Wireless Taxes Are Way Too High

The Wireless Foundation's valuable annual report regarding the taxes and fees imposed on wireless services has just been released. It short, it paints a dismal picture for consumers with respect to the taxes, fees, and government surcharges added to their bills.

 The top line: A typical American household with four phones on a “family share” plan, paying $100 per month for taxable wireless services, would pay over $330 per year in taxes, fees, and government surcharges.

 

Taxes, fees, and government surcharges now make up a record-high 27.60% of the average wireless services bill.

 

The federal Universal Service Fund (FUSF) charge has increased again, from 12.76% to 13.36% of the average wireless services bill, and state and local taxes on the average bill also increased, from 14.01% to 14.25%. Together, you get the 27.60% total.

 

Maryland, where the Free State Foundation is located, ranks in the top quartile of those states with the highest taxes, fees, and government surcharges imposed on wireless services. Over 30% of the average Marylander's wireless services bill is composed of those add-ons.

 

Some good news: The average charge from wireless providers has decreased by 29% since 2012, from $47.00 per line per month to $33.36 per line.

 

Now the bad news: During this same time, wireless taxes, fees, and government surcharges increased from 17.18% to 27.60% of the average bill. The result – the consumer benefits from lower wireless prices are almost totally offset by higher taxes and fees.

 

Of course, the Tax Foundation's report is not just a sterile exercise in collecting and organizing data. All this matters greatly to consumers, and especially to low-income families. According to the report, approximately 83 percent of low-income adults live in wireless-only households. Wireless taxes, fees, and surcharges are regressive and disproportionally adversely impact low-income families.

 

That should be reason enough for state and local taxing authorities, and the federal government with regard to the USF fee, not only to halt the upward trend but to act to substantially reduce the current tax burden on wireless consumers!

Report Tracks Tax Hikes on Wireless Consumers in 2019

In a report published by the Tax Foundation in late November, Scott Mackey and Ulrick Boesen provide an abundance of data on wireless taxes as well as government surcharges and fees imposed on wireless consumers. Their report, "Wireless Taxes and Fees Jump Sharply In 2019," tracks the overgrowth of wireless taxes over time and also compares overall tax bills faced by consumers in different states. As a general matter, states should not tax consumers of wireless services at rates higher than their general sales tax rates. Unfortunately,  the problem of over-taxation of wireless consumers appears to be growing. Consider this key report finding: 

Since 2008, average monthly wireless service bills per subscriber have dropped from just under $50 per line per month to $37.85 per month–a 24 percent reduction. However, wireless taxes have increased from 15.1 percent to 21.7 percent of the average bill–a 44 percent increase.

FCC Report Spotlights States' Wrongful Use of 911 Taxes

Some $285 million in 911 taxes charged to voice service consumers were improperly diverted to non-911 purposes by states in 2017. That's nearly 10% of 911 taxes. Those findings were in the FCC's 10th Annual Report on State 911 Taxes. Diversions of state 911 taxes are contrary to law and undermine the integrity of 911 tax policy. Consumers are harmed by the dishonest, extra charges, and 911 services stand to lose needed funds. 

To the FCC's credit, its report indicates states will face closer scrutiny in the future for diverting 911 taxes. Congress, the Commission, and state officials ought to consider new measures to combat states' misuse of 911 taxes and ensure compliance with the law.

The NET 911 Act of 2018 requires the FCC to annually report to Congress on state collection and distribution of 911 and enhanced 911 (E911) fees and charges. The Act was intended to "ensure efficiency, transparency, and accountability" when it comes to 911 taxes. It requires that the Commission's reports include findings on amounts of 911-related revenues spent by states for purposes other than 911-related services. To prepare its reports, the Commission sends the governors of each state questionnaires regarding 911 tax collections for each calendar year. The 10th Report observed: "All jurisdictions provided written responses to the questionnaire, but not all jurisdictions responded to every question and some jurisdictions provided incomplete responses to questions." 

In all, states collected over $2.9 billion in 911 taxes in 2017. Key findings on diversions of state 911 tax revenues are contained in the 10th Report's paragraph 27:

Based on the data we have received, we find that six states and the U.S. Virgin Islands diverted or transferred fees in calendar year 2017… Montana self-identified in its responses to the questionnaire that it used collected funds, at least in part, for non-911 related purposes. Five states [New Jersey, New York, Nevada, Rhode Island, West Virginia] and the U.S. Virgin Islands did not self-identify as diverting funds, but the Bureau has determined based on review of the information provided that these jurisdictions in fact diverted funds for non-911 related purposes within the meaning of the NET 911 Act. The jurisdictions… diverted an aggregate amount of $284,968,912.66, or 9.70% of all 911/E911 funds reported to have been collected by all responding states and jurisdictions in 2017. 

