State and local lawmakers learned in the 1990s that large, broad-based tax increases are political losers and that they redistribute taxpayers (to lower taxing jurisdictions) rather than redistributing income. Hence, the growing interest in targeting tax increases to divide taxpayers into smaller groups and minimize voter backlash. Tobacco and alcohol are the favorites, but the same thing is happening in telecom and housing. These are some of the findings from a study by Daniel Clifton and Elizabeth Karasmeighan for Americans for Tax Reform.
According to Tom Tauke, “broadband and, in particular, wireless services are increasingly viewed by state and local governments as the golden goose for raising new revenue. The state and local tax burden on communications is now two and a half times what it is for other businesses … Today in some states, taxes on cell phones exceed that of liquor and tobacco.”
Broadband and cellphone providers don’t pay these taxes, of course. They are merely tax collectors. Unfortunately, the taxes lead to higher prices for broadband and cellphone services, which lowers demand, as Tauke points out. Lower demand is bad for innovation, the economy and the future spending plans of politicians and social service advocates.
Clifton and Karasmeighan recommend that states limit spending to the rate of population growth plus inflation to ensure that revenue gains during upturns can be used to offset losses during recessions. They also recommend that states reduce their reliance on volatile revenue sources such as capital gains and dividends. States used temporary surges in capital gains revenue in the 1990s to increase spending permanently. When the stock market declined, states lost 80% of this revenue but kept spending anyway. Many fooled voters into raising taxes to cover the “unforseen” gap.
State and local tax policies are one of the chief threats to investment and innovation in the tech sector today.
See: “State Tax Trends Over Twenty-Five Years: Tax Increases Down, Revenue Sources Shifting,” by Daniel Clifton and Elizabeth Karasmeighan, Americans for Tax Reform, Aug. 2006
See: “Staying Ahead of the Broadband Curve,” Remarks by Tom Tauke, Executive Vice President–Public Affairs, Policy and Communications, Verizon Communications, at the Progress & Freedom Foundation’s Aspen Summit, Aug. 22, 2006
See: “The Excessive State and Local Tax Burden on Wireless Telecommunications Service,” by Scott Mackey, Economist, Kimbell-Sherman-Ellis, Jun. 2004