the wireless tax premium glenn woroch uc berkeley
TRANSCRIPT
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