In July 2010, the city council of Lincoln, Neb., decided that the solution to its budget crunch lay in the cellphone bills of its residents. So, the council passed an ordinance that applied a 6 percent tax to all telecommunications products and services, including monthly wireless-telecommunications bills, data plans and even prepaid cellphones. When the tax increase was added to the sales taxes and other fees and assessments that cellphone companies collect for federal, state and local governments, the result was that the tax burden for cellphone users in Lincoln amounted to a staggering 23.56 percent, which is the second-highest amount in the country.
Lincoln is far from the only cellphone-tax-loving government entity. Nationwide, cellphone users on average pay combined federal, state and local taxes of 16.3 percent, according to a February 2011 study by economist Scott Mackey. That’s more than double the national average sales tax of 7.42 percent, according to Mackey. And that’s only the average. The tax burden ranges up to as high as 24.06 percent in Omaha, Neb., thanks mostly to a state and local cellphone-tax rate that’s at least 10 times as high as it is in Oregon, where the 6.86 percent combined rate is the lowest in the country.
Governments raise $18 billion per year through taxes and fees that are collected on cellphone bills, according to estimates by CTIA-The Wireless Association, which is the trade group for wireless-telecommunications companies. That isn’t necessarily a staggering amount when you break it down per person, because the average cellphone customer pays about $7.84 per month in taxes, fees and surcharges that are applied to his/her bill. Of course, that amount can be much higher depending on your usage and where you live. For instance, in Chicago, we’re aware of a family that pays $25 per month in taxes, fees and surcharges on its three-cellphone plan. That’s $300 per year.
Regardless, cellphone tax rates are rising fast. Mackey pegs the increase over the past few years at three times the rate that sales taxes have increased. And that isn’t just because cellphones are new. In fact, the tax rates were higher in 2005, before the federal government ended a decades-old excise tax that it had slapped on cellular-service bills. Tax rates started to rise again soon after, however, as states and local taxing authorities, as well as the federal government, began to apply new taxes. CTIA pays Mackey to produce his analyses, so his research isn’t entirely independent. But no one disputes that cellphone taxes exist, that they’re higher than are taxes on other products and services and that cellphone carriers simply pass them on to consumers. Despite the continued growth in cellphone use, some believe that taxes eventually might rise high enough to discourage wireless calling. What that level is, however, no one knows.
State and local governments levy most of the taxes and fees. But Mackey points out that another major factor in the increase since 2007 is an increase of nearly 1 percentage point in the federal Universal Service Fund (USF) surcharge. Although other cellphone taxes take a bigger bite, the USF surcharge’s rate of increase is higher than that of other taxes. The USF surcharge also applies to bills in all cities and states, even in those that haven’t raised taxes. Combined with more modest sales-tax hikes, the net rate of taxation has climbed 1.1 percentage points to 16.3 percent since 2007, and experts foresee no end to the increases.
Cellphone tax rates are out of control, but the lack of transparency over what exactly the government does with this tax revenue adds insult to injury. Taxes and fees are buried on cellphone bills, and consumers can have difficulty in distinguishing what the taxes are for and whether they are spent correctly. In many cases, the revenue that cellphone taxes generate isn’t going to the use for which it’s intended, experts say.