“This tax, that tax. What do they all mean? Well, I guess I have to pay them if I want to keep this phone.” Sound familiar?
Earlier this week, the House of Representatives passed the Wireless Tax Fairness Act of 2011, which would freeze any increases in state and local taxes on wireless services. Now that the House has passed its version of the bill, the Senate should follow suit and pass it, as well. Both chambers should consider passing a similar measure—the Digital Goods and Services Tax Fairness Act of 2011 — which would prevent new taxes on digital goods and services. Digital goods such as apps and e-books do not burden state resources in the same way that physical goods and services do.
They should not be taxed at the same rate.
Preventing tax increases on wireless services is a small but significant step toward ensuring the affordability of broadband for low-income consumers who are disproportionately people of color. Increases to wireless bills that may seem slight to middle-class and upper income consumers can be enough to cause low-income consumers to cancel or forego their wireless service. For example, a recent paper by Glenn Woroch estimates that adding $4.17 to the average wireless bill of $47.21 would lead to a 7% drop in wireless subscribership levels.
Three of the top 5 states with the highest wireless tax rates are home to large cities with African American and Latino populations exceeding the national average. In some states, wireless service taxes are more than twice the sales tax placed upon physical goods. New York, for example, has the highest wireless service tax rate (17.78%) among states with majority-minority cities. Contrast this with New York’s state-wide sales tax rate of 8.25%. Other such states include Florida (wireless service tax: 16.57%/statewide sales tax: 7.25%) and Illinois (wireless service tax: 15.85%/statewide sales tax: 9%).
Congress should prevent increases to state taxes on digital goods and services as well. The Joint Center for Political and Economic Studies has reported that African Americans (32%) and Latinos (29%) are more likely than white Americans (23%) to download apps to their cell phones. Further, according to Nielsen, 45% of Latinos and 33% of African Americans own smartphones, as compared to 27% of white mobile users. And what would the apps market be without smartphones?
Smarter devices and services have made quality goods and services more accessible to low-income consumers. However, a regressive tax mechanism applied to wireless service, digital goods and digital services would further repress this potential utility of mobile broadband. For example, several online services can assist low-income consumers in buying groceries if they live too far away from well-stocked and more reasonably priced supermarkets. Previous studies have shown that many low-income, urban neighborhoods are “food deserts” without feasible access to stores with an array of quality produce and meats. Online services, such as Peapod, deliver quality meats, seafood and produce to consumers beyond the one-mile radius of partnering supermarkets. Last week, Amazon debuted a new service that allows consumers to purchase basic groceries—including coffee, cereal, meat, and seafood—with few geographic restrictions at all. Thus, while further raising wireless taxes may create a revenue stream to fund other state and local initiatives, the gains from those initiatives will be negated by nudging low-income consumers toward purchasing lower quality goods at higher prices, and thereby exacerbating negative health and economic outcomes.
Comprehensive and equitable tax policies are absolutely critical for creating a mobile broadband environment that is more conducive to improving conditions in low-income communities.
If you are interested in learning more about the effect of excessive state and local taxes on wireless service and digital goods and services, read the Joint Center for Political and Economic Studies’ report released ahead of this week’s House vote.