As lawmakers consider raising taxes as part of the current deficit-reduction talks, a separate bill moved one step closer to giving consumers a much-needed break -- on their cellphone bills.
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On Thursday, the House Judiciary Committee voted in favor of sending the Wireless Tax Fairness Act to the full House for a vote. A date for that vote hasn't been set yet. The bill calls for a five-year freeze on tax hikes and the introduction of any new taxes and fees on mobile devices which have a service plan, including cellphones, smartphones and tablets. Consumers currently pay about $92 a year on average, or 16.3% of their total bill, in taxes as part of their cellphone plan -- the highest amount ever, according to the Heartland Institute, a public policy research organization. That's up from a 14.1% tax rate in 2006. "That's a huge amount -- it's really going to knock you," says Brian Johnston, director of advocacy at MyWireless.org, a nonpartisan nonprofit organization in favor of consumer-friendly wireless policies.
It's not just current cellphone users who've been impacted. Supporters of the bill, which includes the wireless industry, say rising taxes and fees also hinders new sales of cellphone service plans. "Higher tax rates in the wireless space deter investments," says Congresswoman Zoe Lofgren (D., Calif.), who authored the bill. Taxes account for 16.3% of cellphone bills on average, compared to 7.4% for other goods and services, according to the CTIA-The Wireless Association, an industry trade group. This year, for example, some municipalities raised taxes by 3% to a whopping 75%. The wireless industry says its consumers are unfairly targeted. "Many of these state and local taxes and fees are levied against our consumers because they're good bill payers," says a CTIA spokeswoman. Also, as gadgets like tablets become more popular, the industry is hoping to put the brakes on taxes so that more consumers will buy the products.
For consumers, a freeze would certainly help, say consumer advocates. Taxes vary by location, but residents in at least five states, including Florida, Illinois and Washington, get hit with rates that account for more than 20% of their wireless bill, says Scott Mackey, economist at KSE Partners, which works on behalf of the five largest wireless carriers. In some cities, consumers' tax burden is worse. In Baltimore, for example, taxes and fees account for 27% of the average customer's wireless bill, while in New York they account for about 20%.
Still, some consumer advocates say the bill doesn't go far enough. For starters, it doesn't completely freeze tax hikes. If state and local governments decide to raise taxes on cellphone plans they would have to simultaneously implement those tax hikes on all other taxable products and services sold in their state or municipality, including apparel and home products. It also does little to address the fact that current tax rates vary widely by location, says Linda Sherry, director of national priorities at Consumer Action. "A freeze might be good, but there's still an unfair distribution of taxes that depends on where folks live," she says. Also, the bill addresses state and local taxes -- not the federal "universal service fund" tax that gets applied to all cellphone bills. That tax right now makes up a little more than 5% of phone bills and rising.
Whether the bill will make it to law is uncertain. Wireless experts question if it can get approved at a time when many states and local municipalities are facing budget shortfalls and looking for new ways to raise revenue. "Everything is on the table as local, state and federal entities seek to cover the deficits -- they'll look to offset that any way they can," says Shawn DuBravac, chief economist at the Consumer Electronics Association.
However, the CTIA, which has been pushing the bill, points to the unprecedented bipartisan support the bill has received. Currently, 236 House members have signed on --161 Republicans and 75 Democrats -- representing 42 states. The association spent $2.8 million lobbying Congress during the first quarter of 2011, up from $2.18 million during the same period a year ago, according to the Center for Responsive Politics. A CTIA spokeswoman says the money was partly geared toward the advancement of the bill.
This story was updated to include the date the House Judiciary Committee was to vote on the bill, and the outcome of the vote.