Why are some states disproportionately taxing a service we want more people using?

A new report out this week in State Tax Notes shows the discriminatory way in which Federal, state and local governments treat their citizens who subscribe to wireless services — and according to CTIA that’s about 93% of Americans.

Federal, state and local taxes and fees for wireless services topped an average of 16.3% in 2010. The highest combined rate was 16.85% in 2005. This far surpasses the average retail sales tax rate, which obviously varies by state.

Some blame can rest squarely on the shoulders of state or local officials who have targeted wireless services for a specific tax. The report points out a few examples:

• Baltimore: increased its per-line tax from $3.50 per month to $4
• Montgomery County, MD: increased its per-line tax from $2 to $3.50 per month
• Olympia, WA: imposed a 9 percent telecommunications tax on top of the state-local combined sales tax of 8.5 percent
• Chicago: imposed a 7 percent excise tax on wireless services on top of the state’s 7 percent excise tax
• Nebraska: imposes a local “utility” tax of up to 6.5 percent in addition to the 6.5 percent combined state-local sales tax
• Tucson, AZ: increased its telecommunications license tax from 2 percent to 4 percent

But the Fed’s Universal Service Fund (USF) fee is where the biggest increase has come of late. Increases in the Federal USF have added 0.9 percentage points to the rate since 2007, while state and local increases added just 0.2 percent. However, of concern as well is the rate at which wireless taxes/fees are increasing: almost three times as fast as other general sales tax increases.

I’m privileged enough to live in Washington state, where we impose 23.00% combined Federal,state and local taxes/fees on wireless customers. That’s second highest in the nation. Granted, Washington state has one of the highest state+local combined sales tax in the nation according to the Tax Foundation, but the 17.95% state-local wireless rate is twice that of the state-local sales tax rate of 9%. What is the excuse for that?

Nebraska imposes the highest combined tax/fees on wireless at 23.69%. Lowest is Washington’s neighbor to the south, Oregon, at 6.86% then Nevada at 7.13% and Idaho at 7.25%. Rounding out the top five of the worst are New York (22.83%), Florida (21.62%) and Illinois (20.90%).

So this brings up the debate of why are some government entities disproportionately taxing a service everyone agrees is vital to the health and future growth of our economy? CTIA says that fully one-quarter of households in the U.S. have ditched their landline phone in favor of wireless only or wireless + IP telephony  (count this author among one of those).

Everyone from the Obama Administration on down is touting the future of wireless and mobile broadband as one we should heartily embrace. Examples of this include the FCC’s recent Net Neutrality Order that exempts wireless carriers, the Administration’s push for spectrum re-allocation, all the hullabaloo about 3G-4G-LtE and all the talk about increasing carrier’s backhaul.

A recent Pew Internet poll highlighted that, for many people (and especially minorities), a mobile smartphone is the primary way they connect to the Internet. Now that many smartphones can be had for free with a contract, we have lowered the barrier to entry to things like social networking and search. No longer do you have to own a desktop or laptop, you just need to whip out the computer in your pocket and connect to a cell service or WiFi. Another Pew poll said that among “non-adopters” of broadband, 14% of them had accessed the Internet via their mobile phones.

For years the two main reasons that people state when it comes to explaining why they have not adopted broadband Internet are price and relevance. The non-adopters either can’t afford, don’t see the value in subscribing to broadband or think it’s simply a waste of time. We can’t do anything about the folks who think the Internet is a fad, but why make wireless services and mobile broadband even more expensive, especially if this type of service is so elastic?

Twenty-three states now impose a state-local wireless rate above 10%, which has become the unwritten but psychological barrier that we are seeing sales taxes creep towards.

Wireless services and customers shouldn’t be exempted from paying any taxes or fees, but imposing a disproportionately higher tax rate on a service we as a society are pushing people to use more of is duplicitous.

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