The telephone bill illustrates one such method — each tax looks insignificant in itself; what’s a couple of dollars? But the small amounts do add up, especially for low-income households. These taxes combined add as much as 20 or 30 percent to the average phone bill. Such special taxes are a tax on communication itself and are bad news for consumers and for telecommunications policy.
Take the Federal Telecommunications Excise Tax as an example. This tax, 3 percent of every phone bill, cost consumers about $5 billion in 1999, a tiny fraction of federal revenue. It was originally a “luxury tax,” like taxes on alcohol and tobacco. It was first levied to pay for the Spanish-American War in 1898, then renewed to pay for World War I.
This kind of tax on a particular, narrow activity — making phone calls — is bad policy. The tax will partly determine how many new communications services will be bought by consumers, especially low-income consumers. Just as a special tax on windows once made people board up most of their windows, special telecommunications taxes chill the buying of second phone lines, which many households would find useful in getting Internet access. In 1898 phone service was a luxury, but today it is not, and discouraging the installation of new phones across the country is not a policy the government should advance.
The battle for tax reform needs to start somewhere — and the Federal Telecommunications Excise Tax is a great place to begin. The tax is unnecessary and outmoded, it contributes almost nothing to the treasury and it hurts consumers. Eliminating this tax is not a small matter of nickels and dimes but rather a symbol of our traditional commitment to a fair and minimal tax system.