A Two-Prong Tax Attack on Wireless Services

A Two-Prong Tax Attack on Wireless Services

Taxes on your wireless services remain at all an all-time high -- 10 percent higher than taxes on other goods and services -- and without some close attention from fair-minded legislators, these wireless-service taxes will continue to place an unfair and discriminatory cost burden on consumers, particularly the poor and underprivileged. And things could get much worse come December 11.

Many of us are oblivious to the consumer taxes levied on wireless-telephone service. We open our bill, look at the big, bold number, and cut the check. Some of us set the bill up for auto payment and never think about it again. But next time that bill comes, look closely and you'll see more. You'll see the story of a government taking advantage of consumer trust; you'll see state and federal officials taxing you more on one of today's most essential of commodities than on virtually any other good or service.

The Tax Foundation has released its annual "Wireless Taxation in the United States" report. The findings were as damning this year as last. Among them: Americans pay an average exceeding 17 percent in combined federal, state, and local taxes on wireless services. This exorbitant tax rate is more than double the average rate of sales tax on other goods and services.

In some metro areas, such as Chicago, Baltimore, Los Angeles and New York City, the effective wireless tax rates are in the range of 25 to 35 percent, and many of these cities use wireless taxes to offset their deficit spending. For example, many cities are collecting E-911 wireless taxes only to divert these so-called emergency funds for general purposes. Chicago, for instance, just raised its E-911 fees an additional $1.40 per line to $3.90 per line. These findings aren't just another in a long line of examples of over-taxation; they represent a disproportionate tax on the poor and a likely cause of decreased investment in infrastructure.

While these taxes, for the most part, apply only to wireless voice services, the threat of increased taxation could soon hit wireless Internet services too, and on a significant scale. The Internet Tax Freedom Act, first passed in 1998, is set to expire on December 11. The act essentially bans any Internet-specific taxation in hopes of keeping Internet access open and affordable. If not renewed, some state policymakers looking for a quick injection of tax money could begin imposing taxes on data service and usage. In effect, the new taxes wouldn't just affect wired Internet service, but would be yet another added tax on wireless services.

At the same time that President Obama is pouring as much as $350 billion into his languishing National Broadband Plan, many lower-income Americans are opting to use wireless services as their only connection to the Internet. In a CDC report from 2013, we learned that more than half of impoverished Americans are able to get online access thanks to their wireless service. Ironically, Obama's hope to get poor and rural citizens access to the information and education available on the open Internet is being squashed, not by opponents to his subsidy, but by taxes levied on the service itself.

It's hard to imagine a greater irony than pouring hundreds of billions of dollars of subsidies into helping the poor obtain a service, while at the same time taxing them at disproportionately high rates to obtain it.

In short, the expiration of the Internet tax moratorium could prove to be the most damaging event in terms of Internet access to date, more than negating the nominal effects of his Broadband Plan and adding more taxes to wireless consumer bills. Fortunately, as the moratorium sunsets, some legislators have proposed a permanent ban on the taxes, although other legislators have made no secret of their hope to levy new taxes by quickly blocking the permanent fix.

Legislators need to take a step back and look at the bigger picture as these tax rates are soaring out of control. While a short-term loss in revenue, decreased tax rates on important Internet services will likely spell a generally improved economy on the whole. As research from the International Chamber of Commerce suggests:

Remedying the discriminatory tax treatment of telecom goods and services may reduce tax receipts in the short-term, but the longer-term increase in the use of advanced capability devices, service demand, and network deployment resulting from these tax reductions is likely to counteract this loss of revenue over time.

The Tax Foundation report further suggests:

While most infrastructure investments create these types of multiplier effects, the multiplier effects for telecommunications infrastructure are higher than other industries, because communications and information technology are deeply embedded in business processes.

In the face of high wireless taxes and the threat of Internet regulation on wireless services, consumers could soon face an excessive cost burden to own and use their wireless devices. If the administration and Congress can't rein in mobile taxation and make permanent the Internet tax moratorium, hopes of a faster, broader, and more equal Internet could be set back by a decade.

Zack Christenson and Steve Pociask write for the American Consumer Institute Center for Citizen Research, a nonprofit educational and research organization.

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