Texas Treats Phone Use Like a ‘Sin’

Published September 1, 2008

Texas lawmakers have been studying the state’s telecom taxes, which rank among the highest in the nation, and have begun lowering the tax burden on telephone users.

The state’s telecom tax structure and broadband deployment were the subjects of a recent hearing of the Texas House of Representatives Committee on Regulated Industries.

Texas consumers who buy electronics or yard equipment pay a combined state and local sales tax rate of 8.25 percent. For cars, it’s 6.25 percent. Only mixed beverages (14 percent) and cigarettes (35.6 percent) are in the range of telecom taxes. Taxes and fees for local telephone service total almost 29 percent, putting telephone use in Texas in the “sin tax” category.

Fees Coming Down

Since 2007, the legislature has eliminated the $210 million-a-year Telecommunications Infrastructure Fund fee, and the Texas Public Utility Commission has cut the Universal Service Fund fee by $144 million a year.

When fully phased in over four years, those two cuts will reduce the telephone tax rate by about 2.25 percentage points, saving the average consumer $1.12 per month. Even then, the state’s telecom taxes, including cable and wireless, will remain well above the national average and far above the state average for other goods and services.

Testimony at the House committee hearing centered on the sales tax and the municipal franchise fee on voice and video services that use the public right of way.

‘Pyramiding’ a Problem

Telecommunications industry representatives expressed particular concern about the application of the sales tax to purchases of equipment used to provide service to consumers.

“To the extent that you tax the network elements, and the products that we produce are then subject to the same tax, you have tax pyramiding,” said Diane Barlow, an attorney with Casey, Gentz & Magness. “So the true cost of the tax to the consumer is hidden.”

Barlow said other industries’ manufacturing costs are not subject to pyramiding. Regarding the best approach for expanding broadband deployment, Barlow said the industry would prefer eliminating the tax instead of being given subsidies.

During the hearing state Rep. Joe Crabb (R-Kingwood) questioned whether a change in the application of the sales tax was necessary.

“The industry is growing rapidly–phenomenal growth,” said Crabb. “And then I hear everybody saying that this tax is bad. But I don’t know how that is hurting the consumers because they are lining up to get these things. Normally we think about taxes hurting because people won’t buy things because of taxes.”

Fees Piling Up

Municipal franchise fees also were discussed at the hearing.

Local telephone tax rates in Texas total about 11.32 percent on the average bill. The three largest local taxes are the franchise fee, the 911 tax, and the local sales tax. Of these, the franchise fee is by far the largest. Local franchise fees can even top the state sales tax as the largest single tax on consumers’ tax bills, going as high as 6.35 percent.

Franchise fees are payment for the use of public right of way, though most of the revenue generated from franchise fees is not used to manage or maintain the right of way. Instead, most of it goes straight into a city’s general revenue fund.

The numbers are impressive. Dallas will collect about $31 million in telephone franchise fees in the current fiscal year. The city also collects fees from cable, electric, and gas companies, so its total franchise fee revenue should reach about $125 million this year.

Houston will take even more, collecting $48 million in telephone fees, $99 million in electric fees, and $37 million in gas and other fees, for a total of $184 million.

Nonetheless, Clarence West, an attorney representing the Texas Coalition of Cities for Franchise Utilities, testified, “Payments to cities have gone down quite a bit. Wireless is a growth industry, and it has hit cities particularly hard.”

Fee Reductions Benefit Consumers

Texas Public Policy Foundation analysts believe a significant reduction in telecom franchise fees could lead to more video, voice, and data services being delivered to the home. A reduction in electricity franchise fees also might lead to competition in the transmission or distribution of electricity.

A franchise fee reduction could be accomplished, foundation analysts suggest, by phasing in a new fee structure based on the marginal costs cities incur for managing the right of way over a few years. That would give cities time to adjust their budgets to account for the lower fees.

State Rep. Phil King (R-Weatherford) who chairs the Regulated Industries Committee, said, “It does look like anecdotally there appears to be a problem.”

King says he isn’t sure about the solution, and he isn’t certain cities should wind up losing revenue.

“I think we’d like to see a dialogue get started on this to make sure that we’ve got things allocated properly in our tax structure,” said King. “I don’t think anyone is thinking about anything other than a hold-harmless, revenue-neutral setting for the cities.”

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