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![handle is hein.taxfoundation/iretcgadv0063 and id is 1 raw text is: IET
December 30, 1997 No. 66
HIDDEN PHONE TAX A BAD WAY
TO PAY FOR INTERNET ACCESS
A new de facto tax on telephone users is going
into effect in 1998. The Federal Communications
Commission has used language in the 1996
Telecommunications Act to require the nation's
telephone companies to contribute to a Schools and
Libraries Fund to provide universal access to the
tax by about 40%. Households may expect an
increase in their annual telephone bills of about
$15. Unfortunately, the FCC may have prevailed
upon the phone companies, which it regulates, to
hide the remaining tax from households, although
the companies may list the tax as a separate item on
business phone bills.
Many schools and libraries are already
connected to the internet, using their own money.
We skip over the question of whether hooking up
the rest is the best use of the marginal federal or
local education dollar. Our concern, rather, is with
the question of whether a hidden tax on telephone
service is the appropriate way to pay for such a
program. The answer is, No.
Government subsidies should be explicit on-
budget outlays, debated and appropriated annually,
and funded by explicit taxes, so that taxpayers can
see the outlays and decide if the program is worth
internet for schools and
libraries. The cost of this
subsidized access will, of
course, be passed on to
business and household
telephone customers.
The universal internet
access program is bad policy
for four reasons. First, the
program is of questionable
value. Second, it is not an
appropriate federal concern.
Third, the tax being imposed
to finance the program is a
The...
finance
tax being imposed to
the [universal internet
access] progrin is a distortionary
cr-oss-subsidy o f inter~net utser's by
telephone users... [Ti he
government tried to hide the tax
fr-om the public ais an unsp~ecified
char-ge in the nation 's telep~hone
bills.
distortionary cross-
subsidy of internet users by telephone users.
Fourth, the government tried to hide the tax from
the public as an unspecified charge in the nation's
telephone bills.
The initial contribution was an estimated $2.25
billion a year, or about $25 per household phone
customer. However, after several phone companies
declared that they would reveal the tax as a separate
line item on the phone bill, the FCC trimmed the
the cost. Any agreed-upon
subsidies should be funded out
of general revenues, derived
from broad-based, non-
distorting taxes. The internet
hook-up subsidy phone tax
fails on both counts.
First, the multi-year
program is being run through
an obscure Fund with a
hidden, dedicated revenue
stream. The FCC's intent was
that the telephone charge
should not be broken out on the phone bill as a
separate item, so that no one would realize what
was happening. Hiding outlays and taxes is a big
public policy no-no in a democracy.
Second, instead of general revenues, the
telephone charge is effectively a narrowly-based
new excise tax on telephone services (in addition to
the current explicit long distance excise tax, which
is itself an unreasonable levy). Selective excise
taxes on specific products or services distort output
Institute for
Research on the
Economics of
Taxation
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