The Wireless Tax Premium Glenn Woroch UC 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 Obama State of the Union January 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 end excise tax on wireless 1898 A.B.I G. v. U.S. voids tax on toll service Federal excise tax to finance Spanish American War AT&T Mobility v. Concepcion Supreme Court decision 2010 Revenue Act taxes local service 1941 Wireless Tax Fairness Act 2011 Revenue Reconciliation Act makes 3% tax permanent 1990 War Revenue Act reenacts tax 1917

IRS ends excise tax on wireless

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

How does U.S. compare? CountryWireless Tax Premium In Excess of VAT Australia, Denmark, Finland, France, Germany, Ireland, Norway, Spain, Sweden, Switzerland, Netherlands, U.K. 0.0% Mexico0.01% Brazil0.15% AVERAGE of 63 Premia2.71% Italy3.75% Greece11.51% 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 Bill Federal USF fee5.05% State sales tax4.0% State excise tax2.5% State franchise tax0.38% State wireless fee2.49% Local fee0.62% New York City sales tax4.5% NYC local utility gross receipts tax1.9% Metropolitan Commuter Transportation District sales tax0.375% MCTD surcharge0.13% MCTC excise tax0.6% TOTAL22.55%

States have also targeted Satellite TV

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) P with sales tax = $50.71 P plus premium = $54.89 P retail = $ Revenues from premium Lost surplus Lost sales tax revenue Lost (gross) revenues to carriers

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

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