TCS Daily

The Telecom Tango

By Duane D. Freese - October 10, 2002 12:00 AM

On biannual trips to Argentina in the 1990s, I often would look at the prices there for electronics and computers and wonder: Why so high?

It made absolutely no sense to me that a nation with 30 million fairly well educated people would basically put a tariff of nearly 30 percent topped by a 22 percent sales tax on goods - computers and electronics - that could make its people more productive.

How dumb, I thought, heavily taxing that which can make your country and its people wealthier? That's Third World thinking. No wonder Argentina has seen its economy fall further back rather than surge ahead.

Well, such thinking, it appears, isn't so Third World at all. It's sprouted up right here in this country - pushed along by governments, particularly state and local, that have decided that taxing telecommunications is the way to fiscal Nirvana.

The Wall Street Journal on Sept. 18 reported that new taxes and fees are hitting cell phone users hard. For example, in New York, calling plans listed at $39.99 end up costing users $9.30 more - a whopping 23 percent - thanks to taxes, fees and surcharges imposed by government.

Those charges include $1.32 in federal tax that was imposed as a "luxury" tax on phone service back in 1898 to finance the Spanish-American War. Go, TR! But I thought that war was over? And in today's economy, can we really do without phones?

That, though, was only the start. Also tapping cell phone users is a state sales tax of $1.72, a local tax of $1.82, a 911 surcharge of $1.20, a NYC utility surcharge of 96 cents, a local wireless surcharge of 30 cents, a universal connectivity charge of 42 cents and a gross receipts tax of $1.56.

And New York isn't the worst. California, Virginia (where I live!) and a bunch of other states rank ahead of it.

Now, I'd have no real gripe if these taxes and surcharges were equivalent to the prices paid for other services, or actually provided special services to phone users. I might complain, but I can't object, for example, to a sales tax applied to phone service that is also applied to clothing or other goods and services.

But that isn't the case for a big share of the telecom tax load. Like the corrupt politicians in Argentina who kowtowed to unions and native electronics companies to give their businesses protection, state, local and federal pols here apparently find it easier to tax telecom customers generally - and surreptitiously - than lay a property tax, or income tax, or general sales tax on their local businesses and the general populace.

A study by Robert Cline of Ernst & Young in State Tax Notes on June 3 found that nearly all the taxes and fees were far in excess of what other businesses paid and beyond the services rendered. Property taxes on telecom lines, for example, are 50 percent higher than others. Gross receipts taxes not charged to other services are applied to telecommunications services. And then there are the unique utility charges and things like the 911 fee (for locating emergency cell phone callers).

Overall, telecom taxes (not including taxes on profits) were $7 billion in excess for those of other businesses, Cline's study found, out of a total tax bill of $18.1 billion in 1999. In other words, government is charging telecom companies and consumers a whopping 63 percent more than other sectors.

And even on the charges meant to cover services, telecom companies and consumers aren't even getting the promised services in return. The Wall Street Journal reporter found that the 911 fees, for example, weren't helping state police track cell users' locations, but going for "dry cleaning, lawn mowing and travel expenses." In short, boondoggles.

Now, $7 billion may not seem like much in the overall national economy of $10 trillion. And during the telecommunications boom of the late 1990s, it sort of got lost in all the irrational exuberance of $500 billion in spending.

But the money represents a couple of added percentage points off of sales, and quite a larger percentage off profits, especially now. Indeed, it could make a big difference in whether some telecom companies survive and whether others can invest in delivering new telecommunications services - such as broadband - to the general public.

And that's what makes the attempt to jack up taxes on telecom a robbing Peter to pay Paul proposition. Telecommunications underlies much of the economic growth in the information age, and while it needn't go untaxed, overtaxing it amounts to economic lunacy. It amounts to slowing growth.

Look at California. Silicon Valley, the engine for much of that state's growth, is in the dumps, with the lost profits their reducing state income dramatically. Its leaders are looking to rapid provision of broadband and the spread of high-speed wireless services as opening the door to new software and computer applications. And yet, California is taxing cell phone services at nearly 20 percent.

Congress is holding hearings on the telecom meltdown, with proposals to provide tax incentives to give broadband a boost in rural areas. Yet, it keeps in place its Spanish-American War tax, and rural counties charge excessive property taxes on phone lines.
How dumb is that?

FCC Chairman Michael Powell on CNBC Sept. 18 said the Telecommunications Act of 1996 wasn't to blame for telecom's problems today. He laid most of them on bad business plans and poor investment decisions.

Well, there's more than enough blame to go around. But a good part of it also rests on federal, state and local politicians who decided to try and milk the telecom sector for more than it can or should deliver.

Why in heavens name would supposedly smart First World government leaders here follow Argentina's sorry lead? It's dumb wherever it's done. But by taxing telecom the way they have, they haven't performed a tantalizing tango so much as simply left the economy, and their own finances, in a tangle, much like Argentina's.



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