The report identified the amount of 911 taxes improperly diverted to non-911 purposes by each state. The three most notorious states were New York (over $170.8 million), New Jersey (nearly $94.2 million), and Rhode Island (almost  $11.4 million). A statement by Commissioner Michael O'Rielly rightly called out those three "repeat offenders." Moreover, the Commission's finding of nearly $285 million in diverted 911 taxes in 2017 was more than double its 2016 finding of $129 million in diverted tax dollars. 

Diversion of state 911 taxes poses a serious rule of law problem. As the 10th Report points out: "Section 6(f)(1) of the NET 911 Act requires that obligation or expenditure of 911/E911 fees or surcharges be 'in support of 9-1-1 and enhanced 9-1-1 services, or enhancements of such services.'" It goes without saying that when states impose taxes on consumers – on their citizens – for specified purposes, they should spend collected revenues only on those specified purposes. Indeed, voice service providers alleged to have improperly collected taxes from their subscribers have faced multi-state class-action lawsuits. Penalties for violating state consumer protection acts can include treble damage awards plus steep attorney fee awards. We should be no less tolerant of state governments improperly collecting taxes. States' diversions of 911 tax revenues may undermine public confidence in the integrity of 911 taxation, and in the integrity of tax laws generally. 

Additionally, unaccountable 911 taxation wrongfully hits consumers of voice services. According to the 10th Report, the average 911 fees in 2017 totaled $1.04 per line per month for wireline, $0.97 per line per month for wireless, and $0.99 per line per month for VoIP. Also: "the average prepaid wireless percentage of retail transaction 911 fee [was] 2.12%." As indicated above, 911 tax charges totaled over $2.9 billion in 2017. Voice consumers – including wireless consumers – are already subject to high taxes and fee charges by multiple governments. Such taxes include: state and local sales taxes, federal USF surcharges, state USF surcharges, industry-specific state taxes, and state 911 taxes. Indeed, a Tax Foundation estimate pegged total wireless consumer taxes at $16.1 billion for 2018, amounting to 19.1% of consumers' wireless bills. That estimate likely lowballs the amount of 911 taxes that consumers were actually charged in 2018. 

When it comes to affordability of voice and broadband services, wireless taxes hit lower-income consumers who are wireless-only especially hard. So it's especially important to curb excessive and improperly charged taxes on wireless services. FSF President Randolph May previously urged the FCC to act to prevent state 911 taxes from being assessed against low-income subscribers to no-charge Lifeline wireless service:

Putting aside the legal question, … it seems to me a matter of common sense – or sound policy, if you prefer – that the FCC should not allow states to impose taxes or fees on no-charge Lifeline service that the FCC has sanctioned by rule for the purpose of promoting access to communications services for those who otherwise cannot afford service.

In the past, a few states wrongly have either imposed 911 (and other) taxes on Lifeline services or considered doing so.

Similarly, it is sound policy for Congress, the FCC, and state officialsto ensure that 911 taxes are properly assessed and distributed. Otherwise, wireless consumers will be wrongly financially burdened and discouraged from accessing wireless communications services. And 911 services will be deprived of funds.   

The 10th Report indicated the Commission will more closely scrutinize future state responses to questionnaires on 911 taxes. Going forward, the Commission will presume revenues are being diverted to non-911 purposes unless states make more complete responses. The Commission also should follow through on report warnings that states diverting 911 tax revenues may be ineligible for upcoming matching federal grants awards from funds raised through spectrum auctions. Congress, the FCC, and state officials should consider further ways to spotlight 911 tax diversions and incentivize compliance with the Act. Certainly, governors and state legislators should direct relevant state and local government officials to provide complete and accurate answers to FCC questionnaires on 911 taxation.

If states are going to charge consumers a dollar per line each month for 911, then every tax dollar collected should go to 911-related services. It's unlawful and unfair to consumers if 911 taxes are diverted to anything else. And 911 services stand to suffer.

Additionally, low income recipients should not be assessed 911 taxes on Lifeline service. That's counterproductive and inconsistent with Lifeline's purpose. 

