"Tax on Talking"

"Among the better ideas John McCain announced last week is a ban on new cellphone taxes. For America's 257 million wireless subscribers, the GOP Presidential candidate is advancing a sensible policy with political punch." -- The Wall Street Journal

"Tax on Talking"
Editorial
The Wall Street Journal
April 22, 2008

Among the better ideas John McCain announced last week is a ban on new cellphone taxes. For America's 257 million wireless subscribers, the GOP Presidential candidate is advancing a sensible policy with political punch.

A recent analysis by economist Scott Mackey in the journal State Tax Notes shows that the average monthly tax burden on wireless customers is more than 15% -- double the average sales tax burden. In some states, such as New York (big surprise), the total tax bite is more than 20%.

If the pols were exercising even modest restraint, wireless consumers would now be enjoying a reduced tax bill. That's because in 2006 the IRS stopped applying the Federal Excise Tax on Telecommunications to wireless services. The feds weren't being generous. After the IRS suffered a series of defeats in federal court, then-Treasury Secretary John Snow ordered the bureaucrats to stop gouging consumers. The language of the law, passed in 1898 to fund the Spanish-American War and rewritten in the 1960s, clearly did not apply to today's digital services.

But even though that 3% IRS levy has been knocked off the monthly bill, the overall cellphone tax burden is the same 15% it was in 2003. Increased Federal Communications Commission fees to underwrite universal service plus higher state taxes have offset the potential relief for consumers.

High discriminatory tax rates are a legacy of monopoly telephone company regulation and make little sense in today's competitive market for wireless service. But they make even less sense for music, games and other services that happen to be delivered over the airwaves. Kentucky revenuers have even argued that customers buying ringtones should pay twice -- the state's general sales tax rate of 6%, plus local utility taxes because the music arrived via a phone company.

Meanwhile, the IRS appears to be seeking payback for its lost ability to tax wireless service. Audits of large organizations have lately included a demand that all wireless calls be allocated between business and personal use. Where there is no documentation that most calls are for business, the phones have to be treated as taxable benefits to employees. To avoid the hassle of maintaining call logs on every employee, the University of California recently proposed giving workers taxable cash allowances to buy their own phones. Tax Court decisions reveal that an audit of a major airline resulted in tax increases for employees because cell calls weren't documented.

Congress should immediately call a halt to this bizarre IRS campaign against legitimate business expenses. But even if the pols rein in IRS auditors, wireless customers will still be paying $21 billion per year in taxes and fees on their monthly bills. If there is a policy argument that consumers of this technology should be taxed at twice the average sales tax rate, we haven't heard it.

The good news is that Mr. McCain isn't the only one calling a time-out on new taxes. Last week, Reps. Zoe Lofgren (D., Calif.) and Chris Cannon (R., Utah) introduced a wireless tax moratorium bill. It's time to protect consumers from this tax collector raid.

Read The Editorial In The Wall Street Journal