The Wireless Tax Premium

Glenn WorochUC Berkeley

“This isn't about faster Internet or fewer dropped calls. It's about connecting every part of America to the digital age.”

Pres. Barack ObamaState of the UnionJanuary 25, 2011

“Within the next five years, we'll make it possible for businesses to deploy the next generation of high-speed wireless coverage to 98 percent of all Americans…”

Problem

How is cell service taxed?

• Purchase of handset– Ordinary sales tax (45 states + DC)

• Use of service: monthly subscription + MOUs– State and local sales and excise taxes – Federal excise tax (up to 2006)– 911 fees (federal, some state and local)– USF contribution (federal and some states)

Brief history of phone taxation

I.R.S. forced to endexcise tax on wireless

1898

A.B.I G. v. U.S. voids tax on toll service

Federal excise tax to financeSpanish American War

2005 2006

AT&T Mobility v. ConcepcionSupreme Court decision

2010

Revenue Act taxes local service

1941

Wireless TaxFairness Act

2011

Revenue ReconciliationAct makes 3% tax permanent

1990

War Revenue Actreenacts tax

1917

2003 2004 2005 2006 2007 2008 2009 2010 2011 20120%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

General vs. Wireless Tax Rates:Population-weighted averages across 50

states

General sales/use tax rate Wireless federal/state/local tax rate

Source: Mackey (2012), Table 1. Note: 2011 data interpolated.

IRS ends excisetax on wireless

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012$0

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

$30,000,000

Wireless Tax Revenues:Base Sales Tax Revenue plus the Premium

Wireless Sales Tax Revenue Wireless Tax Premium Revenue

How does wireless compare to other goods & services?

• Cigarette taxes– 1 state taxes wireless at higher rate (MO)

• Beer taxes– 32 states tax wireless at higher rate

• Gasoline taxes– 21 states tax wireless at higher rate

NEWANYFLILRI

MOPAKSTXMDUTSDAZDCTNAROKNDCANMKYCOIN

SCNCMNMSNJGAVTWINHOHWY

IAMAHI

ALMI

MECTAKVALADEWVMTID

NVOR

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%

Comparison of State & Local Sales Taxes on Wireless Services and Beer

State and Local Wireless Tax Rate Effective State Beer Tax Rate

Sources: state revenue departments, the Distilled Spirits Council, Commerce Clear-ing House, The Tax Foundation, and Mackey (2011).

NE WA NY FL IL RI MO PA KS TX MD UT SD AZ DC TN AR OK ND CA NM KY CO IN SC NC MN MS NJ GA VT WI NH OH WY IA MA HI AL MI ME CT AK VA LA DE WV MT ID NV OR0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Wireless vs. Gasoline Taxes(assume $3.00/gallon)

State Gas Tax Rate State and Local Wireless Tax Rate

How does U.S. compare?Country Wireless Tax Premium

In Excess of VATAustralia, Denmark, Finland, France,

Germany, Ireland, Norway, Spain, Sweden, Switzerland, Netherlands, U.K.

0.0%

Mexico 0.01%Brazil 0.15%

AVERAGE of 63 Premia 2.71%Italy 3.75%

Greece 11.51%

Source: Deloitte/GSMA, “Global Mobile Tax Review, 2011”

Why are wireless taxes so high?

• The weight of history– Long tradition of fixed line taxation– Cell service viewed as a “luxury”

• Lucrative revenue source– Widespread adoption (~300 million)– Rapid growth in use (10X in 10 years)

• Irresistible for tax authorities– Easy for carriers to administer– Yet hidden/obscure to users

Feeding frenzy of cities, counties, school districts, etc.

Wireless access eclipses fixed

Wireless usage explodes

Taxes on a NYC Cell BillFederal USF fee 5.05%

State sales tax 4.0%

State excise tax 2.5%

State franchise tax 0.38%

State wireless 9-1-1 fee 2.49%

Local 9-1-1 fee 0.62%

New York City sales tax 4.5%

NYC local utility gross receipts tax 1.9%

Metropolitan Commuter Transportation District sales tax 0.375%

MCTD surcharge 0.13%

MCTC excise tax 0.6%

TOTAL 22.55%

States have also targeted Satellite TV

no actionDBS tax billDBS tax imposed

Some states tax digital goods, too

Analysis

What’s a consumer to do?

• Reduce wireless consumption– Fewer connections per family, less usage per line– Non-local billing address

• Switch to pre-paid service– No tax premium on handset and usage

• Use non-cellular services– SMS– VoIP

Economic consequences of wireless tax premium

• Costs– Lost “surplus” on consumers, both individuals and

businesses– Lost revenues to carriers– Surplus lost to all

• Benefits– Higher tax revenues, but cuts into sales tax

receipts• Spillovers, long run and short run

Direct consumer harm, 2010

Q (millions)

P($/mo)

Pwith sales tax = $50.71

Pplus premium = $54.89

Pretail = $47.21

Revenues from premium

Lost surplus

302.9 325.9

Lost sales tax revenue

Lost (gross) revenues to carriers

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

$20,000

Lost Consumer Surplus Per Year

Foregone wireless services

• Individual users – Emergency response– Employment opportunities– Shopping – Financial inclusion

• Business users– Mobile workforce– LBS and mobile marketing– Wireless payment options

Wireless taxes are regressive

• Cell phone service is an “economic necessity”• Taxes paid fall with income• Dependence on wireless is highest among low

income groups

1h05 2h05 1h06 2h06 1h07 2h07 1h08 2h08 1h09 2h09 1h10 2h10 1h11 2h110

10

20

30

40

50

60

Wireless Only and Landline Only

Wireless Only Landline Only Wireless Only Below FPG

Perc

ent o

f Sur

vey

Resp

onde

nts

Source: Center for Disease Control, Wireless Substitution: Early release of NHI survey, semi-annual.

Spillover benefits

• Complementary markets– Mobile supply chain– Mobile dependent sectors

• Macroeconomic growth– Waaaay back-of-the-envelope estimate: 7.6% reduced wireless users ~1% reduced GDP growth

Mobile phone is a data gateway

• Pew Research: 17% do most internet browsing on mobile phone rather than fixed line connection

• Nielsenwire: 70% / 30% split of time between mobile apps and fixed line web usage

• Taxation of voice hinders mobile data– Disconnect mobile service– Decline to get a smartphone– Decline a dataplan

Policy

Tax principles

• Efficient (or “nondistortionary”)– Proportional to economic cost

• Nondiscriminatory (or “fair”)– Same tax for like services

• Transparent (or “salient”)– Clearly understood by consumer

Reasons to discourage cell phone use?

• Annoying conversations• Distracted driving

• EM radiation• Conflict metals

Aggressive proposals

• Eliminate the tax premium on wireless– Ban state wireless-specific taxes and fees– Roll back/re-direct the federal USF fees

• Equalize taxation of fixed and mobile• Raise taxes on gasoline to efficient levels as

shrink wireless tax premium

More realistic options

• “Hold the line” on wireless tax premium– Moratorium on state increases– Freeze on federal USF fees

• Unify the tax system at state level– Assign tax authority to a single entity (state)– Remove duplicate state and federal USF, 911 fees

Conclusions

• Wireless tax premium is large and growing due, in part, to excess incentives to tax.

• This premium is inefficient and regressive, and conflicts with goals of universal online access.

• Preferable to shrink the tax premium, but measures to curtail its growth more practical.

• But a difficult task in the current fiscal climate.

Thank You