FCC Hits Consumers With New Year’s USF Tax Hike

Starting 2016, consumers must pay an 18.2% surcharge on part of their phone bills. The surcharges pay into the Universal Service Fund (USF), a multi-billion-dollar subsidy system.

Functionally, USF surcharges are taxes. But the FCC doesn't call them "taxes" because the rate is assessed and the money collected and spent outside the control and accountability of Congress. Apparently, labeling USF taxes "surcharges" is the FCC's way of dodging the constitutional maxim of "no taxation without representation."

USF surcharges appear as a line item on consumers' monthly bills for voice services. The surcharge rate – 18.2% – is assessed against the interstate long distance portion of those services. The money is remitted to an entity established by the FCC to administer the USF program. In 2014 alone, money paid into the USF program was given to:

          - voice providers in rural or high-cost areas -- $3.75 billion;
          - schools and libraries -- $2.27 billion;
          - health care facilities -- $193 million;
          - voice providers serving low-income consumers -- $1.6 billion.

Not to be overlooked are the expenses incurred by the FCC-established entity established to administer the USF program -- nearly $119 million in 2014.

Over the last several years the USF subsidy system has snowballed in size. 2014 USF disbursements total over $7.8 billion, marking a significant increase from 2000 USF spending of $4.0 billion. Corresponding to climbing USF subsidy spending are climbing USF surcharge rates. The following pair of charts shows the unmistakably upward march in the effective tax rate on consumers.

As further explained in my blog post, "USF Surcharge Hikes Hit Over-Taxed Wireless Consumers Hardest," the FCC generally treats 37.1% of a wireless consumer's calling plan as the interstate long distance portion subject to USF surcharges. Wireless consumers face a tax pile up from multiple state and local wireless taxes, fees, and surcharges. Often, wireless services are taxed at higher rates than general sales tax rates. Federal USF surcharges heighten the problem of wireless consumer over-taxation.

Plans for future increases in USF subsidies further heighten concerns for taxpaying consumers. For example, the E-Rate Modernization Order (2014) authorized a $1.5 billion annual increase in school-related subsidies. Consumers must ultimately pay for such USF subsidy increases. As the FCC looks to direct USF subsidies to certain broadband services and "experiments," Chairman Tom Wheeler has not ruled out the possibility of subjecting broadband consumers to USF surcharges – in effect, a USF "Internet tax."

Going forward, the FCC needs to make consumers a priority by reducing the burden of USF surcharges. It also needs to resist the bad idea of imposing USF surcharges on consumers of broadband services. For starters, the FCC must take steps to reduce the overall size of the USF program, especially the high cost fund. And it must resist the temptation to make grand new USF subsidy giveaways from the pockets of consumers.

New Study Shows States Should Lower Wireless Tax Rates

On November 16, 2015, the Tax Foundation released a new study authored by Scott Mackey and Joseph Henchman showing that consumers are experiencing record high wireless taxes and fees in 2015. Federal, state, and local taxes and fees combined constitute nearly 18 percent of the average U.S. wireless customer’s monthly bill. And while the price of the average wireless bill has been decreasing over the past seven years, the nationwide average tax rate has been climbing quickly.

Among the individual states, Maryland has the 14^th highest wireless tax rate and is significantly above the national average. Although Maryland’s ranking went down slightly from 2014, when it was 13^th among states, nevertheless its combined state and local wireless tax rate went up from 12.37 percent to 12.67 percent. This increase likely will cost Maryland wireless consumers hundreds of thousands of dollars a year on top of the unreasonably high tax burden they already incur.

As I stated in an April 2015 blog, wireless taxes disproportionately impact poor families who rely on wireless devices as their main form of communication and Internet access. Roughly 56 percent of all poor American adults use wireless Internet service as their only connection, therefore high tax rates impose disproportionately burdensome costs on low-income consumers. Taxes on communications and Internet access should be kept as low as possible to push prices to an affordable level so every consumer can get online.

Florida led by example earlier this year and reduced its wireless tax rate. It is time for Maryland and other states, especially but not limited to those above the national average, to reduce taxes to alleviate this burden on wireless consumers.

U.S. Senate Should Emulate Florida's Wireless Tax Cuts

On June 15^th, Florida’s House and Senate passed legislation which would save the state’s taxpayers $430 million. Included in these tax cuts is a $100 million annual Communication Service Tax reduction on wireless services.

