice

Published April 1, 2004

Should VoIP be taxed and subject to the same fees as conventional wireline telephone service? If you say yes, you may be calling for a substantial extension of state and local regulatory authority over a promising new telecommunications technology. But if you say no, you may be supporting unfair competition with incumbent telephone exchange carriers and a major erosion of state and local tax collections. How to choose?

The solution could be as simple as significantly reducing or eliminating many of the taxes and fees that have come to be attached to telecom services over the years. The lost revenue to state and local governments can either be made up from general revenue sources–general sales, income, and property taxes–or offset by reducing state and local spending.

What are these taxes and fees, and how expensive are they? An article by Purva Patel in the February 1 Houston Chronicle described charges appearing on a typical phone bill in Texas:

  • Federal excise tax: A 3 percent luxury tax dating back to 1898 and originally passed to help pay for the Spanish-American War.
  • Federal universal service fund fee: The federal government charges all telecom companies this fee, and it’s passed on to consumers. The fees help fund phone services for rural areas, schools, libraries, and low-income customers. SBC charges between 48 and 53 cents, with the rates varying slightly every quarter. AT&T charges 8.75 percent of your state-to-state long-distance charges. Alltel charges 8.70 percent.
  • Texas Universal Service Fund Fee: The state version of the federal fee that helps fund services for the hearing-impaired and other programs for low-income and elderly users. Phone companies pay about 3.6 percent of their taxable communications receipts. Not all of them pass along the same amount to their customers.
  • 911 service fee: Set by the state 911 advisory committee to fund emergency services, this fee varies from region to region but can’t exceed 50 cents per phone line. SBC, AT&T, and Alltel charge 33 cents per line for most Houston areas.
  • Texas infrastructure fund fee: A 1.25 percent tax on telecom companies to provide money for advanced telecommunications in schools, hospitals, and libraries.
  • Municipal right of way or municipal franchise fee: Cities charge telephone companies for the “right of way” to put up lines and poles located over and under public streets, and phone companies pass along the cost to their customers. SBC and AT&T charge $1.54 per line. Alltel charges 55 cents per line.
  • Expanded local calling service surcharge: This charge goes toward expanding rural customers’ local calling scope by letting them call numbers outside their local service area for a flat fee. When the cost of providing this service exceeds the fees collected, the phone company can add a surcharge for everyone of up to $3.50.

Joseph Bast ([email protected]) is president of The Heartland Institute, a national nonprofit organization based in Chicago, and publisher of IT Update.