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Newspaper Article

    Do we really need more cell phone taxes?

    BY Matt Kibbe
    12/15/2006
    by Matt Kibbe on 12/15/06.

    Ten years ago, when Congress finally passed legislation that pulled down a century's worth of barriers to competition in the telecommunications industry, 38 million Americans used mobile phones.

    Today there are more than 225 million wireless subscribers in America and mobile phones have become a key element of parental peace of mind and workplace productivity.

    The impact of cell phones on the national economy is dramatic. According to an independent study produced for CTIA-The Wireless Association, the international industry group for wireless telecommunications, the U.S. wireless industry contributes $92 billion annually to the U.S. gross domestic product and supports 3.6 million jobs. At the current rate of growth, it will become a larger sector of the economy than the automobile industry in five years. The report also projects that the affordability and flexibility of mobile phones will drive productivity gains generating more than $600 billion in additional GDP over the next decade.

    Mobile phones have changed the way we live, work and socialize. Competition in the industry has driven down prices, making mobile phones affordable for just about any American with a job. Approximately 1 in 12 households don't even have traditional telephone landlines anymore; they rely exclusively on their mobile phones to keep in touch.

    Unfortunately, the rate of technological innovation in the industry has been matched only by the rate at which elected officials across the country have dreamed up new taxes to impose on wireless subscribers. On average, 16.85 percent of the typical wireless bill is made up of taxes, fees and surcharges. Who pays? You do. About two-thirds of that amount goes to state and local governments, while the rest goes to Uncle Sam.

    By comparison, the average tax rate for other goods and services is only 6.94 percent. The services that make us safer and increase productivity are taxed at the highest rates.
    This high level of taxation imposes significant costs on wireless subscribers and the economy as a whole. High taxes divert money that would instead go to capital investment and research and development of new technologies to drive future economic growth. Economist Gregory Sidak has calculated that lowering state wireless tax rates to match the general tax rate on businesses would increase U.S. GDP by "between $53.6 billion and $65.6 billion over 10 years."

    The wireless tax burden is also highly regressive. Fees and surcharges make up a much higher percentage of the cost of a $40 monthly plan than a $150 voice and data package. For example, the city of Alexandria, Va., decided to cover a budget shortfall by imposing a 10 percent per line charge on wireless customers. The tax applied only to the first $30 of service, putting relatively more of the burden on low-income families.

    To make matters worse, states often don't even use the money collected by wireless surcharges for their stated purpose. New York increased its statewide fee for emergency 911 services and authorized local jurisdictions to establish their own 911 fees, even though a portion of these funds continues to be diverted away from the 911 system. Rhode Island has done the same, funneling money from the local taxes into the state's general fund. It is a taxpayer bait and switch and enough is enough.

    The wireless marketplace is a bright spot in the American economy, but it's well past time to end the excessive taxation that harms consumer welfare and threatens future innovation.