Earlier this week, National Taxpayers Union’s (NTU) friends at the Tax Foundation released their 2016 study on wireless tax burdens. The results for taxpayers weren’t pretty. The report estimates that taxpayers shell out over $17 billion annually in federal, state, and local taxes and fees for their wireless devices, while the overall wireless burden increased to a record national average of 18.6 percent.
At the top-end of the tax spectrum is Washington state, which has a combined average state and local levy of 18.8 percent. After factoring in the Federal Universal Service Fund (USF) rate of 6.64 percent, which is set by the Federal Communications Commission (FCC) on a quarterly basis, wireless consumers in Washington pay an effective rate of over 25 percent -- hardly attractive for a state that claims to welcome tech-innovator businesses. Likewise, Nebraska has a combined federal, state, and local rate of above 25 percent, while New York, Illinois, and Pennsylvania round out the top five – all with combined rates above 22 percent. At the other end of the spectrum are Oregon, Nevada and Idaho, all of which have combined tax rates of below ten percent.
There are several trends and areas of concern noted by the study that are worth mentioning. Typically the largest driver of tax increases has been the FCC’s USF rate hikes -- which, remarkably, managed to make the overall load heavier for consumers even as the 3 percent federal phone excise tax on wireless was repealed a decade ago. This year, by contrast, state and local tax and fee increases are far outpacing federal USF rate hikes. Likewise, the disparity between the wireless tax rates and state and local sales taxes continues to grow - especially for the five highest wireless taxing states. In Nebraska, for instance, the state and local sales tax average is 7.13 percent, while the combined state and local wireless levy is 18.67 percent – nearly three times higher. Just five states had state and local wireless rates that were lower than their sales taxes.
It is important to remember that each state’s reported overall tax burden is only an average -- some cities can’t resist the urge to pile on the misery. Woe to residents of the Windy City, where a 4-line, $100 per month family plan carries a mind-blowing 36.24 percent tax. Baltimore definitely does not live up to its nickname of the Charm City, with a 29.84 percent combined tax.
In terms of tax incidence, it is also worth noting that, according to Tax Foundation’s analysis of IRS data, the average federal income tax rate for middle-income households (roughly between $37,000 and $75,000 annually) is 7.3 percent, while the average wireless tax rate is 18.6 percent. The widening gaps between income and sales tax rates, and disproportionately high wireless tax rates, raises serious concerns about tax fairness, particularly as more and more Americans are using wireless services as the sole means of communication. It is ironic indeed that a typical middle-class household will pay a much higher effective tax rate on their phone bill than they will on the 1040 form, or at the cash register.
While competition has driven monthly wireless prices down considerably over the last decade ($44.65 – down from just under $50 a month, on average, in 2008), tax and fee increases have eaten up much of these savings to consumers. As the report summarizes, “Taxes are growing at a rate twice as fast as average wireless prices have been falling.” Such growth is inimical to expanding access to this vital technology.
Indeed, the Tax Foundation’s study should serve as a wakeup call to policymakers to look at ways of cutting taxes and fees in order to further expand wireless connectivity. At the very least, public officials could declare a “time out” on future tax hikes. The federal Wireless Tax Fairness Act would establish a moratorium on new, discriminatory state and local taxes on wireless services (much in the way Congress permanently banned such levies on Internet access earlier this year). Lawmakers must also work to reform and provide relief from the USF program. It is difficult to imagine any other “tax fairness” issue that could -- and should -- have greater bipartisan urgency.