This article originally appeared in the May 2011 issue of INTERNET TELEPHONY.
Everyone has heard state, local and federal policymakers advocate that broadband needs to be in the hands of all Americans, especially those that can least afford it. Expanding the reach of wireless services will be critical to achieving that goal. Yet somewhere in between lofty public policy goals and ensuring affordable access to wireless services lies a significant problem – multiple layers of taxes and fees on wireless bills that drive up costs to consumers. If these services are critical to all Americans, then why are they taxed two to three times the level of other goods and services?
On Feb. 14, 2011, I released a new report entitled A Growing Burden: Taxes and Fees on Wireless Service. This is the third report I have done since 2005 examining the excessive tax and fee burdens imposed upon wireless consumers and highlighting the critical need for meaningful communications tax reform because of the important role wireless services and its infrastructure play in today’s global economy.
The study found that consumers in 47 states and the District of Columbia now pay wireless taxes, fees, and government charges that exceed the general retail sales tax rate. The average consumer pays more than 16 percent of his or her wireless bill in federal, state and local taxes, fees and surcharges. This is the highest rate on wireless services that I have seen since I started tracking this data. For other goods and services, the average tax rate is only 7.4 percent.
At a time when the president, governors, and business leaders are calling for continued expansion and adoption of wireless service to improve accessibility and productivity, these excessive taxes actually discourage business and consumer purchases of wireless service and reduce the availability of funds for network modernization and continued deployment.
Consumer demand for wireless service is price sensitive. One study on the price elasticity of demand for wireless service found that each 1 percent increase in the price of wireless service reduces consumer demand for wireless service by about 1.2 percent. Using this estimate, the 9 percentage point disparity between wireless taxes, fees, and government charges and other taxable goods and services would suppress demand for wireless service by about 10 percent below what it would be if the tax and fee burden on wireless was equivalent to that imposed on other taxable goods and services.
Wireless carriers invested about $25 billion in their wireless networks in 2008, or roughly 17 percent of their gross revenues. If wireless service were subject to the same tax treatment as other taxable goods and services, carriers would have had up to $2.5 billion more available to invest in network improvements.
More than eleven years ago, the National Governors Association and the National Conference of State Legislatures called upon states to reform, modernize, and simplify the taxation of the telecommunications industry. Most states have failed to enact meaningful reforms. In fact, many have continued to target wireless consumers for additional taxes and fees. The effective rate of taxation on wireless service increased three times faster than the rate on other taxable goods and services between 2007 and 2010, saddling wireless consumers with billions in excessive taxes and fees. The wireless industry and its customers are willing to pay their fair share of taxes, but it is unfair and economically counterproductive for wireless consumers to pay rates two times higher than rates on other taxable goods and services. There is no sound policy reason to tax wireless and other communications services at these high rates.
It is time for policymakers to recognize the adverse impact excessive rates of taxation on wireless services have on consumers and the overall economy and pursue the solutions needed to modernize the current tax structure. Reform of these antiquated tax systems would lower costs to businesses trying to expand and create jobs, speed the deployment of high speed wireless networks, and relieve consumers – especially low-income consumers – of excessive burdens.
Scott Mackey is a partner at Kimbell Sherman Ellis LLP (www.ksepartners.com).
Allan T. Ingraham and J. Gregory Sidak, ‘‘Do States Tax Wireless Services Inefficiently? Evidence on the Price Elasticity of Demand,’’ Virginia Tax Review, Fall 2004, pp. 249-261.
 U.S. Census Bureau, Annual Capital Expenditures Survey, Table 4a (NAICS code 5172), available at http://www.census.gov/econ/aces/xls/2008/Full%20Report.htm.
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Edited by Stefania Viscusi