June 25 (Bloomberg) -- Tweeting, Facebooking, Skyping smartphone users are costing U.S. states and cities revenue as taxes rooted in old-fashioned telephone service fail to keep up with the Internet era.
In Phoenix, the loss of $1.3 million in telephone tax revenue translates to the cost of training and equipping 10 police officers, said Mario Paniagua, the budget and research director. In Springfield, Illinois, a $200,000 shortfall in telecommunications revenue is keeping the library from extending hours.
“I imagine at some point you’ll have an app called the ‘Call Your Friend’ app and you won’t be using the phone network at all,” said Max Behlke, the manager of state-federal relations for the National Conference of State Legislatures in Washington. “It is a concern for states and localities because this has been one of the most reliable revenue streams they have. Phone service is almost as much a necessity as food.”
Just as they created new business models for retail sales, taxi service, short-term accommodations and watching movies and listening to music, smartphones and the Internet are changing how people dial each other up. Tax-dependent governments, still struggling to recover from the 18-month recession that ended five years ago, find themselves seeking to compensate for a once-reliable source of money.
Unlike voice calls, which face levies either on landline or mobile networks, data use can’t be taxed under federal law. And that’s where the growth is. Mobile Internet use more than doubled last year from 2012 to 3.2 trillion megabytes, according to a report released this month by CTIA-The Wireless Association, an industry trade group.
While voice use over cellular networks rose 14 percent, multimedia-messaging soared 29 percent, according to the trade group. Text messaging, which uses the same mechanism as voice calls and is also taxed, fell 13 percent.
“It’s not that people are talking less,” said Scott Mackey, a partner at KSE Partners LLC, a lobbying and public-relations firm in Montpelier, Vermont, that represents the cellular industry. “It’s that people are talking less on the public switched network. Down the road, voice is going to become another application on your Internet service.”
The pace of change has outstripped tax structures created for an era in which telephone service meant a trusty rotary-dial Western Electric 500 plugged into the wall. Phone companies in the U.S. had 140.9 million phone lines at the end of 2012, down from 161.8 million five years earlier, according to Bloomberg Industries.
In Illinois, taxes on telecommunications fell to $572 million for the year ended June 30, down $98 million from 2011, according to the state Department of Revenue. In Arizona, Phoenix’s revenue from phone-call taxes slid 7.2 percent in the past year.
Officials there are looking for ways to close a shortfall in next year’s budget created in part by the city council’s lowering of a grocery tax as well as the $1.3 million drop in telecommunication revenue, Paniagua said.
“We’re not talking about a huge amount of money, but it puts a further strain on our budget,” he said.
In Springfield, the capital of Illinois, taxes on telecommunications provide $3.1 million of the $4.5 million budget for the main library. They fell $200,000 behind the mark for the year that ended Feb. 28, said William D. McCarty II, the city’s budget director.
So the library, which cut hours during the recession, stays open only until 6 p.m. on Thursdays and Fridays and 5 p.m. on weekends, he said.
“Even to just maintain the services that we have, we have to dip into the general fund,” he said.
The Illinois state government, collecting 15 percent less in telecommunications revenue than two years earlier, has recouped the loss through higher taxes on cigarettes and liquor, said Susan Hofer, a spokeswoman for the Revenue Department.
Florida’s telecommunications-tax revenue fell 6 percent between 2011 and 2013, according to its Revenue Department. In Seattle, telephone taxes have declined since 2002 because of a “lackluster” economy, industry consolidation and competition from non-taxed Internet voice services, the city said in its 2014 budget. Telecommunications tax revenue dropped 3.7 percent between 2011 and 2012.
Software that replicates the function of phone calls has been beyond the reach of state and local tax collectors since President Bill Clinton signed the Internet Tax Freedom Act of 1998.
Now, users of Microsoft Corp.’s Skype, the most popular so-called voice-over-Internet application, spend more than 2 billion minutes a day connecting with each other, said Ali Dwiggins of Waggener Edstrom Communications, a spokeswoman for the company. Apple Inc. has a similar application, FaceTime, used 15 million to 20 million times a day, the company said in February. Text messaging is being eroded by free Internet-based alternatives such as Facebook Inc.’s WhatsApp Inc., a service that it acquired in February for $19 billion.
Internet-based calls have better sound quality and flexibility to add video and data, said John McGlory, 23. He answered a call to his Phoenix-based information technology consulting business, Metro Ventures LLC, with an application that adds a second line to mobile phones, tablets and computers, called Line2. Plus, they’re cheaper.
Cities and states have no business taxing calls or other functions on the Internet, he said.
“The Internet isn’t a right, but I almost see it that way,” McGlory said. “You are not using any city equipment or facilities.”
Mackey, the cellular industry representative, said cities and states need to wean themselves from dependence on chatty phone customers.
“Thirty, 40 and 50 years ago, they were able to grant franchises on local telecom services and collect revenue from them,” he said. “This is no longer a good way to tax in the 21st century.”
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