Federal Excise Tax on Telephone Service: A History

Publication Date: January 2001

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Media, telecommunications, and information

Type:

Abstract:

The federal excise tax on telephone service applies equally to general and toll (local and long-distance) telephone service. The tax is levied at a 3 percent rate and is a permanent part of our revenue structure.

The tax was first imposed in 1898 because of revenue needs brought about by the Spanish-American War. This initial tax of 1 cent for calls costing more than 15 cents applied only to long-distance service and was repealed in 1902. Revenue needs to prepare for World War I saw the reintroduction of the tax in 1914. The tax rate was increased at the time America entered the first world war. It was not until 1924 that the tax was again repealed.

A depression reduced federal government receipts and led to the reintroduction of the tax in 1932. In 1941, just before America entered World War II, rates were increased and the tax was extended so that it also applied to local telephone service for the first time. During the war, tax rates rose to 15% on local telephone service and 25% on long distance service when the charge was more than 24 cents. Telephone taxes have been continuously collected since this period.

A review of federal excises in 1965 brought about a reduction in the tax rate and a scheduled date for elimination in 1969. However, revenue needs resulting from the Vietnam conflict not only caused extension of the tax but resulted in higher tax rates. Large budget deficits in the 1970s, 1980s, and 1990s resulted in repeated extensions and postponement of the tax's repeal. In 1990 the tax became a permanent part of the federal revenue structure at a 3 percent tax rate.

In the prior Congress, the House of Representatives passed legislation twice to repeal the tax. Under the House passed bill (H.R. 3916) the tax would be reduced from 3 to 2 percent, starting 30 days after enactment. Then the tax could decline to 1 percent on October 1, 2001. The tax would be completely repealed on October 1, 2002. On September 14, 2000, the House of Representatives included an immediate repeal of the tax in a package of spending and tax bills (H.R. 4516). The House bill was folded into the fiscal 2001 appropriations bill for the legislative branch, the Treasury Department and the U.S. Postal Service. After passage by the Congress, the bill was vetoed by President Clinton. Any additional changes made to the tax will be reflected in an updated report.