Telecom Taxes Are Unduly Harsh, Regressive: Study

Published July 1, 2007

Taxes and fees imposed on cable TV and phone services in 59 U.S. cities cost the average household approximately $264 a year, according to a new report from a team of researchers at The Heartland Institute and Beacon Hill Institute at Suffolk University.

On average, communication services are taxed at 13.32 percent, twice the average rate of other products, the study found.

The heavy taxes impose a major burden on consumers, particularly on low-income households. Taxes and fees also vary considerably from state to state and depending on the technology used to deliver otherwise-similar services.

“Telephone and cable companies remain easy targets for taxation because nearly everyone is a customer and because the companies bill their customers every month,” said Paul Bachman, director of research at the Beacon Hill Institute and a coauthor of Heartland Policy Study No. 113, “Taxes and Fees on Communication Services,” released in April. “Furthermore, these taxes and fees have morphed into sources of revenue for the general fund and support programs, benefiting small but highly leveraged interest groups as well as federal programs such as the federal Universal Service Fund [USF].”

$41 Billion Price Tag

Taxes and fees on communication services nationally add up to nearly $41 billion a year, the report found. Such taxes are highly regressive: Families in the lowest quintile of earnings pay 10 times as much as families in the highest quintile, as a percentage of their income.

Communication taxes also vary dramatically from city to city, with consumers in some cities paying more than three times as much as those in others, the report finds. In some cities, taxes on wireline telephone service are even higher than those on beer, liquor, and tobacco.

According to the report, economists estimate the value of services lost due to high taxes and fees on communication services represent a “deadweight loss” to society of $11.4 billion a year.

“Taxes on long-distance and wireless create big hidden costs for our economy, because consumers use a lot less of these services when the price goes up,” explained Jerry Ellig, senior research fellow at the Mercatus Center at George Mason University in Arlington, Virginia. “The hidden cost, or ‘deadweight loss,’ of taxes on long-distance and wireless is between 45 and 70 cents per dollar raised–far more than the cost of more broad-based taxes.”

“While the technological hurdles that once limited competition in telecommunications services have been overcome, policymakers have not reduced the high tax rates that are a legacy of the monopoly era,” Bachman noted.

Wide Disparities in Rates

The report spotlights the dramatic difference between tax rates when consumers use different technology for the same services.

“A typical phone call placed with a wireline phone is taxed at 17.23 percent, while a call placed over a cell phone and billed at the same rate is taxed at 11.61 percent. If placed using a Voice over Internet Protocol (VoIP) service like Vonage, or the ‘digital phone’ services increasingly offered by cable companies, the call in most states isn’t taxed at all,” the report observes.

Similarly, “A typical pay-per-view movie ordered through a cable TV box is taxed at 11.69 percent, while the same movie downloaded over the Internet using a service such as Vongo is not taxed. The new video services being offered by wireline phone companies will probably be taxed at 5 or 6 percent,” the report continues.

“Time spent on the Internet using a broadband connection is not taxed, except in the eight states with grandfathered taxes, but the same amount of time spent on the Internet using a wireline dial-up connection is taxed as heavily as a wireline phone call–17.23 percent,” the report notes.

The problem is getting worse. “The seeming absurdity of the current tax regime is growing worse over time as people increasingly watch videos over their cell phones, place calls using their cable modems, and connect with the Internet with devices ranging from personal computers to cell phones to iPods,” the authors write.

Calls for Reform

The report offers recommendations for reform at the federal, state, and local levels. It suggests Congress could adopt legislation prohibiting discriminatory sales, use, or business taxes on communication services and reform the Universal Service Fund.

The report suggests states can replace, reform, or eliminate video franchise laws, following the example of states such as Texas, which in August 2005 became the first state to pass legislation creating statewide franchising.

On the local level, the report recommends video franchise fees be brought in line with the actual opportunity cost incurred by a business’s use of the public right-of-way, and that non-price concessions required of video franchise operators–such as demands that cable companies fund parking lots, swimming pools, and other projects unrelated to video service–be reduced or eliminated.

In March, the FCC issued an order requiring local governments to decide on video franchise applications within 90 days and prohibiting build-out requirements and other nonprice concessions that may block or delay entry by competitors.

Reforms in Progress

“At least eight states have passed laws that streamline the process by which new entrants can get authorization to offer video services by applying directly to the state,” said Bachman.

“Although the specifics of the state laws differ, the best of them require that franchise fees apply only to right-of-way costs, allow cable companies to apply for statewide franchising upon entry of a competitor, and limit the definition of ‘video revenues’ subject to the franchise fee formula,” Bachman continued.

“Local governments can act unilaterally,” Bachman noted, “to repeal current discriminatory taxes on communication services, consider altering or ending current franchise agreements with cable companies, and remove regulatory obstacles to new entrants.”

Steven Titch ([email protected]) is senior fellow for IT and telecom policy at The Heartland Institute, managing editor of IT&T News, and coauthor of “Taxes and Fees on Communication Services.”

For more information …

David Tuerck, Ph.D., Paul Bachman, Steven Titch, and John Rutledge, Ph.D., “Taxes and Fees on Communication Services,” Heartland Policy Study No. 113, The Heartland Institute and Beacon Hill Institute at Suffolk University, April 2007,