Wireless service has become essential to daily life for individual consumers, businesses, and government. Few other services have seen the kind of explosive growth in subscribers that wireless service has enjoyed. Unfortunately, government has viewed this boon as a convenient revenue source, evidenced by the fact that over the past ten years the overall tax burden on wireless consumers grew three times faster than the general sales tax rate on other goods and services.
Last month, the Tax Foundation released a study on wireless taxation in the United States. Their results for 2014 show that Americans pay an average of 17.05% in combined federal, state and local taxes and fees on wireless service. Unfortunately, Utahans pay above average at 18.35% combined. This is more than double the sales and use tax Utahans pay on other taxable goods and services, and ranks Utah 12th highest in the nation for wireless taxes.
Regionally, Utah ranks number one for state-local wireless tax burden, despite neighboring Nevada and Idaho, with the 2nd and 3rd lowest rates in the country respectively. When considering the extent to which the wireless tax rate is above the general sales tax rate (disparity with sales tax rate), Utah fares even worse.
So where exactly does 18.35% of your cellphone bill go each month? The chart below outlines the various taxes and fees that wireless subscribers in Utah pay. In addition to these taxes and fees, many wireless providers charge their own surcharges to defray the cost of federal regulations, a federal Universal Service Charge, and other taxes on the network provider’s facilities and services.
Policy makers may think that high taxes on wireless communication are annoying to users, but aren’t burdensome enough to change consumer behavior. This is not actually true. The price elasticity of demand for wireless service, which shows how sensitive consumers are to price changes, indicates that for each 1% increase in the price of wireless service, consumer demand for such service falls about 1.2%.
Cell phones are becoming the sole means of communication and connectivity for many Americans, with nearly 40% of all adults “wireless only.” Amongst low-income users, the percentage jumps to 56%. As such, low-income users are disproportionately impacted by excessive taxes on wireless communication.
Another downside to discriminatory taxes on wireless service is a slowdown in wireless infrastructure investment. This slowdown not only impacts the deployment of more advanced wireless network infrastructure, but limits economic benefits in the broader economy because so many sectors rely on wireless networks to boost productivity and efficiency. If all businesses can operate more productively and profitably, they can create new jobs and generate further economic activity. Subscriber revenue determines the extent to which providers can invest in network modernization, so price sensitive consumers responding to high taxes on wireless service only feed the problem of slower infrastructure investment. While fixing discriminatory telecom taxes may reduce revenue in the short term, the increase in consumer demand and network deployment as a result of a lower tax burden would likely over time counteract the lost revenue.
There is currently a congressional moratorium on state and local taxes on Internet access. Your Taxpayers Association believes that this tax-free zone should extend to cover wireless communication as well. Wireless communication is a cornerstone for economic growth, and burdening wireless service users with fees merely shoots the messenger. Current telecom tax policies need to move away from discriminatory taxes on wireless communication towards more broad-based tax sources that do no distort consumer purchasing decisions or slow investment in critical infrastructure.
The map below from The Tax Foundation shows wireless tax rates and rankings in the United States.