July 16, 2010

New cell phone taxes state

This commentary appeared in the San Diego Union-Tribune on July 16, 2010.

For “Ellen,” who is too embarrassed to use her real name, it was back-to-back cell phone bills totaling $1,100 for her daughter’s text messages and excess minutes. Such excessive cell phone bills are increasingly common in California thanks to taxation run amok.

Federal, state and local surcharges and fees are breaking the bank for wireless consumers. From June 2002 through June 2008, 22 California cities approved requests to extend their public utilities taxes to “modern forms of communication,” i.e., wireless services such as cell phones, Internet access and text messaging services.

What caused this wave of new taxes at the state and local levels? Ironically, a federal tax cut.

In 2006, the IRS released Notice 2006-50 admitting that the previous 3.5 years of taxes it had collected on long-distance service were illegal. So-called bundled services — flat-fee plans offered by wireless carriers that provide both local and long distance service — were exempt from federal taxation.

When California cities realized their public utilities taxes no longer applied to bundled cell phone plans, they swiftly amended their statutes, not only to preserve their revenue streams, but to increase them. Take Sacramento, for example. In 2008, the city approved Measure O, allowing the local utilities tax to cover “modern and emerging technologies in communication.” More recently, on April 13, El Segundo passed Measure M, which approved “updating and replacing the telephone tax regulations with modern communication services.”

The trick behind this vague wording is that the suddenly untaxed bundled services are small compared to the size of the newly taxed “modern services.” So cities including Sacramento and El Segundo were able to boast “tax reductions” by lowering the rate a bit while greatly increasing their revenue by taxing so many new things.

Covering Measure O in Sacramento, News10 ABC quoted Timothy Bittle of the Howard Jarvis Taxpayers Association, “Don’t be fooled. When the city says vote ‘yes’ for this because it’s a tax reduction, you need to realize what the city is trying to do is double, triple and even quadruple your tax.”

In 2009, more than 1.56 trillion text messages were sent within the United States. Currently, 91 percent of Americans use cell phones, compared to 82 percent in 2007. This booming market looks like a cash cow to local governments, and they are lining up to milk it. In November, it is Chula Vista’s turn, and the wording is similar to Sacramento’s: The city’s public utilities tax laws should be amended so that they “reflect recent changes in Federal tax law and to modernize the definition of technology communications so that it is technology neutral.”

Staff members claims the city is only trying to close a “threatening loophole” found in the federal excise tax that jeopardizes the city’s current ordinance and its ability to collect tax revenue

The measure will be on the November 2 ballot and advocates extending the utility user tax to Internet, texting and toll-free numbers.

The purpose of the public utilities tax is to compensate the government for building infrastructure to facilitate utilities such as water, gas and electricity. Cities do not subsidize wireless carriers or intervene in constructing cell phone towers and infrastructure. The important distinction to make is that wireless carriers like Verizon, Sprint and others are not public utilities, nor do they use public utilities. Therefore, local governments in California have no business placing a public utilities tax on a private good.

If cities in California continue passing measures that include broad terms like “modern and emerging technologies in communication,” residents are making current and future cellular services fair game for taxation.

What are the chances Chula Vista will reverse such a perverse trend? The answer may hinge upon the turnout in the 51st Congressional District race between Republican Nick Popaditch and Democratic incumbent Bob Filner. One or both of them may take a stand on this issue, warning voters that an unjustified tax is sneaking up on them. After all, what politician in his right mind would support a tax on text-message donations to Haitian Relief or on cell-phone votes for American Idol?

Forster is a visiting scholar at the Tax Foundation in Washington, D.C., and a student at the University of San Diego.