Cities Have the Wrong Number on Cell Taxes

Cell phone taxes are putting a significant strain on the budgets of many Americans. A report published late last year by Scott Mackey at Leonine Public Affairs, LLP found that the average taxes consumers pay on wireless service increased again in 2020. While wireless costs everywhere are rising, cell taxes affect people differently in cities across the country.

In most states, taxes and fees on wireless service are much higher than they are on other goods and services, including tobacco and alcohol in some places.

By heavily taxing cell service, these communities are discouraging the use of cell phones more than other products, including some products like alcoholic, which can be harmful to consumers. Unlike liquor, cell phones are beneficial to residents in the community. They are critical to bridging the digital divide between high and low incomes and are most useful to those near the bottom.

City officials should recognize these regressive tax rates, fees, and surcharges for what they are, and take steps to lower as well as standardize rates across the nation to incentivize more in the community to take advantage of the benefits these devices provide.

Nationwide, Chicago retains the highest effective tax rate of any city on a single line voice plan at 37%, followed by Baltimore and Little Rock which charge around 30%. The high costs on cell service in these cities are largely determined by the added taxes localities place on service.

State and local rates are wildly different from state to state, which leads to a wide disparity in costs for consumers in each city. Most states impose non-discriminatory sales and use taxes, and the severity of the rates are dependent on state policy.

Cities can follow-suit, leading to places like Seattle, Springfield, and Albany paying local taxes which are added to state and federal taxes on consumer wireless bills. According to Mackey, since the early 2000s state-local sales tax rates on cell service have increased on average three times faster than sales tax rates for other products.

Tax bills on cell service are not limited to sales and usage fees.Local governments in 13 states currently impose some type of tax or fee on service over and above any local sales tax. Many of these fees are legacy taxes created for landline services that have been extended to wireless services now that most consumers have made the switch.

New York City is one place with extra wireless service fees. NYC imposes a gross receipts tax, as well as an additional $0.375 surcharge to New York Metropolitan area residents that is lumped in with state and local sales taxes, causing their effective tax rate to be fifth highest in the country.

Many states also impose 911 fees at the local level to fund capital expenses associated with the 911 emergency system. These rates, much like the usage rates on wireless service, vary greatly from city to city. Missouri pays nothing towards 911 fees, while cities like Chicago and Baltimore pay $5 and $4 per device, respectfully. Using tax dollars to fund emergency services is common, but the FCC discovered that cities routinely divert 911 fees for other purposes. In 2018, the city of Chicago used its authority to increase its monthly 911 fee by $1.10 per month to cover a shortfall in pension obligations.

Cell phones have a high importance in the future of the American economy, and they should not be discouraged by excessive local taxation. High state and local sales taxes in some states combined with added local fees are having regressive effects on poorer residents. Then, there are federal taxes on top of all of this. Lawmakers should consider lowering and standardizing taxes and fees so that people with similar plans pay a similar amount regardless of where they live.

Policymakers should not tax what we should be encouraging.

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