Tuesday, October 25, 2016

Maryland and Other States Must Reduce Wireless Tax Rates

On October 11, 2016, the Tax Foundation published a report entitled “Wireless Tax Burdens Rise for the Second Straight Year in 2016.” According to report authors Scott Mackey and Joseph Henchman, wireless tax rates have increased to a record high 18.6% for the average U.S. consumer. Wireless consumers are paying an estimated $17.2 billion in taxes, fees, and government surcharges. And while average wireless bills have been dropping since 2008, consumers have been unable to enjoy the benefits because “taxes are growing at a rate twice as fast as average wireless prices have been falling.”
Wireless services have raised living standards for low-income Americans, offering them flexible low-cost connections to the rest of the world. Wireless communications provide low-income Americans cost-effective means for accessing health, transportation, and education services. However, burdensome state and local tax rates on wireless connections increase costs for low-income Americans who access these valuable services.
At the end of 2015, more than 64% of all low-income adults subscribed only to wireless voice services, whereas more than 48% of adults overall were wireless only. Wireless taxes and fees disproportionately harm low-income consumers because the taxes they pay represent a higher percentage of their income compared to middle and high-income consumers. With a federal Universal Service Fund rate of approximately 6.64%, state and local governments account for the remaining 11.93% of tax burden for the average American wireless consumer. These heavy taxes make it more likely that low-income consumers will drop wireless services. State and local governments must alleviate these disproportionate harms affecting low-income wireless consumers. For low-income adults who currently have no connection, a reduction in state and local wireless tax rates likely would encourage them to connect wirelessly.
Of course, all wireless consumers are harmed by record-high wireless tax rates. Artificial price increases from taxes reduce consumer demand and thereby reduce network investment. As Mr. Mackey and Mr. Henchman explain: “The reduced demand impacts network investment because subscriber revenues ultimately determine how much carriers can afford to invest in network modernization.” The authors add, “Higher taxes on wireless service, coupled with increased taxes on wireless investments, may lead to slower deployment of wireless network infrastructure, including fourth generation (4G) and fifth generation (5G) wireless broadband technologies.”
In Maryland, the wireless tax burden is severely harmful to consumers. Maryland and its localities charge up to five different taxes on a consumer’s monthly wireless bill. All combined, average wireless consumer tax burdens in Maryland far exceed the state’s general sales tax rate of 6%. Including Washington, DC and Puerto Rico, Maryland has the 15th highest combined wireless tax rate at 19.47%. But among Maryland’s neighboring states, Delaware ranks only 48th with a 12.98% combined rate. Meanwhile, Virginia is 47th highest with a 13.36% combined rate, and West Virginia is 46th highest with a 13.36% combined rate.
In particular, Baltimore has notoriously high wireless taxes. Baltimore charges a $4 tax per line per month. Therefore, the taxes on a basic $100 per month family plan of 4 lines would add almost $30 extra a month. (See chart below.) With the second highest combined wireless tax rate in the country – only Chicago ranks higher – Baltimore should reduce its wireless tax rates immediately in order to improve opportunities for its residents to cost-effectively access wireless services. More generally, Maryland should lower wireless tax rates to enhance opportunities for wireless providers to invest in statewide networks.
Table 6: Wireless Taxes and Fees on Multi-Line Plan in Selected Cities, July 2016
Federal, State, and Local 
Tax on 4 line plan @ $100 per month
Tax Rate
Chicago, IL
Baltimore, MD
New York, NY
Philadelphia, PA
Omaha, NE
Seattle, WA
Providence, RI
Tallahassee, FL
Kansas City, MO
Los Angeles, CA
(Source: Scott Mackey and Joseph Henchman, “Wireless Tax Burdens Rise for Second Straight Year in 2016”)
In an October 17 blog post, Free State Foundation President Randolph May discussed ways that Maryland Governor Larry Hogan can improve his fiscal record. Governor Hogan’s two-year record of reducing taxes and fees and proposing to eliminate unnecessary regulations provides a strong start. The time is now right for the Governor to work with the Maryland General Assembly to reduce the tax burdens that wireless consumers experience on a monthly basis.
All state and local governments that burden their wireless consumers with heavy taxes should think twice about the harms being visited disproportionately on low-income consumers. State and local governments – including Maryland’s – should also recognize the negative impact that excessive and discriminatory taxation has on consumer demand and on network investment. High taxing states and localities should significantly decrease wireless tax rates to encourage more wireless connections for consumers of all income levels and more investment from wireless providers.