The Telephone Excise Tax: Revenues, Effects, and Repeal Proposals

Publication Date: February 2001

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Media, telecommunications, and information

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Abstract:

The federal excise tax on local and long distance telephone service produces substantial revenues even at a tax rate of 3%. In the Budget for fiscal year 2001 it is reported that the tax reached a new record in collections of $5.185 billion in FY1999. These taxes go into the general receipts of the U.S. Treasury and are not dedicated to a trust fund or any other special purpose. In the debate over whether the tax should be repealed, interested parties have attributed a number of advantages and disadvantages to the tax. Not only is the tax administratively easy for the federal government to collect, but it also continues to generate large and stable amounts of revenue. Those who favor the tax note that there is no serious evidence that the communications industry has been injured by the past imposition of this tax.

Among those opposed to the tax there is broad consensus that this is a regressive tax. They stress that telephone usage should be distinguished from the sumptuary ("sin") excise taxes imposed on items such as alcoholic beverages and tobacco. Opponents argue that the tax base is one which should be left to the states, that without this tax the communications industry would grow more rapidly, and that the economy would benefit from this expansion. In the 106th Congress, legislation passed which included the repeal of the telephone excise tax. That measure was vetoed by President Clinton. Thus, the tax continues at the 3% rate. This report will be updated if legislative actions occur in the current Congress.