The following excerpts are from the Report to the Congress on Communications Services Not Subject to Federal Excise Tax, August 1987. To receive a full copy of the Treasury report, please send an email with your name and mailing address to feedback@repealthetaxontalking.org.

Report to the Congress on Communications Services Not Subject to Federal Excise Tax

Office of Tax Analysis
U.S. Department of the Treasury
August 1987

Principal Findin[g]

1. The communications excise tax should be allowed to expire at the end of 1987 as scheduled under current law and as envisioned in the President's FY 1988 Budget. The tax causes economic distortions and inequities among households. Further, allowing the tax to expire would obviate the need to address the issues raised by the various exemptions to the tax. There is no policy rationale for retaining the communications excise tax in the federal tax system. (emphasis added)

Conclusion

The above analysis indicates that, on efficiency grounds, only a weak argument can be made in favor of the communications excise tax as it applies to local calls placed by households. As it applies to toll calls by households to and to businesses' use of communications services, the tax causes distortions. Further, the tax is precisely the wrong policy with respect to externalities, in that telephone services exhibit positive externalities and should therefore not be taxed but rather subsidized. There being no other efficiency arguments for the tax, on balance it must be judged as inferior from an efficiency standpoint relative to other taxes which could be used to raise the same amount of revenue.

The tax violates the horizontal equity standard. With respect to vertical equity, the tax is regressive, although perhaps only mildly so. Finally, the tax does appear to be reasonably simple, although no more so than other excises.

On balance, there are no strong arguments in favor of the communications excise tax. In addition, there are reasonably strong efficiency and moderate equity arguments against the tax. Further, although reasonably simple in itself, the tax contributes to the complexity of the tax system as a whole. For these reasons, the tax should be allowed to expire at the end of 1987 as scheduled under current law and as envisioned in the President's FY 1988 Budget.

Summary

The current exemption for private communication service is an attempt to neutralize the otherwise disparate tax treatment of owning rather than leasing communication equipment. An unintended consequence of this exemption is that it creates a distortion between private and nonprivate communication service. The recommended policy option is to allow the communications excise tax to expire as scheduled under current law and as envisioned in the President's FY 1988 Budget. This option would not only obviate the need to address the problems associated with the current exemption, it would also be desirable on general tax policy grounds.

If the tax is extended, one policy option is to return to previous law. Previous law, though distorting the owning versus leasing decision, did not distort a firm's decision between private and nonprivate communication service. However, it does not appear that the new distortion is greater than the previous distortion. Furthermore, a return to previous law would exacerbate the problem of bypass.

A second policy option, if the tax is extended, is to tax the services provided by communication equipment, regardless of whether the equipment is leased or purchased. This would eliminate the distortion between private and nonprivate communication service, but would exacerbate the distortion between communication services and other inputs. Further, it would be difficult in practice to define the equipment that should be subject to tax, and there are a number of circumstances under which the tax would cause differentials between various types of equipment.

A third policy option, if the tax is extended, is to improve current law. This could be accomplished by rewording the definition of private communications service to attempt to include all close substitutes.

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