Inequities in Texas Telecom Taxation
Many states do not charge sales taxes on certain items. State sales tax exemptions vary, but are regularly granted for purchases of products used in manufacturing final goods. States that typically exempt equipment used to manufacture a tangible good do not always allow the same deduction for equipment used to provide an intangible good, such as telecom or broadband services. As a result, telecom and wireless services are subject to "double taxation," in which both an intermediary good and the services provided are taxed. Until recently, Texas taxed telecom and wireless services in this manner. Currently 20 states exempt on at least one or more services (telecom, voice or broadband), whereas 30 states tax all three. However, Texas consumers continue to face a heavy tax burden that varies widely from city to city.
Sales taxes. Texas consumers pay a 6.25 percent sales and use tax on cable and wire-line services. Municipalities, counties, special purpose districts and transit authorities may impose additional taxes, up to a total of 8.25 percent.
State/Local Cable Franchise Fee. Cable video providers pay a state-imposed monthly franchise fee of up to 5 percent of gross revenues for the use of public right-of-way (infrastructure). Municipalities also impose an additional one percent Public Education and Government (PEG) franchise fee. Revenues generated by the PEG cover cable television providers' capital costs for local public and educational access channels.
Right-of-Way Fees. Telecommunications providers must compensate municipalities for use of the public rights of way in the municipality. The right-of-way fee is considered a rental payment for the use of public property and is assessed at fair market value. However, the fee is passed on to consumers.
Texas Universal Service Fund. The Public Utilities Commission levies a fee for the Texas Universal Service Fund (TUSF) on all voice services, including local, long distance, pager and wireless. Telecommunication providers pay an average tax of 3.4 percent of taxable communications receipts, and pass that cost on to consumers.
911 Emergency Service Fee and Equalization Surcharge. These fees are assessed for emergency telecommunication services. Consumers pay a set $0.50 fee every month, along with an variable fee averaging $0.25 for areas served by Emergency Communications Districts, the equivalent of a 2.14 percent unregulated tax. One percent equalization surcharges are also imposed on consumers, based on the cost of intrastate long-distance services.
Public Utility Commission Fee. The state assesses a 0.0017 percent fee on all public utility service providers (which includes certified telecommunication providers) to fund the Public Utility Commission.
The 10 most populous Texas cities generated more than $300 million in fee and tax revenue from cable television and telephone services in 2011. In the 10 most populous Texas cities:
- The average effective tax rate (AETR) on cable television ranged from 14.13 percent in San Antonio to 14.25 percent in most of the top 10 cities.
- The AETR for a fixed-line phone ranged from 21.79 percent in San Antonio to 27.16 percent in Arlington.
Major metropolitan areas such as Houston, San Antonio and Dallas maintain the lowest tax rates, and consequently the lowest annual burden for consumers. Arlington, Laredo and Corpus Christi, on the other hand, suffer triple-digit annual tax burdens for basic telephone services.
Adjusted for population and tax burden distributions, cities with lower populations and lower median household incomes carry a much larger share of the tax burden than more populous and higher-income areas:
- Laredo, for example, has the lowest population and lowest median household income of the top 10 Texas cities.
- Consumers in Laredo pay a 15 percent greater share of the total average state aggregate consumer tax burden than their share of the state population.
The evidence suggests that for every 1 percent increase in the AETR (on fixed-line voice services), the regressivity of the tax burden increases about 4 percent.
The tax treatment of the Texas telecom industry is far from equitable. The industry faces tax hurdles not imposed on other industries or in other states. The Texas legislature should consider the following options:
Streamline Business and Cable Franchise Taxes for Cable Providers. In Texas, non-satellite cable providers are subject to a cable/video franchise fee that is not required of satellite cable providers.
Reduce Right-of-Way Fees to their Original Intended Use. State law allows municipalities to derive up to 21 percent of their revenue from right-of-way fees. This may benefit local coffers, but it burdens consumers and the telecom industry. Right-of-way fees should be assessed annually based on the actual maintenance and operating costs of public rights of way.
While the telecom industry's changing and ever-evolving technology has benefitted consumers greatly, the state of Texas still tethers the industry to outdated and burdensome laws and taxes. Moreover, Texas may be losing out to other states that provide tax exemptions for equipment used to provide services. The telecom industry still has room to grow in Texas, and the legislature should recognize the opportunities that an equitable business and consumer telecom tax system would help bring to the state.
Pamela Villarreal is a senior fellow with the National Center for Policy Analysis. Villarreal is an expert on retirement, Social Security, economic growth and tax issues. She has authored studies and analyses on specific topics, including the danger of 401(k) borrowing, Social Security disability, the expiration of tax cuts and the future of Social Security and Medicare. Villarreal blogs about these topics and more at www.retirementblog.ncpa.org
Kyle Buckley is a former research associate with the National Center for Policy Analysis.