Congress has been appropriately cautious in holding the line on how government can tax Internet access. Indeed, earlier this year President Bush extended the moratorium on taxing Internet access for another two years. The thinking is that the Internet is such a powerful information tool, nothing should be done to stifle its development or prohibit access to it by the masses.
Likewise, Congress and the Federal Communications Commission are moving to allow Voice over Internet Protocol telephone service to develop with a light regulatory touch. Some legislators are introducing bills that would prohibit states from taxing VoIP services, even as they are allowed to tax traditional telephone services.
Wireless missed the boat. The industry couldn’t even get a 3-percent federal excise tax imposed during the Spanish War removed. Today, local and state taxes are sneaking up on industry much in the same way a cold suddenly turns into life-threatening pneumonia.
An article by economist Scott Mackey in State Tax Notes spells it out clearly: “Many of the taxes imposed by state and local governments are throwbacks to the monopoly telecommunications era. These taxes are levied at rates significantly above those of consumption taxes (typically sales and use taxes) on other goods and taxable services. Despite the fact that congressional policy enabled the U.S. wireless industry to develop as a competitive industry, state and local policy-makers continue to impose monopoly-era telecommunications taxes on wireless service in the interest of `competitive neutrality,’ ” wrote Mackey in The Excessive State and Local Tax Burden on Wireless Telecommunications Service report. “The wireless industry, like any other competitive, technology-based industry, is ill-suited to this type of taxation because consumer demand is price-sensitive (price-elastic in the language of economists).”
Mackey, formerly chief economist with the National Conference of State Legislature, points out that most of the time when states and local governments are taxing something too much, it is to discourage its use, like alcohol and cigarette consumption.
It will be extremely difficult for the wireless industry to fight for fair taxation after 21 years of solid growth, but perhaps wireless data can be treated as an information service that should be allowed to flourish with a light regulatory touch.
