For the last couple of years, Texans have been focused on reducing school property taxes, and rightly so – as a percentage of income, the per capita property tax burden in Texas ranked us 11th worst among the states in 2004.
However, there is at least one area of taxation where Texas ranks even worse – telecommunications. Texans pays a total of 29.29% in taxes on the average phone bill. This means Texans face the third highest tax burden in the country. Only Virginia and Maryland levy higher telecom taxes than Texas.
Another problem with the telecommunications tax system today is that, in a world where voice, video and data communications are merging into almost indistinguishable packets of electrons, taxes still discriminate based on the type of telecommunications service being provided, with traditional telephone service the most heavily taxed.
Though Texas clearly has an inequitable and excessive telecom tax burden, changing the system will not be easy, because these taxes supply significant revenue streams to both the state and local governments. And they are reluctant to part with the money.
However, the current period of sustained growth in the Texas economy provides a great opportunity for policymakers to reduce telecom taxes.
At the state level, even after the property tax reduction Texas has a budget surplus of at least $4.2 billion that could be used to reduce telecom taxes – two of which are especially deserving of elimination.
The first is the TIF tax, originally levied on phone bills to fund the installation of Internet and other communications infrastructure at a variety of public institutions. However, once this task was completed the Texas Legislature decided to keep the $200 million the tax generates every year and divert the funds to general revenue.
The second is the portion of the sales tax that is levied on other telecom taxes, including the TIF, utility gross receipts and municipal franchise fees, on phone bills. This tax-on-a-tax costs consumers about $90 million a year.
The biennial cost of eliminating these two taxes would be about $600 million; chump change compared to the current budget surplus.
At the local level, cities levy municipal franchise fees averaging over six percent on telephone and cable/video services purchased by consumers. Though this fee is often described as “rent” to compensate cities for the use of the public right of way, is has become just another revenue stream. Houston generates almost $50 million annually from its telephone franchise fee alone, while Dallas and Austin generate $20 million and $15 million, respectively. In order to reduce the burden of municipal franchise fees, the Texas Legislature should treat this fee simply as compensation for the use of the right of way, not as a tax on video and voice communications. Cities should charge the fee on lines that are physically present in the right of way, not on every service that uses the lines.
Over time, this would save Texas consumers tens of millions of dollars per year. Cities can afford this loss of revenue from telecommunications franchise fees, as revenues from other franchise fees and general fund sources have shown healthy increases the last couple of years.
As sensible as these proposals might seem, Congress is considering “Net neutrality” legislation that would interfere with the ability of telecommunications companies to efficiently respond to them and other state-based reforms. While a grand sounding concept, Net neutrality is merely a gambit by content providers to limit competition and guarantee free access to the customers of Internet providers, and should not be seriously considered.
In a time of increased business efficiencies and technological innovation, consumers are benefiting from declining prices on a wide variety of telecommunications products and services. Government at all levels should similarly adopt innovative tax policies that will bring much needed relief to Texas taxpayers.
Bill Peacock is the director for the Center for Economic Freedom with the Texas Public Policy Foundation, an Austin-based research institute. He may be reached at [email protected].