Virginia & Telecom Tax Reform: A Note on the Morality of Taxing Telecommunications & Information Services

by on February 2, 2005

Some Virginia officials want to reform telecom taxes. Good idea. To get that much-needed job done they are considering “leveling the playing field” by imposing the exact same tax on all new forms of communications and information services. Bad idea.

Here’s the Washington Post summary of what’s going on:

“With telephone service available over the Internet, phone companies preparing to offer video and cable companies selling phone service, backers of the plan say, it is time for Virginia to tax all modes of communication the same way. The proposals before the assembly would impose a 5 percent flat tax on various communication and information technologies. That would reduce taxes on local calls, mobile services and paging, which in some cases range from 10 to 35 percent, and impose levies on monthly satellite television bills, Internet calling technology and long-distance service, which currently aren’t taxed.”

This is an old story that we’ve all heard many times before. Politicians are confronted with paradigm-shattering technology change. Their old rules (or taxes) no longer make sense, or unfairly burden on set of market players relative to others. The unfairness of the situation demands action. So what are they to do?

All too often, the answer involves tweaking the old rules (or taxes) just a bit and then rolling that bad old regime on the new kid in town. True, that’s “fair” in that everyone is being “regulated-up” or taxed-up” to the same level playing field. But consider the amazing opportunity we have missed to potentially phase out inefficient regulations or taxes altogether when lawmakers take this path.

After all, why are we imposing taxes on these services or activities at all? Here’s the way I’ve always looked at it: Taxes on telecommunications are taxes on talking. They are taxes on what two people want to say to one another. They are, in essence, taxes on free speech.

Taxing cable, satellite, or the Internet is no different. In fact, in some ways, such taxes are even more offensive. They are taxes on the movement of information. Why in the world, for example, would we want to tax the posting of website or a 24-hour global news service on cable TV? If, as the old saying goes, taxes involve the power to destroy, why would want to destroy or even slightly diminish these wonderful things?

Moreover, there are some practical enforcement considerations to consider. In a world of hyper-decentralization, in which borderless technologies like Skype can defy all the traditional rules and legal paradigms, how in the hell are state and local governments going to tax or regulate these services in the future? Seriously, someone explain to me how it will work short of creating a full-blown IP-Service Tax Enforcement Swat Team that patrols the globe trying to find the guys who release the source code that makes phone calls free. Nuts.

Oh well, I guess I should just be happy that Virginia at least understands that there is a problem and that something needs to be done to lessen the tax burden on some of the players and technologies out there today. But I’m still worried about what their new “level playing field” means for tomorrow’s technologies. More simply, I just believe it is unethical to tax human communications and the movement of information.

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