Although this legislation does not cut wireless taxes as much as Governor Rick Scott’s proposal outlined (see here), it is certainly a positive step for Florida wireless consumers, who currently pay the 4^th highest wireless tax rate in the country. Effective July 1^st, Florida residents will see their wireless tax rates decrease by 1.73 percentage points. This may seem small but considering that 56 percent of all poor American adults had only wireless Internet service as of December 2013, this will substantially benefit low-income Florida residents.

As I posted in a blog back in April 2015, the United States Congress should emulate Florida’s approach on wireless taxation. The House of Representatives did so last week when it passed the Permanent Internet Tax Freedom Act (H.R. 235), which bans state and local taxes on Internet access. Now, the Senate should quickly pass its version of the bill, the Internet Tax Freedom Forever Act (S. 431). Permanently banning taxes on Internet access would help keep the Internet affordable to the poorest Americans and would lead to additional market-driven innovation, content, and economic growth.  

Prince George's County Council Budget Hearing

On April 28th, I had the privilege of testifying before the Prince George’s County Council during its fiscal year 2016 budget hearing. I warned the County Council that its proposed budget includes a 50 percent increase in telecommunication taxes that would negatively affect the County residents.

Not only would this tax increase require Prince George's County residents to pay the second highest wireless tax and fee burden in the country (when including state and federal taxes), but it would disincentivize wireless Internet Service Providers from investing and innovating within the County. This proposal should be rejected because this tax increase would also greatly and negatively impact poor residents who want to connect to the Internet.

Check out this blog for more on the proposal.

Maryland's Prince George's County Proposes to Increase Wireless Taxes

Just a week or so after the Florida House of Representatives passed a bill which would reduce cellphone taxes, a County Executive in Maryland’s Prince George’s (PG) County proposes the opposite. County Executive Rushern Baker proposed a budget which includes a 50 percent increase in telecommunications taxes.

If passed, PG County residents would see their landline, television, and wireless tax rates go from 8 percent to 12 percent. When factoring in state and federal taxes, PG County residents would pay a total wireless tax and fee burden of 26 percent, which would be second in the country to only Chicago residents. Policymakers throughout the United States – including PG County - should instead work to lower tax rates as a means to encourage innovation and economic growth.

Additionally, lowering wireless taxes reduces prices for consumers and subsequently increases demand and competition in the wireless market. This expands the consumer base and oftentimes increases tax revenue for the jurisdiction as more consumers contribute to the pot.

I understand Prince George’s County wants to raise revenue, but a regressive wireless tax is not the way to go about it. Cutting wireless taxes, on the other hand, would substantially benefit the low-income PG County residents considering that over 56 percent of all poor American adults had only wireless Internet service as of December 2013. (This percentage has likely increased as wireless networks and wireless plans have become more available.) Taxes on Internet access should be kept as low as possible to push prices to an affordable level so every willing consumer can 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.

The transformation in wireless networks has been incredible over the past ten or more years (2G, 3G, and 4G) as more and more consumers have demanded higher quality broadband services. For this progress to continue, state and local governments should emulate Florida’s recent legislation and substantially decrease the rates of wireless and telecommunications taxes. 

Congress Should Emulate Florida's Approach On Cellphone Taxation

In January, Florida Governor Rick Scott announced a plan to cut $470 million in cellphone and television taxes. Fortunately, Florida State legislators appear to be receptive to his plan. On April 9, the Florida House passed a $690 million tax cut that would save cellphone users a significant amount of money if the Senate signs off on the bill.

Currently, Florida residents pay the fourth highest wireless tax rate in the country when including federal, state, and local taxes. Only New York, Washington, and Nebraska have higher wireless tax rates.

Cutting wireless taxes will substantially benefit the low-income Florida residents considering that over 56 percent of all poor American adults had only wireless Internet service as of December 2013. (This percentage has likely increased as wireless networks and wireless plans have become more available.) So not only is it important that wireless taxes be cut throughout the United States – not just Florida, but also that taxes on Internet access are as low as possible in order push prices to an affordable level so every willing consumer can get online. As I’ve encouraged Congress before, this is why the House and Senate should vote to permanently extend the Internet Tax Freedom Act (ITFA), which would ban taxes on Internet access at the state and local levels. (See here and here.)

As of now, the current tax moratorium of the ITFA expires on October 1, 2015, so the permanent moratorium should be adopted as soon as possible. Permanently extending the ITFA should be legislation both parties and chambers can support because it will lead to additional market-driven innovation, content, and economic growth.

USF Surcharges: How High Will They Climb?

