In 1898, a “temporary” Federal Excise Tax (FET) was levied on phone service to help pay for the Spanish-American War.  The war lasted only a few months, but the telephone tax it started is still with us.  Like the Energizer Bunny, it keeps going, and going, and going....

Congress will soon vote on eliminating the 102 year old “temporary” Federal Excise Tax on telecommunications.  H.R. 3916, a bill I am co-sponsoring, would phase out the three percent tax on telecommunications over a three year period.  The first reduction would occur when the bill is enacted into law.  The tax would be fully repealed by October 1, 2002.

The Growth of a Tax

When the tax was first enacted, it imposed a one cent tax on long-distance phone calls costing more than fifteen cents.  At the time, there were less than 2,000 phones in America.  It was viewed as a luxury tax because phone calls were seen as non-essential and something that only the wealthy could afford.  Today, 94% of American households have phone service.  Long distance phone calls are part of our daily lives.  A luxury tax on phone service no longer makes sense.

In 1990, a three percent tax on telecommunication services was made permanent.  Under the tax, services such as caller ID, call waiting, directory assistance, cell phone service and long distance charges are all taxable.  With a blurring of the lines between traditional phone service and the Internet, and with technological changes rapidly occurring in telecommunications, it is even possible this tax could one day be applied to the Internet.

A Regressive Tax

Taxing telephone service is regressive.  Because everyone pays the tax at the same rate, it hits low and fixed income Americans the hardest.  The less someone makes, the greater the tax is as a percent of their income.  A 1987 U.S. Department of Treasury study found, "the (communications excise) tax causes economic distortions and inequities among households."  The study went on to conclude that "there is no policy rationale for retaining the communications excise tax."

The telephone tax also disproportionally hurts rural areas.  Rural customers obviously don’t live as close to as many people as those living in urban areas.  Residents of rural areas are more likely to place long-distance phone calls, have higher telephone bills on average and consequently pay a heavier share of the tax on telephone service.

This bill will save Americans $5 billion each year.  For the typical family, the legislation will cut their phone bills by fifty dollars a year.  Since 94% of American households have telephone service, the bill will mean a tax reduction for just about everyone, regardless of income level.

In 1900, just over 1.7% of Americans had phone service.  At the time, a credible argument could be made that the telephone was a luxury.  Today, with near universal telephone service, this regressive tax is hard to justify and should be repealed.  I believe it is time to hang-up on the 102 year old “temporary” tax on telephones.
 

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