Wireless Consumers Deserve a Break From Excessive Taxes
September 2009

Governors, federal and state legislators, and economic development officials have the opportunity to use telecommunications tax reform to energize local economies, create jobs and increase tax revenues. It is no secret that broadband communication services are vital to economic growth and vitality, especially in rural and underserved areas. Unfortunately, most states still have antiquated tax policies that cost their citizens billions of dollars in increased costs and discourage investment in telecommunications infrastructure.

Economists generally discourage policymakers from imposing taxes on investment.  Excessive taxes on wireless and other communications services may harm state economic development efforts by discouraging investment in communications networks that boost business productivity. Furthermore, new discriminatory taxes and fees on wireless service are regressive and significantly increase consumers’ cost of service. These tax burdens fall disproportionately on lower income users and may discourage seniors who are on fixed budgets from purchasing wireless service.

The deployment of mobile broadband services needs to be encouraged by keeping prices affordable for all constituents (individuals and businesses) through a fair and reasonable tax regime. The “Cell Tax Fairness Act of 2009” (H.R. 1521 / S. 1192) does not take away any existing revenue from state or local governments; it simply calls for a period of tax stabilization as stakeholders work to determine what is best for consumers, the economy, and the further deployment of wireless services in rural and urban areas.

• H.R. 1521 is entirely prospective. The “Cell Tax Fairness Act of 2009” does not roll back or reduce current wireless taxes or fees imposed by state or local governments. Current revenues derived from wireless consumers are held harmless.
• H.R. 1521 only preempts state and local governments when it specifically targets wireless services for new discriminatory taxes. If a state or locality wants to impose or raise wireless tax rates or fees in conjunction with raising the rate on general goods and services, it is permissible under the legislation.

A five-year moratorium on state and local discriminatory wireless taxes will give State governments, the Federal government and the telecom industry and its consumers, time to craft a solution to address the high rate of excessive and discriminatory taxation on telecom services.

• The effective rate of taxation on wireless service increased four times faster than the rate on other taxable goods and services between January 2003 and July 2007. Clearly wireless consumers continue to remain a target for discriminatory taxes.
• Twenty-one states, including the District of Columbia, currently impose double-digit state and local transaction taxes on wireless service, raising taxpayer equity and critical economic issues.
• Some of the most burdensome taxes on communications services are local taxes authorized by state statute or imposed through local home rule authority. Examples of states with widespread local taxes on wireless service include California, Florida, Illinois, Kentucky, Maryland, New York, Utah and Washington.
• Some states also double tax consumers by imposing a gross receipts or excise tax on wireless communications in addition to the general sales tax.

Nearly nine years ago, the National Governors Association (NGA) issued a paper urging states to reform, modernize, and simplify the taxation of the telecommunications industry. During these nine years, the National Conference of State Legislatures (NCSL) has also repeatedly endorsed the need to reform telecommunications taxes. Unfortunately, although some states have simplified their tax structures, most have failed to enact meaningful reforms.

In order to foster economic growth and increase consumer savings, NGA and NCSL should reiterate their call for states to reform and modernize their telecommunications tax structures. In particular, NGA and NCSL should urge states to follow the lead of Virginia and Texas in reforming their telecommunications tax structures.

• In 2006, Virginia lawmakers approved a historic telecommunications tax reform bill that dramatically reduced the tax rates imposed on consumers of communications services that took effect January 1, 2007. The reform equalized the rate of taxes imposed upon communications services to the same rate imposed on general business under the sales tax.
• In 2007, Texas lawmakers took the first step towards reducing the excess tax burden imposed upon communications consumers in their state by repealing the Telecommunications Infrastructure Fund (TIF) fee effective September 1, 2008. This reduced the total tax burden imposed upon communication services in Texas by 1.25 percent. While there is still work to do to equalize the tax burden imposed upon communication services with the burden imposed upon general business, this was a positive first step in that process.