On March 13 the FCC issued a public notice announcing another Universal Service Fund (USF) rate hike for voice telephone service consumers. For the second quarter of 2015, voice consumers will be stuck with what is effectively a 17.4% tax on the interstate long distance portion of their phone bills. Federal USF surcharges typically appear as a separate line-item on consumers' monthly telephone bills.

USF is a multi-billion dollar subsidy system. The surcharges imposed on voice consumers are given to telephone companies in rural or high-cost areas, as well as schools, libraries, and some health care facilities. And, in some instances, the surcharge subsidizes providers serving qualified low-income consumers. The USF subsidy system has also grown exponentially over the last dozen years. Program subsidy disbursements for telecommunications service in high-cost areas grew from $2.6 billion in 2001 to $4.17 billion in 2013. According to the FCC's 2014 USF Monitoring Report, in 2013 additional USF subsidy disbursements for low-income voice consumers totaled $1.8 billion. Health care facilities received $159 million. Also, $2.2 billion in school-related subsidies were disbursed. 

Corresponding to the steady ballooning of USF subsidy spending are USF surcharges on consumers. The charts below show the spike in the effective tax rate on consumers over the last several years.

As I described in a prior blog post, "USF Surcharge Hikes Hit Over-Taxed Wireless Consumers Hardest," the FCC treats 37.1% of a wireless consumer's calling plan as interstate long distance, and hence subject to the USF surcharge. The FCC does permit wireless providers to classify a lower percentage of consumers' calling plans as interstate long distance if providers supply the FCC with supporting network-wide traffic studies. Nonetheless, the hit to wireless consumers from federal USF surcharges is especially hard. Wireless consumers are subject to multiple state and local wireless taxes, fees, and surcharges, piled one on top of the other. And wireless is often taxed at a higher rate than other services subject to general sales taxes.

The FCC has begun implementing comprehensive USF reforms. We have supported those reforms and also urged the FCC to go further. But questions remain as to the FCC's follow-through.

What's more, the FCC's December E-Rate Modernization Order (2014) authorized an increase in school-related subsidies to the tune of $1.5 billion annually. Given a subsidy spending jump of that magnitude, it's hard to expect voice consumers will avoid even heavier USF surcharge burdens in the future.   

Protecting consumers should be an FCC imperative as USF reforms and modernization continues. But rising USF surcharge rates are a sign that the FCC is failing to protect consumers. Reducing USF surcharges should go hand-in-hand with comprehensive reforms that reduce the overall size of the USF subsidy system and improve its efficiency. Reforms should be implemented – and the overall size of the USF program should be capped – before any additional subsidies are extended to broadband services.

Florida Governor Plans to Cut Wireless Taxes

Earlier this week, Florida Governor Rick Scott announced his plan to cut $470 million in cellphone and television taxes. The plan would decrease tax rates on cellphones and television by 3.6 percent and would save the average Florida family $43 a year. Currently, Florida residents pay the fourth highest wireless tax rate in the country when including federal, state, and local taxes. Only New York, Washington, and Nebraska have higher wireless tax rates.

This proposal from Governor Scott is a step in the right direction towards incentivizing more Florida residents to adopt Internet service. As I wrote in an October 2014 blog, wireless taxes are very regressive because over 56 percent of all poor American adults had only wireless service as of December 2013. It is important that taxes on Internet access are as low as possible in order to push prices to an affordable level so every willing consumer can 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.

The transformation in wireless networks has been incredible over the past ten or more years (2G, 3G, 4G), as more and more consumers have demanded higher speed services. For this progress to continue, more states should adopt similar plans to Governor Scott’s and substantially decrease the rates of wireless taxes.

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.

Maryland Wireless Taxes Are Too High!

The Tax Foundation's study detailing the wireless service tax and fee rates in the U.S. shows that Maryland's taxes and fees at 12.77% put it at No. 12 -- that is, the state with the 12th highest tax/fee add-ons.

The average state and local rate is 11.36 percent. The Tax Foundation's Map shows that Oregon has the lowest rate at 1.85%, and is tailed closely by Nevada at 2.13% and Idaho at 2.28%. Nebraska has the highest rate at 18.67%, and is followed closely by Washington at 18.62% and New York at 17.85%. 

These rates do not include the additional federal rate of 5.92%, which brings Nebraska's rate to 24.49% and Oregon's rate to 7.67%. The average combined federal, state, and local rate is 17.18%.

With the federal rate added, the total taxes paid by a wireless customer in Maryland is 18.69% -- in other words, nearing 20%. This is just one more example of why Maryland is known as a "high tax" state.