NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Taxes on Wireless Services Burden the Economy


"Taxes on wireless phones cost the economy $2.56 billion more than the $4.79 billion raised in revenue."

Cell phones are everywhere these days. You see people talking on their phones in cars, in restaurants, and walking along city sidewalks. The numbers confirm what your eyes observe. Since their introduction in 1983, use of wireless phones has grown at 25 to 35 percent per year, and there are now more than 69 million wireless telephones in the United States.

Business believes wireless phones improve worker productivity, and consumers think they enhance personal safety. Government likes cell phones, too, but for a very different reason. "Federal, state, and local governments have seen wireless as a ready source of tax revenue while the FCC [Federal Communications Commission] has used wireless to fund new subsidy programs for wireless telephone usage," says NBER Research Associate Jerry Hausman.

To illustrate, Hausman breaks out the taxes paid by a wireless user in California: FCC taxes for the high-cost fund, universal service, and school and library internet subsidy; state, county, and city sales taxes; taxes (fees) levied by the California Public Utilities Commission for universal service (3.2 percent), emergency telephone service (0.72 percent), high cost funds (3.14 percent), teleconnect fund (0.41 percent), hearing impaired fund (0.36 percent), local utility taxes (7 percent), and the federal excise tax (3 percent). Nationwide, taxes on wireless services range from 14 to 25 percent, a relatively high rate.

The economic cost of these government taxes and fees on the wireless world is substantial, Hausman argues in Efficiency Effects On The U.S. Economy From Wireless Taxation (NBER Working Paper No. 7281). He finds that taxes on wireless phones cost the economy $2.56 billion more than the $4.79 billion raised in revenue. In other words, there is an efficiency loss to the economy of about 53 cents for every dollar raised. What's more, policymakers are considering imposing other fees and taxes. Yet prospective taxes could pose an efficiency loss of 72 cents to $1.14 per additional dollar of tax revenue raised, he calculates. That's two to four times more expensive than tapping into general tax revenue. "The effect of these federal taxes, and the many state and local taxes on wireless, is to raise the cost to consumers, suppress demand, and impose efficiency losses on the economy," Hausman writes. Federal and state regulators should take into account the efficiency effects of their actions on the economy, he concludes.

-- Chris Farrell


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