Wednesday, November 28, 2012

Growing Tax Bills Burdening Wireless Subscribers

Wireless consumers are under a pile of federal, state, and local taxes, fees, and surcharges. Regrettably, in recent years that costly pile has grown heavier. State and local governments bear responsibility for the burdens on wireless consumers resulting from their own misguided tax policies.

For its part, Maryland should halt – and reverse -- its state and local wireless tax hike trend. It should reduce the special burden it puts on wireless consumers through multiple taxes, fees, and surcharges. Ideally, Maryland tax policy should treat wireless services just like any other service, taxing them no higher than general sales tax rates and limiting any imposed fees to actual costs.

Trenchant analysis of wireless tax trends is provided in Scott Mackey's study "Wireless Taxes and Fees Continue Growth Trend." According to Mackey, "[t]he average burden on consumers increased from 16.26 percent in July 2010 to 17.18 percent in July 2012, a 5.5 percent increase in just two years." The single largest share of the growing tax burden on wireless consumers is attributable to increasing federal universal service fund (USF) surcharges. But this burden is also explained by the fact that "[s]tate and local wireless tax and fee burdens rose modestly from 2010 to 2012, from 11.21 percent to 11.36."

As Mackey explained, "[o]ne of the long-standing arguments for reform of wireless taxation is the disparity in the tax burdens on wireless services compared with the tax burdens on other goods and services subject to state sales and use taxes." Unfortunately, this disproportionate taxation of wireless continues. "Wireless customers now pay taxes, fees, and surcharges nearly two and a half times higher than the average 7.33 percent general sales tax rate imposed on other taxable goods and services."

Consider now Maryland's system of multiple taxes, fees, and surcharges, and the disproportionate burden they put on wireless services compared to other services. Maryland grants its local governments authority to impose high tax rates on wireless. The City of Baltimore and Montgomery County impose $4 charges per line per month. Monthly wireless bills for consumers in Maryland also include 911 fees, set both at the state and county levels. The state 911 fee is $.25 cents per month per line, while county 911 fees run to $.75 cents per month per line in Baltimore and Anne Arundel counties. And Maryland's new state universal service fund took effect on July 1, 2012. Maryland's USF surcharge grabs another $.18 cents per month.
Maryland consumers bear the eleventh highest wireless tax burden in the nation according to Mackey's analysis. While the state applies its regular 6 percent sales tax to wireless services, Maryland's wireless consumers face an average state and local tax rate of 12.77 percent thanks to the additional taxes, fees, and surcharges.

Unlike higher taxes, say, on cigarettes, which are imposed at least in part to discourage consumption, the government should not want to discourage consumption of wireless services. It's debatable whether taxing power should ever be used to directly alter consumer behavior. But discouraging consumption of the targeted service is what higher taxes do, of course.

Aside from higher prices that discourage consumer adoption of wireless, there are broader economic consequences stemming from this kind of heavy and disproportionate taxation. "Higher taxes on wireless service coupled with increased taxes on wireless investments," pointed out Mackey, "may lead to slower deployment of wireless network infrastructure, including 4G wireless broadband network technologies that an increasingly mobile workforce relies on for economic success."

Burdensome and distortionary tax policy poses particularly significant harm to marketplace investment in next-generation wireless networks. It results in forsaken business productivity gains resulting from technological upgrades, not to mention lost job creation opportunities. Observed Mackey: "If wireless service were subject to the same tax treatment as other taxable goods and services, increased carrier revenue could make as much as $3 billion more per year available to invest in network expansion and improvements."

The most economically sound, efficient long-term tax policy for states like Maryland to pursue includes a broad-based tax set at a low rate. A simplified approach makes for easy compliance by businesses that assess taxes owed to the relevant taxing authorities. It better ensures that all consumer services are taxed fairly, encouraging efficient economic activity in the market and ensuring that the tax system does not become a mechanism for distorting or changing consumer buying choices. In the context of wireless and other communications services, this approach means taxing such services at the same rate as any other kind of service and limiting any fees to costs that the relevant services actually impose on the public.

In 2012 the Maryland General Assembly established the Maryland Communications Tax Reform Commission. The Commission is tasked with assessing the "feasibility and fiscal implications for the State and local governments of a modernized, competitively neutral communications tax and fee system that eliminates disparate treatment of similar communications service providers" as well as the "efficacy of tax and other incentives to encourage investment in broadband networks and emerging technologies." The Commission will issue an interim report recommending tax reforms to the Governor and the State Assembly by the end of this year, with a final report due by June 30, 2013.

Maryland's tax policy toward wireless and other communications services is ripe for reform. The heavy and disproportionate tax burden shouldered by Maryland's wireless consumers needs to be lifted. Obstacles to wireless broadband adoption and expanding economic opportunities arising from next-generation networked technologies must be removed. A streamlined, broad-based, low-rate tax policy is in Maryland's long-term best interest.

Hopefully, the Maryland Communications Tax Reform Commission will seize the opportunity it has been given. Maryland's wireless consumers need tax relief from a haphazard tax system that needs reform.