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1 J. D. Foster, The Telephone Excise and the E-Rate Add-on Tax 1 (1999)

handle is hein.taxfoundation/taxfaanc0001 and id is 1 raw text is: TAX 11fin FOUNDATION July 1999 The Telephone Excise and the E-Rate Add-On Tax Anachronism - defined by the American Heritage Dictionary as something out of its proper order or time. Anachronism is the best possible description of the federal telephone excise tax. The Congress levied the tax for the first time in 1898 at a time when telephones were a luxury, owned only by wealthy indi- viduals and prosperous businesses. This new excise taxed telephone usage at the rate of one cent for each call valued at 15 cents or more, and it was an important source of government revenue in those days before the income tax. The justification for the telephone tax has evolved from that of a luxury tax to a war tax to a deficit-reduction tax; none of these justfi- cations apply today. Today's information age has made tele- phones a necessity for everyone, no matter how poor. Yet, over a hundred years later the Tax on Talking remains, generating about $5.5 bil- lion for the federal government in fiscal year 1999 and rising toward $10 billion by the end of the next decade. The one modernization of the telephone excise has been to add a new E(ducation)-rate tax on telephone usage. Even more than the original telephone excise, this new E-rate tax raises serious tax policy questions. A Tax in Search of a Rationale The Congress enacted and repealed the telephone excise tax repeatedly between 1898 and 1941. In 1941 the tax went into effect permanently at the rate of 10 percent, but it was soon increased to 25 percent to help pay for the Second World War. It was reduced after the war, and in 1969 it was slated to drop from 10 percent to 3 percent before finally disappearing altogether. This phase-down from 10 percent was delayed until 1973. Throughout the 1980s the repeal of the tax was repeatedly delayed until the tax was made permanent again in 1991 at its current rate of 3 percent. Thus the justification for the tele- phone tax has evolved from that of a luxury tax to a war tax to a deficit-reduction tax; none of these justifications apply today. Explaining Excise Taxes The telephone excise tax has always suf- fered from serious policy deficiencies. To begin with, it does not fall into either of the categories that are generally considered to justify a tax on policy grounds. The Excise Tax As User Fee A common justification offered for excise taxes is that they act as user fees. The federal government provides a wide range of services, and wherever practical it is reasonable to re- quire the users of a service to bear some or all of the service's cost. The best known example of an excise-cum-user fee is the federal gaso- line excise tax that goes primarily to fund the national highway system. Other user fees, such as the fee for entering Yellowstone National Park, are indistinguishable in form and func- tion from a classic user fee excise. The essential criteria in this regard are that the fee or tax be imposed on the beneficiary of ByJ.D. Foster, Ph.D. Executive Director and Chief Economist Tax Foundation - - _ J 1B F