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Telecom Taxes Are Unduly Harsh, Regressive: Study
Author: Steven Titch
Published by: The Heartland Institute
Published in: Info Tech & Telecom News
Publication date: May 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
"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 co-author of 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
Communication taxes also vary dramatically from city to city, with
consumers in some cities paying more than three times as much as those
in other cities, the report finds. In some cities, taxes on wireline
telephone service are even higher than those on beer, liquor, and
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,"
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.
"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
On the local level, the report recommends video franchise fees should
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 to repeal current discriminatory taxes on
communication services, consider altering or ending current franchise
agreements with cable companies, and remove regulatory obstacles to
Steven Titch (email@example.com) is senior fellow for IT and telecom
policy at The Heartland Institute and managing editor of IT&T News.
For more information ...
David Tuerck, Ph.D., Paul Bachman, Steven Titch, and John Rutledge,
"Taxes and Fees on Communication Services," The Heartland Institute and
Beacon Hill Institute at Suffolk University, April 2007, available
online at http://www.heartland.org.