Out of Control

In many states, telecom taxes are substantially higher than so-called “sin taxes” on alcohol and tobacco. For example, in Jacksonville, Fla., beer is taxed at roughly 19 percent, liquor at 23 percent, tobacco at 28 percent. But for wireless phone service consumers pay whopping 33.24 percent in taxes and fees.

Although voice, data and video services can all be delivered via cable, wireline and wireless technologies, equally problematic is the varying degrees these telecom services are taxed. On average, wireline phone service still gets hit with the largest assessment – 17.23 percent on average. The tax rates on wireless and cable services average 11.78 percent and 11.69 percent respectively. Congress has maintained its moratorium on Internet access services, which expires in November of this year. Eight states, however, have been allowed to grandfather ISP taxes that were in place prior to the Congressional legislation.

This has the effect of creating tax-based price disparities on services that, from the consumer perspective, are no different from one another. For example, applying the averages above, the same flat-rate $49 long distance package would be carry a tax of $8.44 if purchased from a wireline company, such as Verizon or Qwest; $5.77 if purchased from a wireless company such as T-Mobile or Sprint, and virtually no tax if purchased from a Voice over IP provider such as Vonage or Comcast (although the Feds recently started imposing Universal Service Fund and 911 fees on VoIP service).

Discriminatory taxation extends into the multimedia world. Consider this for absurdity: An on-demand movie downloaded via your cable company’s set-top box is subject to the same taxes and fees imposed on all cable services. However, the same movie downloaded from a service such as Vongo or Amazon.com Unbox, which comes to your home over the same local cable infrastructure--except once inside your house gets routed through a cable modem to your PC—is not taxed at all. Go figure.

The current telecom tax regime runs at cross-purposes toward the goal of faster and more widespread broadband build-out. Taxes add to the cost of services that studies show are highly price-elastic. For wireless, that means a price increase of one percent results in up to a 1.29 percent drop in demand. For cable, a one percent increase in price can mean as much as a three percent drop in demand. This elasticity also is why legislators should avoid the temptation to “simplify” telecom taxes by raising them all to match the service taxed at the highest rate. In addition to being simplified, telecom taxes must be lowered.

Some may counter that cable TV is fair game for extra taxation because it’s an “entertainment” service, not a necessity. But that ignores the market fact that video services drive broadband uptake. Consumers usually buy cable first, that upgrade to high-speed Internet. It’s why cable modem market share has outpaced DSL from the phone companies—that is until the phone companies began to roll out video service of their own.

From municipalities up to the federal level, lawmakers need to rethink telecom tax policies. Virginia offers a good example of a state that barred municipalities and sub-divisions from imposing special taxes on telecom services. Ohio and Florida simplified taxes and fees. Even the Treasury department stopped collecting its three percent excise tax on long-distance—created to fund the Spanish-American War—although not so much out of enlightened policy as out of the difficulty of calculating the tax amid the proliferation of pricing packages that make no distinction between long distance and local service.

Lawmakers are fretting so much over the “high cost” of telecom services and the “digital divide” that they find it necessary to call for whole new funding mechanisms – to the point of spending millions to build their own municipal networks – to provide “affordable broadband.” There’s an easier and much more constituent-friendly approach—cut telecom taxes!