With almost 303 million wireless connections and nearly 27 percent of wireless-only households in the U.S., wireless technology is a necessity for many consumers. Since Americans rely on their devices as their sole or a primary means for communications, it might be a surprise that 47 states and the District of Columbia charge monthly taxes and fees that exceed the general tax rates for other goods and services. In fact, the average tax rate for wireless consumers is more than twice the amount (16.3 percent) than the tax rate for general goods and services (7 percent). These disproportionate taxes and fees inflict economic harm on both consumers and the U.S. economy. Why is this happening?
Glenn Woroch, a member of the Haas Business School faculty at the University of California-Berkeley, published a study late last week on wireless taxes that explained how cash-strapped local and state governments across the country have unfairly targeted wireless consumers for years to solve their fiscal woes. It’s a bad problem that keeps getting worse; Woroch estimates U.S. wireless consumers pay more than $15 billion annually in extra taxes and fees when compared to other goods and services. Equally concerning is that these taxes are disproportionately larger for low-income families, who are also more likely to live in wireless-only households than those with higher incomes. In fact, 42.8 percent of adults living in poverty and 35.2 percent of adults living near poverty live in wireless-only households, according to the CDC.
Woroch states in the study:
In the end, I do not find any economic reasons that mobile wireless services carry tax rates that, on average, are more than twice the general state and local levels. Why should we care about this discrepancy? Economists dislike differential taxation that is not justified by external costs because they distort relative prices that guide consumer purchases and the expenditure of resources to supply the goods. The wireless tax premium makes mobile services relatively more expensive than other goods, steering consumers to substitute services that they otherwise decided were less desirable. Consumers have voted with their dollars as they disconnect their landlines which lack the functionality found in even the most basic cell phone.
But Woroch also explains why what hurts consumers, will also hurt the economy. Woroch warns that high taxes can delay the spread of wireless and mobile broadband, thus postponing its benefits to the economy. For example, the huge consumer demand for smartphones has encouraged developers to create more than 1 million apps available on a number of different operating systems and devices. A wireless tax premium slows the adoption of smartphones, which hampers innovation with the size and growth of the capabilities they deliver, thus affecting the entire wireless ecosystem.
CTIA and the wireless industry remain concerned that state and municipal budget deficits will cause policymakers to continue to increase the tax premium on wireless, even if the result is inefficient and damaging. Woroch writes in the study:
As it is, many empirical estimates of the tax policy conclude that only about 60 cents of economic value is realized from each dollar of more efficient income taxation. That might be a bargain when compared to the wireless tax premium which likely generates far less wealth for the U.S. economy, and may even destroy more value than it collects.
Woroch strongly believes it is in our national interest to stop the upward creep of wireless taxes to freeze the level of harm they inflict on American consumers and the U.S. economy. We agree, which is why we work hard with state legislators, Congressional members and other policymakers to highlight the need to address the current monthly wireless tax and fee burden on consumers by reducing onerous rates thereby encourage broadband adoption for all.