Taxes, Fees & Regs Add 18% to Cell Phone Bills

October 15, 2003

Telephone Excise Tax • Mistakes Abound on Telephone-Tax Refund Requests • One-Time IRS Credit for Telephone Tax • Feds Surrender, Kill 108-Year-Old Telephone Tax • Congress Considers Permanent Ban on Internet Tax • Taxes, Fees & Regs Add 18% to Cell Phone Bills --- Spanish-American War Drawing: Library of Congress

A new study finds that U.S. cell phone users will soon be paying $10 per month per user in fees, taxes and costs imposed by regulations. Nationwide, the study concludes, the higher prices could result in nearly 31 million fewer wireless users.

The report by economists Thomas M. Lenard and Brent D. Mast says the typical wireless user faces a total tax rate (federal, state and local) of over 14 percent on wireless services. This amounts to $6.77 for the average monthly bill of $54.14.

• Wireless Local Number Portability, which allows consumers to take their cell phone numbers with them when changing providers;
• Number Pooling, which sets aside numbers for anticipated growth;
• The Communications Assistance for Law Enforcement Act, which requires cell phone companies to modify their equipment to allow law enforcement and national security agencies to eavesdrop on calls;
• Enhanced 911 (E911), which enables 911 dispatchers to know where a cell phone call is coming from.

The study projects the cost of these four programs to be $2.62 per consumer per month, and says the additional expense could price almost eight million potential wireless users out of the market.

Although it is widely regarded as deregulated, the cell phone industry in fact faces many of the same fees and taxes as landline phone service, the authors note. In fact, the federal tax on wireless service is presently 4.10 percent, the same as that charged for landline service. State and local taxes add another 10 percent on average.

The lowest state and local tax rate is 0.17 percent in Idaho. The highest -- hardly a surprise -- is New York's, a whopping 16 percent.

The federal tax is made up mostly of a three percent federal excise tax that was levied on telephone companies to help finance the Spanish-American War.

Proposed consumer protection regulations will further increase costs, the study finds. The economists said a proposed California measure that would make it easier for consumers to cancel cell phone service during the first 30 days, and requirements for additional truth-in-advertising measures will add nearly $4 to monthly bills.

Viewing cellular as a "mature" market tempts regulators to impose new fees and regulations, the study warned. It noted that, although there are about 175 wireless carriers, six national companies -- Verizon, Cingular, AT&T, Sprint PCS, Nextel and T-Mobile -- account for nearly 80 percent of the market, presenting a tempting target to legislators looking for new tax revenue.

“In such a competitive environment the costs associated with these mandates will be passed on to consumers,” Lenard and Mast conclude. “The wireless sector is under increasing pressure on a number of regulatory fronts – most notably in the areas of taxation and regulatory mandates."

While the study says some of the mandates “may be justified,” the authors contend there has been little or no systematic analysis of the combined effects on average consumers.

You can download the full report online.

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