Wireless Tax Hikes Mute Price Cuts - Tax Foundation Report

This week the Tax Foundation released its annual report for 2021 regarding the imposition of various taxes, fees, and surcharges on top of the charges for basic wireless services. The report highlights how regressive, record-high rates prevent low-income Americans from fully benefitting from price cuts by mobile carriers. These regressive fees almost certainly widen the digital divide, despite the consensus from policymakers that closing it is a top priority.

The overall tax rate customers paid on wireless in 2021 increased to a record high 24.96%, another year-over-year hike. Higher Universal Service Fund (USF) rates fueled the spike, though some states and localities hiked various sales taxes, 911 fees, or wireless surcharges. In total, governments collected $11.3 billion, about half for USF and half for state/local consumption taxes. Thanks to record high fees, a family of four paying $100 per month for four wireless voice lines paid $300 in fees this year. The same family paid $270 in 2020, amounting to an 11% year-over-year increase.

Taxes are increasing despite cuts in wireless service prices absent the added taxes, fees, and surcharges. The average line price dropped to $35.31 in 2021, a 15% decline from $41.50 in 2017. But consumers aren’t fully benefitting from the price cuts because the hikes in the various taxes, fees, and surcharges partly offset them.

And the burden of fee hikes falls heaviest on low-income Americans. Wireless taxes are regressive, since they are almost all flat rates or per-line fees. Plus, 74% of low-income adults subscribe to wireless voice only, compared to 65% of all adults. So every hike in wireless fees shifts more burden to low-income Americans.

Offsetting price cuts for wireless services with hikes in taxes, fees, and surcharges is no way to close the digital divide. Instead, governments should look to broader revenue sources that let consumers benefit from lower-prices. Lower prices would encourage more wireless adoption for Americans most in need. Then, closing the digital divide would be closer to a priority than lip service.

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.

Maryland Should Reduce Regulations and Fees That Inhibit Broadband Deployment

On January 2, 2018, I published a blog suggesting that Maryland Governor Larry Hogan should reestablish the Regulatory Reform Commission and should specify as one of its tasks identifying unnecessary taxes and fees. More specifically, the Commission and the Maryland General Assembly, which convenes this week for its 2019 legislative session, should focus on reducing regulatory and tax burdens that stifle broadband deployment and slow the delivery of next-generation wireless services. According to two recent reports, Maryland has one of the most burdensome regulatory processes with regard to broadband deployment and some of the highest wireless tax rates in the country.

A new report by the R Street Institute ranks Maryland 45^th out of 50 in terms of how conducive its laws are to broadband deployment. Importantly, Maryland presently does not require localities to adopt "shot clocks" to ensure timeliness for the processing of applications or to employ hard caps on fees pertaining to accessing public rights-of-ways, acquiring construction permits, or installing pole or collocation attachments. For example, the fees localities charge for public rights-of-way access are not required to be non-discriminatory or based on an estimation of costs, meaning local governments can charge whatever they want and can charge different prices to different providers despite granting the same level of access. Whether a wireless or wireline provider of broadband access, building and upgrading a network requires a significant number of permits from the local government. Without shot clocks and without hard caps on fees, the regulatory costs imposed by impediments associated with the local government approval process slows broadband deployment.

Deploying communications networks includes heavy capital investments from broadband providers. If fees are excessively high, it will discourage competition from small providers who cannot afford access. Also, if the regulatory costs differ significantly among jurisdictions, it could discourage providers from upgrading networks in certain localities. Although there is high demand in a relatively densely-populated, wealthy state like Maryland, the margin between profit and loss is very small in the dynamically competitive broadband market.

In May 2015, Governor Hogan signed House Bill 541, which required the Public Service Commission to convene a workgroup to study attachments to utility poles in Maryland. The workgroup found in a January 2016 study that the “terms and conditions for pole attachments are adequate” and the “rates charged to pole attachers are reasonable.” But with the emergence of the 5G revolution, small cell deployment in a populated locality will require hundreds if not thousands more pole attachments than 4G, meaning the existing terms and conditions likely are outdated. With 5G deployment, wireless providers will deploy small cells on already existing buildings or utility poles, a practice called “collocation.” Without shot clocks for the review of collocation applications and without hard caps on the fees localities can charge, the regulatory uncertainty will slow 5G investment in Maryland. In 2018, Maryland policymakers introduced small cell legislation to minimize these regulatory barriers and streamline 5G deployment, but the Senate and House bills failed to pass.

If Maryland wants to continue to be considered a prime location for innovative businesses, it should adopt rules that give guidance to local governments regarding streamlining the application and approval processes and charging cost-based fees that properly compensate the local governments without slowing 5G deployment.

Moreover, according to a recent report by the Tax Foundation, Maryland, at an average rate of 13.89%, has the 15^th highest combined state and local wireless tax rate in the United States. This means its wireless tax rate is 2.31 times the size of its general sales tax of 6%, which is the 9^th highest disparity multiple in the U.S.

Of course, some localities impose higher tax rates than others. In Baltimore, residents pay an effective tax rate of about 25% for wireless services. At the end of 2017, over 68% of all poor adults had wireless-only voice service and nearly 24% of Baltimore’s population falls below the poverty level. Additionally, more and more consumers are substituting mobile wireless broadband for fixed broadband. And while this trend is occurring across all demographics, it is particularly prevalent among low-income and minority consumers. About 31% of U.S. adults making less than $30,000 a year are wireless-only with regard to broadband service. And 35% of Hispanic adults and 24% of black adults also are wireless-only. Maryland’s relatively high wireless tax rates unnecessarily raise the price of wireless services and harm all consumers, but they disproportionately harm low-income and minority consumers.

The Regulatory Reform Commission’s December 2015 report recommended streamlining application review processes, reducing fees and payment frequency, and expanding minority and disadvantaged business opportunities. These recommendations have not been implemented yet with regard to the taxation and regulation of broadband and wireless communication services.

As stated in last week's blog, Governor Hogan’s regulatory reform efforts have improved Maryland’s business climate and its overall fiscal condition. To continue this progress, Governor Hogan should reestablish the Regulatory Reform Commission and task it with identifying more regulations, taxes, and fees that discourage economic activity. The communications and broadband marketplace would be a good place to start.

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
City	Tax on 4 line plan @ $100 per month	Tax Rate
Chicago, IL	$36.24	36.24%
Baltimore, MD	$29.84	29.84%
New York, NY	$27.11	27.11%
Philadelphia, PA	$26.24	26.24%
Omaha, NE	$26.06	26.06%
Seattle, WA	$25.94	25.94%
Providence, RI	$23.68	23.68%
Tallahassee, FL	$22.58	22.58%
Kansas City, MO	$21.49	21.49%
Los Angeles, CA	$21.19	21.19%

(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.