From 2012 to 2013, mobile Internet use in the U.S. more than doubled, to 3.2 trillion megabytes. Multimedia messaging jumped 29 percent. These numbers, reported in June by the trade group CTIA–The Wireless Association, are bad news for states, which reap hundreds of millions of dollars each year taxing landlines that people are using less and less or ditching altogether. At the end of 2012 there were 140.9 million phone lines in the U.S., down from 161.8 million five years earlier, according to Bloomberg Industries.
Unlike a home phone call, Internet data use can’t be taxed under federal law. Services such as Skype (MSFT), which let users bypass cellular networks and make calls online, have been outside the reach of state and local tax collectors since President Bill Clinton signed the Internet Tax Freedom Act of 1998, intended to spur Web innovation. Hundreds of millions of Tweeting, Snapchatting, and Skyping smartphone users have made relics of tax provisions created for a time when a telephone was a clunky rotary-dial plugged into the wall.
“Phone service is almost as much a necessity as food.”—Max Behlke, National Conference of State Legislatures
In Illinois, taxes on telecommunications fell to $572 million for the year ended June 30, down $98 million from 2011, according to the state’s Department of Revenue. Florida’s income from telecommunications taxes fell 6 percent from 2011 to 2013, according to the state. In Phoenix, landline phone taxes have slid 7.2 percent in the past year. “It is a concern for states and localities, because this has been one of the most reliable revenue streams they have,” says Max Behlke, the manager of state-federal relations for the National Conference of State Legislatures in Washington. “Phone service is almost as much a necessity as food.”
States have tried to close the gap with hefty taxes on cellular voice plans and text messaging, which aren’t covered by the federal ban on taxing Internet data. In some parts of the country these fees can equal more than 18 percent of a customer’s monthly bill. Still, the income isn’t always enough to cover falling revenue as people forgo landlines and use the Internet instead of cellular plans to make calls. While voice calls over cellular networks rose 14 percent from 2012 to 2013, untaxable multimedia-messaging soared 29 percent. Over the same period, text messaging, which is taxed, fell 13 percent.
Illinois has made up part of the difference with higher taxes on cigarettes and liquor, says Susan Hofer, a spokeswoman for the Revenue Department. In Springfield, the capital, the library keeps shorter hours to help close the gap. Baltimore taxes residents $4 a month for every cell phone with a billing address in the city.
States can’t expect relief from Washington, where no one’s pushing for new taxes on phone data. Local governments have no claim on those services, says John McGlory, an information technology consultant in Phoenix. “The Internet isn’t a right, but I almost see it that way,” he says. “You are not using any city equipment or facilities.” Scott Mackey, a partner at KSE Partners, a lobbying and public-relations firm that represents the cellular industry, says cities and states must wean themselves from phone taxes. “Fifty years ago, they were able to grant franchises on local telecom services and collect revenue from them,” he says. “This is no longer a good way to tax in the 21st century.”