By Larry Jones
September 29, 2008

During a September 18 hearing before the House Subcommittee on Commercial and Administrative Law, Tillman Lay presented testimony on behalf of the U.S. Conference of Mayors, National League of Cities, National Association of Counties, National Association of Telecommunication Officers and Administrators, and the Government Finance Officers Association. The testimony was offered in opposition to the so-called “Cell Tax Fairness Act,” a proposal that would impose a five-year moratorium on new state and local taxes on cell phones. Lay is a partner in the Washington (DC) Law firm of Spiegel and McDiarmid. He has for many years been a close adviser to local government groups and many municipalities on telecommunications issues.

Local governments opposed the cell phone tax moratorium because it would represent an unwarranted federal intrusion into the long recognized taxing authority of state and local governments. If enacted, it would set up a dual tax system on telephone services by extending preferential tax treatment for cell phone customers while continuing to allow taxes on traditional wire-line phones. This would come at a time when the cell phone industry is experiencing unprecedented growth and the traditional wire-line industry is experiencing significant decline.

Most local and state governments do not tax cell phones. But many are considering modifying their telecommunications taxes to ensure that they are applied equitably to all telephone services and to offset the revenue loss from declining wire-line subscribers.

The proposed legislation, H.R. 5793, was introduced last April by Rep. Zoe Lofgren (CA), who claims the legislation is needed because “wireless service and mobile devices are going to play an essential and growing role in affordable broadband access in this country.” She explained there are currently 39 million wireless subscribers who earn less than $25,000 per year. The state and local tax burden on these workers would be significant.

Testifying in favor of the legislation, Scott Mackey, an economist and partner with Kimbell, Sherman and Ellis in Vermont, told members of the subcommittee that according to a 1999 study published by the Committee on State Taxation (COST), “Consumers of telecommunications services paid effective state and local tax rates that were more than twice than those imposed on taxable goods sold by general business (13.74 percent v. 6 percent). And if federal taxes are included, he said the tax burden was nearly three times higher than general business.

In a follow up study on the impact of state and local taxes on the wireless industry, published in February 2008, Mackey said the results were consistent with the findings in the COST study. He said, “Wireless customers face a tax burden that on average is two to three times higher than general business.” He claimed that the legislation is needed to protect millions of wireless consumers and businesses from “new discriminatory taxes.”

Expressing opposition to the bill on behalf of local governments, Lay pointed out to members of the subcommittee that the wireless industry had presented no data indicating that state and local wireless taxes have had any adverse effect on wireless service subscribership, revenue or investment. Further, he explained that, “The wireless industry claims of supposedly excessive taxes and fees are based upon an apples and oranges mix of federal, state and local fees and taxes, many of which would not be affected or limited by or limited by H.R. 5793.” Lay said, “When these various federal and state fees and taxes are stripped away, what the wireless industry’s own data show is that the amount of true state and local taxes imposed on wireless services…is not very significant at all.”

Since 2000, subscription to wireless telephones has grown from 99 million to 255 million (158 percent) and wireless industry revenue has grown from $62 billion to $138 billion (124 percent). “What these figures reveal,” Lay explained, “is that regardless whether one subjectively believes that state and local taxes and fees on the wireless industry are too high, too low, or just right, there is no evidence that those taxes and fees have had any measurable or significant impact at all on wireless industry growth.”

No congressional action is expected on H.R. 5793 before Congress adjourns in September. However, industry is expected to push for its passage soon after the next Congress convenes in January. The Conference and other local government groups will continue to oppose this and all other similar preemptions of state and local taxing authority.