The Internet Tax Freedom Forever Act Should Be Adopted

On Wednesday, Scott Mackey and Joseph Henchman of the Tax Foundation released a report entitled “Wireless Taxation in the United States 2014.” Some of the key findings include:

·         Americans pay an average of 17.05 percent in combined federal, state, and local tax and fees on wireless service. This is comprised of a 5.82 percent federal rate and an average 11.23 percent state-local tax rate.

·         The five states with the highest state-local rates are: Washington State (18.6 percent), Nebraska (18.48 percent), New York (17.74 percent), Florida (16.55 percent), and Illinois (15.81 percent).

·         The five states with the lowest state-local rates are: Oregon (1.76 percent), Nevada (1.86 percent), Idaho (2.62 percent), Montana (6.00 percent), and West Virginia (6.15 percent).

·         Four cities—Chicago, Baltimore, Omaha, and New York City—have effective tax rates in excess of 25 percent of the customer bill.

·         The average rates of taxes and fees on wireless telephone services are more than two times higher than the average sales tax rates that apply to most other taxable goods and services.

More importantly, there are some key implications of high taxes on wireless service. When a tax is imposed on any good or service, it raises the price, resulting in a decrease in the quantity demanded from consumers. In a previous blog, I mentioned that taxes are generally regressive because the marginal value of a dollar is much higher to a poor person than to a rich person. Well, according to surveys by the Centers for Disease Control, over 56 percent of all poor adults had only wireless service as of December 2013. Therefore, high tax rates on wireless service are very regressive because they impose a disproportionate burden on low-income consumers.

I have also written about how the Senate should pass the Internet Tax Freedom Forever Act, which would permanently ban state and local taxes on Internet access (here and here). This should be done as soon as Congress returns after the elections. Mackey and Henchman’s report mentions that without this legislation state and local taxes “could add significantly to the tax burden on wireless consumers.” Many Americans still remain offline, either because they cannot afford Internet access or have chosen not to connect, but taxes on Internet access would lower the incentive for these individuals to get online.

Wireless networks are rapidly becoming the future of broadband throughout the United States, but high tax rates slow down the pace of deployment of wireless infrastructure. The reductions in the quantity of service demanded by consumers decrease the incentive for providers to invest in infrastructure. Although the transformation in wireless networks has been incredible over the past ten or more years (2G, 3G, 4G), the progress certainly could be slowed considerably or hindered if the Internet Tax Freedom Forever Act is not adopted.