The Public Policy

No New Wireless Taxes

John McCain wants to keep states from milking your cell phone bill. But there's much more he can do.

By 5.23.08

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The Wall Street Journal gives credit to Sen. McCain for trying to protect consumers from excessive, confusing, and duplicate taxes on wireless communications, aka mobile phone service. While Mr. McCain must share the credit with Reps. Zoe Lofgren and Chris Cannon, he was indeed the first to press for a halt in the states' shameless milking of your cell phone bill. His Cell Phone Tax Moratorium Act, introduced in January, proposes a three-year moratorium on new cell phone taxes that unduly burden wireless consumers, compared with other communications services.

If anything, this initiative (clearly modeled on the Internet Tax Moratorium, which has done a pretty good job of restraining taxes on Internet service per se) is long overdue. As the Heartland Institute points out, wireless taxes rose four times faster than other taxes (aimed at goods and services) between 2003 and 2007. Sen. McCain cites the figure of 17 percent as the average state-local combined tax burden on wireless. The average sales tax, by contrast, runs under 7 percent.

There is nothing new about government chasing the hottest growth industries as a revenue source. Politicians should realize, though, that growth in any industry automatically generates more revenue without special targeted taxes and fees. Higher company profits, a bigger wage base, and more customers means more money rolls in from income, sales, and use taxes. Hitting up the winners in economic competition just increases the risk the party will stop sooner rather than later: if you want to keep benefiting from the robust growth wireless generates, don't cut off the industry's oxygen supply.

Aside from growth (and revenues) per se, it should be obvious to everyone that wireless, wired, and broadband services are converging at an ever-faster clip. Wireless is competing in music, video, web-surfing, and gaming, to name just a few. If there's a more sensible public policy than making the tax-and-regulatory playing field as level as possible among communications providers, no one has come up with it yet.

Yes, administering federal controls on state and local wireless taxes is tricky, probably trickier than the Internet Tax Moratorium, which has been pretty successful. Still, even if there are a few loopholes and exceptions here and there, it's important to send the message that piling on endless wireless taxes and fees won't cut it anymore.

YET THERE IS AN IMPORTANT piece missing from this puzzle. When the IRS (under court order) stopped assessing federal telephone tax on wireless (in 2006 -- you should have applied for a refund on your tax return), everyone expected the wireless tax burden would go down. Well, it did, ever so slightly, but most of the difference was made up (in some cases, more than made up) by the noxious combination of those state and local tax hikes on wireless, plus the steady rise of fees imposed for the Universal Service Fund (USF).

The misnamed USF is supposed to subsidize communications services to remote and underserved areas. Instead, it's a slush fund for state and local governments. Worse yet, its fees (let's call them taxes, shall we?) are imposed not by Congress but by the FCC. Yes, Congress passed the law mandating that, but it's still classic taxation-without-representation.

Until McCain and Co. tackle the USF (and the FCC), we shouldn't give them too many bragging rights about defending us from uncontrolled cell phone taxes. Whatever legitimate mission the USF might have (e.g. subsidizing universal broadband and wireless access to the Internet) should be decided by Congress and supported by taxes legislated the old-fashioned way: with hearings, reports, debates, and full accountability to the taxpayer. Take the FCC out of the tax-hiking business altogether, and let the public know what is going on.

Let's hear it for the wireless tax moratorium, then -- but let's not forget it is only half the battle.

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About the Author

George Pieler is a senior fellow at the Institute for Policy Innovation.