According to a State Tax Notes report this month by Scott Mackey, "[w]ireless users now face a combined federal, state, and local tax and fee burden of 16.3 percent, a rate two times higher than the average retail sales tax rate and the highest wireless rate since 2005." Moreover, the recent increase in rates is mostly attributable to the rapid growth in the rate of the federal Universal Service Fund (USF) surcharge."
The federal USF system for subsidizing rural telephone companies, schools, libraries, and other institutions has been snowballing for years. As the FCC's recent notice for modernizing and streamlining the USF and intercarrier compensation systems states: "The component of the Fund that supports telecommunications in high-cost areas has grown from $2.6 billion in 2001 to $4.3 billion in 2010." USF is funded by a "contribution factor" that wireless and other telecommunications service providers pay into the system. Those companies recover their contribution costs through consumer surcharges that appear as a line item on consumers' bills.
Coinciding with the ballooning USF high-cost fund is a ballooning USF contribution factor that results in ballooning USF consumer surcharges. In 2001 the USF contribution factor was only in the 5 - 6 percent range. But since that time the USF contribution surcharge has made an uneven but nonetheless persistent march upwards. Prior posts on the FSF blog, for instance, have pointed to the first quarter 2010 contribution rate of 14.1 percent, and the second quarter 2010 contribution rate of 15.3 percent. For first quarter 2011, the surcharge runs even higher at 15.5 percent.
The chart below shows the steady climb of USF contribution rates over the past decade, which has resulted in the steady climb of USF surcharges.
Wireless broadband adoption is and will remain crucial to any public policy stressing increased consumer adoption of broadband technologies. But as Scott Mackey points out in the State Tax Notes report, "[c]onsumer demand for wireless services is price sensitive." Although the USF line item contained in consumers' bills is designated a surcharge, from a consumer perspective the USF surcharge is the functional equivalent of a tax. Therefore, high USF surcharges that make wireless service more costly to consumers deters wireless adoption, including wireless broadband adoption.
So despite the FCC's initiatives to expand broadband adoption, its own policies generating such a high USF surcharge remain a major barrier to achieving the National Broadband Plan's adoption goals. Therefore, the FCC's recently renewed efforts to comprehensively reform the USF and the intercarrier compensation regimes are desperately needed to reverse this surging surcharge trend.
Not to be forgotten is the fact that "[t]wenty-one states have a USF or similar type of mechanism that is funded by an imposition on wireless users." In those states that have their own USF programs, wireless consumers pay surcharges for both federal and state USFs. Therefore, states also bear responsibility for addressing the extent to which their own USF surcharges create further disincentives for wireless broadband adoption.
Aside from federal and state USF surcharges, state and local governments shouldn't be let off the hook. Going back to the State Tax Notes report, Mackey points out that since 2007, "[w]ith a few notable exceptions, state and local taxes, fees, and government charges remained high but were relatively stable." In fact, "local governments in a few states have been aggressive in levying new taxes on wireless users as the recession has stressed revenue collections from property and other broad-based taxes." Some of those "notable exceptions" regarding state and local taxes are worth a closer look.
Maryland is one of those states that most aggressively taxes wireless, particularly at the local level. According to the State Tax Notes report, Maryland consumers bear the eleventh highest wireless tax burden in the nation. While the state applies its regular six percent sales tax to wireless services, Maryland also grants its local governments authority to impose high tax rates on wireless. The City of Baltimore and Montgomery County recently increased their per-line tax from $3.50 per month to $4.00 and from $2.00 per month to $3.50, respectively. (Maryland does not, however, have a state USF program.)
Monthly wireless bills for consumers in Maryland also include state and county 911 fees, which amount to 0.52 and 1.56 percent, respectively. While those numbers sound small, 911 and "E911" rates can add up to big money. According to the FCC's Second Annual Report to Congress On State Collection and Distribution of 911 and Enhanced 911 Fees and Charges, state and local 911 fees collected in Maryland for 2009 total $55,556,616.37. Most would agree that emergency services are a worthwhile expenditure that merits such charges. To its credit, Maryland reported to the FCC that it does not use its 911 fees for non-911 purposes. "Thirteen states, however, report that collected funds are or may be used, at least in part, to support programs other than 911 and E911." The FCC's report indicates that 911 funds totaling over $100 million were devoted to non-911 purposes in 2009.
So what do federal USF surcharges, state USF surcharges, state sales taxes, state telecom taxes, local telecom taxes, state 911 fees, local 911 fees, and in some cases wireless fees totally unrelated to wireless service add up to? A lot of money. Exact numbers will vary by state, by county, and by city. But the taxes, fees, and charges set at the federal, state, and local levels are too high.
In all or almost all contexts, the economically sound and most efficient tax policy is a broad-based tax set at a low rate. This approach makes for easy compliance by businesses that collect and remit taxes to the relevant taxing authorities. It ensures that all kinds of businesses are taxed fairly, encouraging efficient economic activity in the market and ensuring that the tax system does become a mechanism for distorting or changing consumer buying choices. In the context of wireless and other telecom services, this approach means taxing such services at the same rate as any other kind of service and limiting any actual fees to any actual costs that the relevant services actually impose on the public.
Comprehensively reforming our telecom tax systems to approximate a streamlined, broad-based, low-rate approach remains a long-term project. But at the very least, policymakers who profess to appreciate the importance of wireless broadband adoption as a means of empowering citizens and expanding economic opportunity need to recognize the costs of the tax burdens they are putting on wireless consumers.
(Hat tip: Washington Policy Center's Carl Gipson for an excellent blog post at TechLiberationFront.)