In our troubled economy it makes little sense to bog down the most vibrant, innovative, and investment-heavy markets with special tax burdens. Onerous and unequal tax burdens penalize growth markets that are best positioned to bring about overall economic prosperity. Unfortunately, discriminatory taxation has been our policy for the last several years when it comes to wireless.
Legislation now working its way through Congress, however, would put a temporary halt on wireless discriminatory tax trends. And it would turn the spotlight onto state and local governments that are responsible for targeting wireless consumers with extra tax burdens. The legislation's proposed federal moratorium on new discriminatory wireless taxes could be just the thing to motivate state and local government reforms that will put wireless services in a position of tax parity.
In a February blog post I discussed a State Tax Notes report by Scott Mackey that concluded "[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." Significant blame can be placed on rising federal universal service fund (USF) surcharges. But state and local governments single out wireless consumers by sticking them with disproportionately heavy taxes.
When all respective state taxes on wireless are combined with their respective statewide average for local wireless taxes, the numbers show that 47 states subject wireless to tax rates that are higher than their combined average sales tax rates. As of July, 2010, the three worst offenders were: (1) Nebraska, whose state and local tax rates on wireless of 18.64% compared to a state and local sales tax rate of only 7%; (2) Washington State, with a wireless state and local tax rate of 17.95% compared to a 9% sales tax rate; and (3) New York, with a with a wireless state and local tax rate of 17.78% compared to an 8.25% sales tax rate.
This trend of discriminatory tax treatment of wireless services must stop.
On July 29, the House Judiciary Committee reported out H.R. 1002 – the "Wireless Tax Fairness Act of 2011." The legislation is sponsored by Rep. Zoe Lofgren. A Senate companion, S.543, sponsored by Sen. Ron Wyden, was also introduced earlier this year and referred to the Senate Finance Committee.
H.R. 1002 would put in place a 5-year freeze on new discriminatory state and local taxes on wireless services. The core of the bill, as reported out of the House Judiciary Committee, provides:
No State or local jurisdiction shall impose a new discriminatory tax on or with respect to mobile services, mobile service providers, or mobile service property, during the 5-year period beginning on the date of enactment of this Act.
As the legislation makes clear, a "new discriminatory tax" is defined as a tax imposed by a state or local jurisdiction on a mobile service that "is not generally imposed, or is generally imposed at a lower rate" than is generally imposed on: (A) other services or transactions involving tangible personal property; (B) other persons that are engaged in businesses other than mobile services; or (C) other property devoted to commercial or industrial use and subject to a property tax levy. And H.R. 1002 grandfathers in all discriminatory wireless taxes already in force at the state and local level as of the day the bill is enacted.
Obviously, running a government requires a steady source of revenue to fund its basic operations. This is true for state and local governments no less than for the federal government. Accordingly, Congress can't trample the taxing power of the states without violating the basic structure of constitutional federalism. And the ability of local governments to levy taxes likewise depends on delegations of state taxing power provided by their respective state constitutions or legislatures. H.R. 1002 is therefore written with careful attention to constitutional concerns and the preservation of state taxing power.
H.R. 1002 would not interfere with states' ability to lower or raise general purpose taxes that include wireless services, such as general state and local sales taxes. Nor would the bill interfere with the ability of state and local governments to assess and collect fees "imposed on a particular entity or class of entities for a specific privilege, service, or benefit." It likewise excludes federal and state USF charges as well as fees "specifically dedicated by a State or local jurisdiction for the support of E–911 communications systems."
A July 13 letter by a half-dozen local government lobbying organizations opposing H.R. 1002 contends that the bill takes away state and local governments' ability "to tax the wireless industry – at the expense of other taxpayers and businesses," thereby "mandating that state and local governments provide favorable treatment to the wireless industry."
But this is a disingenuous, over-simplistic mischaracterization of H.R. 1002. As the legislation specifies, existing wireless-discriminating taxes would remain in effect. And the bill would not interfere with the ability of state and local governments to raise or lower general purpose taxes, or to assess fees and charges. (As a prior blog post pointed out, the CBO review of the bill – also cited in the House Committee's Report – indicates that H.R. 1002 won't impose any direct costs on state or local governments.)
The point of H.R. 1002 isn't to provide wireless with preferential tax treatment – it doesn't – but to provide a remedy to an ongoing pattern of discriminatory tax treatment. The bill puts a halt on further abuses. And it imposes a time-out for state and local governments, calling their attention to the problem and giving them opportunity adopt their own measures for putting wireless taxation on stable and equitable footing. H.R. 1002 expressly provides that during the 5-year freeze period the bill's restrictions will not apply to states and local tax reforms that subject wireless services to general purpose taxes — even when those general purpose tax rates are simultaneously raised.
In addition to the basic tax principles at stake, there are other policy and economic considerations that favor a moratorium on new discriminatory wireless taxes. For instance, as the House Judiciary Committee Report for H.R. 1002 points out, taxes depriving the wireless industry of capital that could otherwise be invested in infrastructure hinders the goals of universal access and expanding economic opportunity envisioned by the President's Wireless Innovation and Infrastructure Initiative.
Also, "tax policies that discourage wireless use also negatively affect secondary markets for smartphone applications, wireless based Internet service, and digital goods and services delivered over telecommunications networks." The market for mobile applications, in particular, has been a bright spot in an otherwise sluggish economy. According the FCC's latest Wireless Competition Report, "both the number of mobile applications launched and the number of applications downloaded by consumers has grown significantly over the past three years," and that "by the end of 2009, U.S. consumers had access to more than 130,000 applications, a number that has grown to well over 300,000 today and continues to grow daily." But subjecting wireless to even more discriminatory taxes could impede the progress and potential economic benefits of this important and growing market segment.
Ideal tax policy includes broad-based taxes that treat all goods and services equally and at low rates, without exceptions or carve-outs. Realistically, even if Congress adopts a moratorium on new discriminatory wireless taxes, reforming state and local taxes on wireless by bringing them under streamlined, broad-based, low-rate taxes would not be easy. Even with a federal moratorium, state and local governments would still have to do their part. But by focusing national and local attention on the problem that now exists, H.R. 1002 would give us a shot at turning the corner on wireless tax discrimination and rolling back some of the worst abuses at the state and local level.
That is a shot worth taking.