NCPA - National Center for Policy Analysis

The Federal Telephone Excise Tax Is Regressive -- And Permanent

June 3, 1999

As some industries are finally breaking free of federal regulation, the telecommunications industry is saddled with an explicit federal excise tax of 3 percent on telephone service originally enacted by Congress in 1898 as an emergency measure to finance the Spanish-American War. Despite repeated attempts to abolish the tax, the Revenue Reconciliation Act of 1990 made the tax permanent to help reduce the budget deficit.

Critics say the telephone excise tax is not justified. It cannot be described as a user fee, which is generally dedicated to maintaining the activity being taxed, such as the gasoline tax used for road construction. On the contrary, this tax does nothing to promote telephone service, instead going into a general revenue fund.

The excise tax is no longer a luxury tax, as it was considered in 1898. Telephone access is not a luxury, but a necessity. In fact, it is so necessary that federal and state governments have mandated a complicated system of cross subsidies among consumers and service providers to encourage universal access, even in high-cost areas. As a result, the tax is regressive, which means it takes a larger percent of a poor household's income to pay it than it does for a wealthy household.

Unfortunately, repealing the tax will not be easy. The tax often goes unnoticed by consumers, and it is small enough to not cause too much grievance for the individual subscriber. Overall, however, this tax brings in roughly $5 billion annually, and is expected to generate another billion dollars annually by 2002, making the tax quite valuable to the federal budget.

Source: Stephen J. Entin, "Taxing Talk: The Telephone Excise Tax and Universal Service Fees," IRET Policy Bulletin No. 74, February 2, 1999, Institute for Research on the Economics of Taxation, 1300 19th Street, N.W., Suite 240, Washington, D.C. 20036, (202) 463-1400.


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